It’s an exciting time to be in high-tech. In the fast-paced world of a high-growth tech company, change is a constant in almost every aspect of the business.
But there is one characteristic of Silicon Valley that does not seem to be changing ― the decidedly small number of women in leadership roles in tech companies. A 2016 study by Fenwick and West showed that the largest 150 Silicon Valley public companies averaged only 14% women directors and an average of only 0.8 women executive officers.
Although debates about the gender gap within technology companies tend to become mired in identity politics and focus heavily on moral issues and notions of equality, there is a more pragmatic issue for shareholders and investors – the gender gap is bad for business.
Diversity improves financial outcomes
The correlation between having women in leadership roles and improved financial outcomes has been well-studied. Over a decade ago, a Catalyst study found that, among F500 companies, having women in leadership roles was associated with a 35% increase in the return on equity and a 34% increase in total return to shareholders.
Indeed, nowhere is this correlation seen more than in industries where innovation is a key focus of the company’s business strategy, such as high-tech. In his landmark study on cognitive diversity, Scott Page explains that when people think alike, they will get stuck at the same locally optimal solutions. Sheer intelligence is not as powerful as having multiple points of view to find new and better solutions. That’s why diversity powers innovation. This phenomenon has been examined time and again in research studies.
So, aside from any moral discussion of the issue, the striking gender gap in Silicon Valley is, well, confusing. In an industry where disruption is king and new ideas and fresh perspectives can lead to massive valuations, it’s hard to reconcile the fact that the makeup of the new guard of tech companies is not much different than that of the old guard.
The problem with bias
While gender bias has been blamed for much the apparent discrepancy between the value of women leaders and the frequency with which we see them in tech companies, there is a much more subtle bias at play here – confirmation bias. A type of cognitive bias, confirmation bias refers to the tendency of seeking out evidence to support preexisting beliefs or hypotheses.
For example, if someone believes that there are innate reasons that women do not excel in mathematics or technology, they are likely to interpret and recall information to support that hypothesis. Because of confirmation bias, an anecdotal experience is extrapolated into a generalisable rule in the mind of the observer.
Confirmation bias is particularly insidious because it promotes group-think. In our decisions—whether they be hiring decisions, investment decisions, or promotion decisions—we tend to place too much value on those who remind us of past examples of success. If the majority of successful tech entrepreneurs or CEOs you’ve observed have been white or Asian men, you are likely to associate those characteristics with success even though objectively they are irrelevant to business acumen and innovation.
Ironically, trying to copy previous models of success can lead to a significant competitive disadvantage specifically because it intensifies cognitive homogeneity and obfuscates good opportunities that are brought by leaders that don’t fit our mental model.
The opportunity
Today there remains huge untapped potential within the ranks of women who are willing and able to step up to the challenge of leading tech companies. Smart companies can take advantage of this inefficiency in the talent market and some are seizing the opportunity. One example is the recent formation of XFactor Ventures, a Boston-based seed venture fund run by women focused on investing in tech companies with women founders.
Large tech companies can also take advantage of this opportunity by actively recruiting and promoting women to senior leadership roles. Avoiding tokenism, which undermines a woman’s status and the value of her contributions, a better strategy is to build a well-balanced team that can lead to better decision-making. In fact, studies have shown that the ideal ratio of men to women in a team involved in a creative or innovative process is 50/50.
In the end, the current gender gap in Silicon Valley is irrational because it limits a company’s financial potential. There are huge numbers of women who are smart, passionate, and ambitious and if they are included in executive management teams, they contribute to cognitive diversity and can lead to better strategic decisions for the company and better financial outcomes.
In short, hiring and promoting women is not important because of some vague notion of equality for its own sake; women leaders are good for business.