Women in Business: Where are all the female small cap CEOs?

This monthly column by Hannah Moreno, Founder & Managing Director of Third Hemisphere, was originally published in The Australian and Stockhead. You can also read it in The Daily Telegraph, MSN, Herald Sun, Townsville Bulletin, The Courier Mail, The Advertiser, Cairns Post, The Chronicle, The Mercury, NT News, Geelong Advertiser, and Gold Coast Bulletin.


Hannah Posts


Gender Diversity in ASX Small Caps: Breaking Down the Numbers


We hear a lot of talk about the big end of town when it comes to gender diversity in ASX-listed leadership teams.


But what about the 2,235 ASX companies that fall outside the large cap and mid cap size, worth a combined total of around $710 billion?


Third Hemisphere analysis of IPO data reveals that only 4.1 per cent of small caps that debuted on the ASX between January 2021 and April 2023 had a woman CEO or managing director at the helm.


That’s 12 female CEOs out of 294.


Sadly, for reasons explained below, this percentage is quite likely to be even lower across the entire population of ASX small caps.


And these low numbers matter.


Money left on the table


Aside from gender equality in governance simply being fair and ethical, performance data highlights significant financial and shareholder benefits for female leadership in listed companies.


Further Third Hemisphere analysis up to April 2023 uncovered that female CEOs recorded greater six-month performance compared to male CEOs, in both ASX20 companies (14.77 per cent versus 8.18 per cent) and ASX50 companies (14 per cent versus 11.85 per cent).


This reflects existing research showing that a female CEO can lead to a five per cent increase in the market value for an ASX-listed company.


Looking abroad, US research also shows that boards with three or more women tend to be more profitable, have a higher return on assets, and deliver better market performance. This effect is amplified even further for tech companies with unique products in scarce supply.


And UK research shows that companies with more than 30 per cent female executives were more likely to outperform companies that have less.


It is clear that we are leaving money on the table by not lifting the numbers of women at the helm of listed companies.


So what exactly is stopping this from happening?


The Connection Between Women-Led Small Cap IPOs and Venture Capital Funding


All of the droughts


The women-led small cap IPO drought is almost certainly related to the women-led venture capital (VC) firm drought, which in turn contributes to the women-led startup funding drought.


Because how can a female founder or CEO list their company, if they can’t secure the required funding to reach that point in the first place?


Harvard research also shows that female entrepreneurs who secure funding from an all-male VC firm face drastically reduced chances of a successful exit, potentially because VCs with female partners can better evaluate and advise women-led startups.


Yet Australian Investment Council research shows that women accounted for just 6 and 16 per cent of senior positions in private equity and VC firms respectively in 2022.


VC firms must therefore urgently lift numbers of female partners if they wish to avoid overlooking potential investment opportunities, and improve the chances of success for the female-led startups they do finance.


They must also consider the gendered nature of pitches and other aspects critical to accurately assessing ventures.


For example, Jackie Vullinghs, principle at AirTree Ventures, once said: “Women often tend to pitch the most realistic version of their plan, whereas men will often pitch the most optimistic version of their plan.”


She went on to explain that AirTree Ventures addresses this by scaling back forecasts from male CEOs by a far greater percentage than those from female CEOs.


Line role inequality preventing female ascension


The majority of internal CEO appointments are made from C-level line roles like chief financial, revenue, or operations officers.


And – no surprises here! – in Australia these roles are predominantly filled by men.


In 2022, the Chief Executive Women (CEW) Senior Executive Census 2022 showed that men held almost 9 in 10 line roles in the ASX300.


This means that when a CEO role becomes available, an internal hire is almost guaranteed to be filled by a man. Which brings us to the next point…


Women CEOs fired… then replaced with men


Female CEOs of listed companies are 45 per cent more likely to be fired than male CEOs – regardless of high performance.


To add insult to injury, 78 per cent of these CEO positions are then refilled by men, compared to just 22 per cent refilled by women.


Given all that the data shows, boards and investors must urgently reject the statistically false notion that men make more “natural” leaders, and more proactively support women CEOs – for the good of their own hip pockets.


To action this, they may need to consider a much lengthier external and internal recruitment process, specifically targeting more female candidates.


What this all means for investors


Small caps offer significant upside growth potential for investors that is almost never matched by larger companies.


They are also sometimes undervalued due to market anomalies. For example, an indiscriminate sell-off in Australian small caps last year means they are currently trading at the largest discount to big cap stocks in two decades.


So any investor wishing to capitalise on the unique opportunity these stocks can provide should be pushing for their best possible leadership.


This means not tolerating the mediocrity of the status quo, and instead demanding greater numbers of women at the helm across the board in listed companies.