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Luck (in business) be a lady

Why investing with a gender lens increases chances of higher profit

by Ruth Brännvall

Exactly a year ago, my organization Impact Invest Scandinavia was one of those who responded to the invitation of the International Trade Center and the International Organization for Standardization (ISO) to help reach a global definition of what a “woman-owned business” means.

Firstly, as an impact investor we are concerned about the inequality of capital directed to startups and private companies ending up disproportionately in favor of male founder teams. This is not news to you, as readers of Executive Magazine, you know that about 10 percent of businesses in Lebanon are run by women, but only a fraction of them have received external investments beyond family and friends. As a female founder myself I have to admit that I react emotionally to such statistics (“This is unfair!”), but as an investor and economic scientist I also want to find the logical argument to why this is a problem. Luckily, we do not need to search for long; There is more and more evidence showing that diverse teams in executive management and board of directors in general make better decisions, leading to better acquisition and investment decisions and less aggressive risk-taking. This in turn leads to better profit margins for owners and other stakeholders. 

Research studies, such the one published by a team of British scientists provide interesting insights into why this happens; Having female board members helps balance the overconfidence that male CEOs often display, improving overall decision making for the company. Overconfidence is a problem as it leads to overestimation of growth and return and underestimates competition and other risks, which destroys shareholder value. (I am quite sure that we can see the parallels of such alpha male behavior to other parts of society as well, not just business, when we see non-equal political leadership and underrepresentation of women in power). 

The McKinsey report “Diversity Matters”, which looked at gender and ethnic diversity, came to the same conclusion when studying the performance of 366 large public companies. In this study, ethnic diversity stood out as an even stronger factor to explain greater performance compared to industry peers, which should be quite expected from companies that serve clients in many different markets, but is still far from standard Human Resources practice when recruiting and advancing people on the career ladder. 

Secondly, the reason I spent time contributing to the global definition of “women-owned business” is that I believe that it will allow us to advance women’s economic empowerment and the overall achievements of the global Sustainable Development Goals (SDGs). There are over 50 SDG indicators that are gender-related and 20 of those specifically focus on women empowerment, such as one of the indicators of Goal 17 focused on an “open, non-discriminatory, and equitable multilateral trading system.” Several countries have stated that a business which is 51 percent, or more, owned by a woman can be considered a women-owned business, and is therefore used as the definition when putting initiatives in place to promote or to invest in diversity. 

Those of you who run a family business will probably immediately see the problem of too simplistic definitions – what if you share the company 50/50 with your husband or own part of the company together with other family members? Or what if you are a female CEO who has successfully managed to get investors on board and your ownership is therefore diluted to below 51 percent? 

When the end-goal is to promote equality from a performance based perspective (per the logic above that this will lead to more profitable and sustainable businesses), as an investor, I want to be able to identify those types of businesses that are a) majority owned by women, but also b) led by a woman with a slightly lower ownership share. When an investor (or business promoter) can identify both of these women-owned business types, then they can define how the investment strategy will apply the gender lens, i.e. whether to invest in women founders, in women-owned or women-led businesses, or in diverse teams of both women and men. At Impact Invest Scandinavia, we do not have the scope of investing in female-owned companies only and so we started applying the consequence of a gender-aware investment criteria as a red flag: Never invest in businesses with male only executive management teams and boards – or women only ones, for that matter.


Can gender-based criteria compensate for other criteria?

A question that I have received from many entrepreneurs whom I work with, is whether investors would give more importance and weight to the gender perspective (or some other positive social aspect), so that other factors that affect the judgment of what is an investable business carry less weight. 

Since many factors make up the collective assessment of what is investable – and criteria differ between investors – the answer needs to be the classic “it depends.” If an investor is focused mainly on social returns, rather than financial returns, then this is probably true. Examples in Lebanon of such investors include Alfanar [Editor’s note: See the comment piece by Michelle Mouracade, Could social enterprises lead Lebanon’s economic recovery?], who therefore define themselves as a venture philanthropist, or international donors such as UK Aid through its LEEP programme. 

For investors focused also on financial returns, the basic criteria will be that the business shall have a good value proposition for its clients and an appropriate business model that can help create a competitive advantage. If this is not the case, then it does not matter who is running this business or whether they show fantastic inclusion in their workforce. If the business cannot grow, there simply will be no potential return from an investment. 

If the factors that relate to the market economics are detrimental, such as the situation in Lebanon today, then such risks could possibly be mitigated with a combination of actions taken by the business and actions taken by the investor. For the past ten years, I have been engaged with equipping women entrepreneurs in Lebanon with skills to grow their operations and to lead. In the past two years, the question instead became “How do we survive?” The power cuts affected all, but in particular businesses like the women-owned health food service Green Junkie, that need electricity to be in production every day and to preserve food ingredients. Founder Angela Sawan is just one of many restaurant owners who went from optimistic expansion plans for her restaurant in Downtown Beirut to temporary closure. For Sawan, it is not just about her own team, but the business has a mission of collaborating with local farmers to grow sustainable, nutritious food ingredients. At the point where Green Junkie was about a year ago, it would not have been investable. In the programme that Sawan participated in, we encouraged all entrepreneurs to (re)consider their business models, pivot in what, how and to whom something is delivered. Green Junkie has done just that, and now sells healthy meal plans, which to a great extent are based on raw food. In combination with a number of other changes that the team could implement and keep the business afloat. Examples of persistence and agility like this can convince an investor that the founder is well equipped to handle risk and macroeconomic shocks. 

A common way for investors to fund businesses in countries that suffer from political and economic instability is to partner with international donors that have instruments that help offset some of the risks; the use of so called guarantee-instruments works as a kind of insurance against potential financial losses in an investment that are not directly the fault of the business. 

The World Bank, the United Nations and the European Union pledged new funding a year ago to support the recovery of the Lebanese economy (first of all addressing corruption and mismanagement in the public sector) that is starting to channel investments into micro-businesses via micro-credit institutions. They are likely to lower normal requirements on loans to provide so called “concessional loans,” but if a business cannot put up sufficient security for the loan, then guarantees shall also be made available. A key criterion for businesses to receive international donor funding is that they can display mixed teams, in management as well as in the workforce. 

To thrive in times of crisis can also be possible thanks to the strategy that some other entrepreneurs applied – to set up part of the business abroad, if the business can serve international clients. This strategy has for example worked well for startup entrepreneur Laura Jardine Paterson as she founded the web development agency Concat, which hires female and refugee developers to serve clients in the UK and elsewhere. After all, the best investment a business can get is the money from clients.

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Ruth Brännvall

The CEO of Impact Invest Scandinavia and author of “Capital with Purpose. The second wave of impact investing.”
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