The more women who serve on a firm’s board as independent directors the higher the percentage of net income that gets paid out to shareholders via dividends, according to a new study.
Given that dividends play a key role in long-term returns, and that they are also a key tool to keep potentially self-serving insiders in line, this is a metric worth tracking.
“We find evidence that firms with a larger fraction of female directors on their board have greater dividend payouts,” Jie Chen, Woon Sau Leung and Marc Goergen of Cardiff University wrote in an October working paper. (here)
For every 10-percentage-point increase in the percentage of firms’ outside board members who are women there is a 1.67-percentage-point rise in the dividend payout ratio. The study looked at firms in the S&P 1500 index from 1997 to 2011, during which time the mean firm paid out about 23 percent of its net income.
The most meaningful increase in dividend payouts was among firms which met various criteria of having weak governance, such as having the same person as chief executive and chairman.
“We find that board gender composition significantly increases dividends only for firms with weak governance, suggesting that female directors use dividend payouts as a governance device,” according to the paper.
This is not the first study to find a relationship between having women on the board and better shareholder oversight.
Female board members are more likely than male counterparts to actually attend board meetings, and more likely to serve on auditing and other committees which monitor insider behavior.
Dividends, according to a theory advanced by Michael Rozoff in the 1980s, play a key role in corporate governance in that they reduce the amount of cash sloshing around in a company. Less cash for managers and insiders to play with means fewer opportunities for the wide range of self-dealing tactics that can benefit those making the decisions but hurt owners. And while paying out dividends can force firms to take on debt, debt markets too act as a break on bad behavior, both by pricing bad firms out of the market and by insisting on loan or bond terms which constrain executives.
Dividends for the Long Run
Of the firms studied, 27 percent had female directors, as compared to the S&P 500 index of largest firms, of which 20 percent of all directors are now women.
All of this gets to the heart of the tension inherent in giving other people your money to go and make more of it. While you want them to put the money to work and create value, insiders inevitably use cash belonging to the company less scrupulously than they would their own. As dividends help to minimize this, it is no surprise how central they are to better longer term stock returns.
Looking at U.S. equity market data since 1871, James Montier of value investor GMO found that on a one-year time horizon almost 80 percent of the return has been driven by changes in valuation. However, on a five-year view 80 percent of returns are actually generated by dividend yields and dividend growth.
Taken over the very long term the importance of dividends and dividend growth has been even more striking, driving about 90 percent of total returns.
This is also not the first time we’ve seen evidence that having women in charge is good for shareholders. A Credit Suisse study found that the share prices of global large-cap companies with one or more women on the board outperformed those with none by 26 percentage points in the six years to the end of 2011.
Global small-caps with woman board members beat single-sex peers by 17 percentage points over the same period. Return on equity among companies with woman board members was also higher, while leverage was lower, Credit Suisse found.
The study is silent on why women in positions of power and oversight are associated with higher dividends, much less why they are associated with better shareholder returns.
I couldn’t possibly comment, but when you find a rule of thumb like this it is usually best to pay attention.
(Editing by James Dalgleish)
