Olivia Gull, Analyst on the Governance and Responsible Investment Team, discusses the importance of diversity and inclusion from an investment perspective, and key indicators that investors can look out for when analyzing a company’s diverse culture.
- Companies are increasingly being held accountable by consumers who reward brands aligned with their values.
- For many global businesses, matters of diversity and inclusion go beyond the workplace, and efforts are made to address discrimination in the countries in which they operate.
- Investors should be wary of companies that fail to futureproof themselves in terms of diversity. Socially conscious brands that make inclusivity a central part of their business strategy and brand ethos are more likely to succeed.
- What gets measured, gets improved. Investors should focus on company disclosure, diversity-related targets, and meaningful initiatives in place.
There is growing evidence to support the argument that diversity within the workplace is good for business. Reports from Credit Suisse,1 Exane,2 and Morgan Stanley3 all find a positive correlation between employee diversity and company share price performance. McKinsey4 and BCG5 studies also show that diverse leadership teams are more likely to outperform on profitability and value creation. There is growing demand for gender-equality investment bonds as well as diversity indices and a greater focus on “gender-lens” investment products, which consider the positive and negative impact of financial investments on women and girls.
So, how should investors start thinking about diversity in their portfolio and what metrics are the most meaningful? As data providers try to fill the diversity vacuum with relevant environmental, social and governance (ESG) data – Bloomberg currently offers 77 diversity-related fields, most of which are unpopulated – it is difficult to know what to look for and where to look for it.
Ultimately, the value of diversity is tied to uncorrelated thinking. If members of a management team all share similar backgrounds, one individual’s over-weighted opinion may go unchallenged and it could lead to groupthink. A team that is not actively pursuing uncorrelated thinking is probably not generating pioneering thinking and this lack of diversity could damage a company’s potential value.6
Moving Past Board Diversity
Over the past few years, investors and regulators have focused on board diversity as a useful metric to analyze companies. Soft laws and regulations regarding female board representation have increased across the world and U.S. states including California and New Jersey have passed bills respectively.7 Against this backdrop, the pressure on boards to diversify has increased and more investors are voting in favor of diversity-related shareholder proposals.
In the U.S., nearly 50 shareholder proposals regarding diversity were submitted in 2019 with a number of asset managers indicating that they will vote against boards that are progressing diversity too slowly.8 Meanwhile, Goldman Sachs announced that it will no longer help take companies public (the process of offering shares of a private corporation to the public) unless there is “at least one diverse” board member.9 Subsequently, all-male boards are moving toward extinction.
In terms of board diversity, the conversation is now moving away from gender and focusing more on ethnicity, with the Black Lives Matter movement playing a significant role in this shift. In the U.S., numerous companies have signed up to The Board Challenge, pledging to add a black director to their board within 12 months.10 And in the UK, the Confederation of British Industry (CBI) has launched Change the Race Ratio campaign, for companies to set and publish clear targets for greater racial and ethnic diversity at the Board and Executive level.11
Although board representation is a good corporate governance metric, there is mixed evidence and inconclusive results from studies to prove that this impacts company performance. Investors have since moved further downstream, engaging with companies on representation at the executive level, where studies have found stronger correlation between diverse management teams and company performance.12
Harassment Hurts Performance
Looking at high-level diversity data is not enough to determine a company’s inclusive culture. As a New York Times article on Signet Jewelers revealed, a company with a seemingly strong diversity profile – 50% board diversity, female CEO and part of the Bloomberg gender-equality index – also had a workplace culture of pay inequality and gender discrimination that led to an unresolved class-action lawsuit.13
Media coverage on workplace culture and inclusion is continuing to rise and is a growing reputational risk to companies. Harassment scandals have led to a number of CEO and executive resignations at a wide range of high-profile companies. How a company responds to these allegations provides investors with insight into whether human capital and an inclusive culture is a priority for senior management.
It is, however, difficult for investors to adequately analyze the risk of litigation in this area and many lawsuits are settled confidentially before reaching class-action status. In some cases, harassment claims have had a material financial impact: for example, Wynn Resorts lost $3.5 billion in value when allegations of misconduct were published.14 A recent academic study highlighted how “harassment-prone firms” on average underperformed the U.S. stock market by approximately 19.9% the subsequent year, negatively impacting profitability with a decline in return on equity, return on assets and an increase in labor costs.15
Although anti-harassment policies do not represent how the policy is enforced and therefore should not be used as a proxy for good governance, they can be a good starting point for discussion. Investors can engage with companies to understand: how complaints are dealt with (what channels are in place to report issues and what level of management deals with these complaints); if there are comprehensive diversity, anti-harassment and human rights policies that mention certain committees, employee forums or governance structures; or if the whistleblowing hotline is regularly used and whether management can provide any examples.
Certain sectors are more vulnerable to harassment exposés, including male-dominated industries that have a historically reported “lad-culture,” such as the technology or finance sector. Sectors with a predominantly low-paid female workforce, including the hospitality, retail and restaurant industry, are also at risk. Companies that struggle to change this corporate culture may find it difficult to attract and retain talent at their firm, and it may be a symptom of a wider systemic cultural problem.
An Indicator of Corporate Culture
Adding new board members who are a different race, gender or professional background is a good first step. However, diversity is only beneficial when an organization has a culture that welcomes diverse opinions and encourages challenge. It is therefore important for investors to look at diversity as part of a broad range of indicators that reflect a company’s culture. An example of this might be a company that puts policies in place to help disadvantaged members of society long before they are legally required to do so. If an organization develops independent thinking based on its own beliefs regarding diversity, it may have the ability to stay ahead of the crowd on other matters.
UK water company Severn Trent is currently one of just two FTSE 100 companies with both a female chair and female CEO.16 It aims to not just be a leader in gender equality, but has focused on social mobility, disability, LGBTQ+ (lesbian, gay, bisexual, transgender and queer or questioning, and others), and employee rights.
Oil and gas company BP has gone a step further than the required UK gender pay gap reporting and has committed to voluntarily report on the company’s ethnicity pay gap by 2022. The company has set specific goals of increasing ethnically diverse representation across all levels of the business, is partnering with racially diverse institutions, and from January 2021, will be providing focused “development interventions to support career progress for UK black employees and other underrepresented ethnic minorities.”17
Global Standards that Go Beyond the Office
Diversity is especially important for companies with a global reach. A global understanding will become even more crucial for large U.S. and European firms as market growth is expected to come from Asia and Africa. As an organization becomes international, shaking off stereotypes and cultural biases is helped by building a team with diverse leaders. The growth in international CEOs is being seen across the U.S. technology sector with leaders such as Satya Nadella (Microsoft), and Sundar Pichai (Alphabet).
For many global businesses, matters of diversity and inclusion go beyond the office, and efforts are made to address discrimination in the countries in which they operate. To date, same sex marriage is illegal in more than 70 countries, and state-sponsored oppression still occurs in many countries including South Korea, Nigeria and Russia.18 Many businesses are therefore working harder to take a stand against LGBTQ+ discrimination in communities that they operate in.
In 2015, Salesforce CEO Marc Benioff threatened to pull business out of Indiana due to laws that would discriminate against the LGBTQ+ community. Salesforce has since expanded its LGBTQ+ employee resource groups, Outforce, from 14 to 24, to countries including Japan and India. Employees’ sexual orientation and gender identification, including pronouns such as “him”, “her”, “they”, can be applied to internal systems, and a diversity dashboard is issued to all executives supervising more than 500 employees, tracking diversity and progress. Benioff believes there is real business value in promoting equality and reducing the “mental tax” some employees may have coming to work.19
Diversity in Design
Diversity in product design is also an area for investors to interrogate in order to understand whether a business is considering all users. Women account for a large portion of consumer spending and are decision makers across many different product categories. Lack of gender awareness in the product development cycle could reduce market access to over half the population. Often women are excluded from product design, which can lead to “gender-neutral” products being biased towards men. According to author Caroline Perez in her book “Invisible Women: Exposing Data Bias in a World Designed for Men,” this is especially true in the technology industry where wearables do not fit on women’s bodies, speech recognition software is 70% more likely to recognize male speech and Apple’s health-monitoring system initially failed to include women’s health. The same is true for the auto industry where seatbelts are not designed for pregnant women and crash-test dummies do not accurately reflect women’s bodies.20
There is also a well-known bias in artificial intelligence (AI) facial recognition systems, where lack of racial representation in big data image libraries is having a dangerous impact on algorithms. As the data used to train AI software consists of overwhelmingly white male faces, faces of racially diverse groups are harder to recognize, increasing the likelihood for discrimination and abuse. For this reason, Microsoft, IBM and Amazon have all taken a position to not let their facial recognition technology be used by law enforcement until more regulations are in place.21
Encouraging diversity in product design can reap financial rewards. According to Bob Iger, Walt Disney chairman and former CEO, in his book, “The Ride of a Lifetime,” there was a common misconception in Hollywood that films with black leads would struggle in international markets. Despite the pushback he received, he prioritized the production of Marvel film “Black Panther” – the first superhero movie to feature a predominantly black cast. The film was released in 2018 and subsequently earned well over $1 billion, ranking then as the fourth-highest grossing superhero film of all time. In a letter to his employees, Iger stated how the success of the movie “speaks to the importance of showcasing diverse voices and visions, and how powerful it is for all sectors of our society to be seen and represented in our art and entertainment. The movies success is also a testament to our company’s willingness to champion bold business and creative initiatives.”22
Consumer Demand for Value-Driven Companies
The issue of diversity has come to the fore during the rise of conscious consumerism. Companies are increasingly being held accountable by consumers who reward brands aligned with their values. Social media has intensified consumer access to information and made it easier to coordinate efforts to push for organizational change.23 There is an increasing expectation for brands to challenge stereotypes, to take active positions on social issues, to set internal policies that reflect these values across the business, and for senior executives to be held accountable when things go wrong.
During social movements like #metoo or Black Lives Matter (BLM), it is even more important for organizations to respond with action instead of words. Companies are increasingly under scrutiny to do more than present an emotive press campaign and use social media to boost sales. Companies are at risk of facing a backlash internally from employees who find statements hypocritical, and consumers who want evidence of credibility. Social media companies like Facebook and Twitter have faced public criticism for verbally supporting the BLM movement while having products that undermine it. This led to a temporary advertising boycott from more than 1,000 brands for the month of July to protest Facebook’s failure to address hate speech.
Futureproof or Failure
Investors should be wary of companies that fail to futureproof themselves in terms of diversity. And it is fair to question whether companies can survive without a strong culture of diverse employees, and whether it is sustainable to be targeting a certain cohort without that cohort in strategic decision-making power.24
Consumers increasingly want to think that the products they use and the companies they buy from represent them. Socially conscious brands that make inclusivity a central part of their business strategy and brand ethos are therefore likely to succeed.
What Gets Measured Gets Improved
Diversity data is being disclosed at a rapid rate and, in terms of ESG data, it is considered one of the most publicly available numeric metrics, even above greenhouse gas emissions. The more a company discloses around gender pay gap and diversity at different management levels, the more investors can understand best practice and monitor improvements. Whether it is encouraging further transparency at executive, management or firmwide level, disclosure is the best starting point for investors who want to engage on diversity.
Additionally, more companies are setting diversity related targets, some even tying executive bonuses to diversity goals (Microsoft and Intel both have diversity as a strategic performance goal determining 50% of executives’ annual cash incentive. Other examples include Facebook, Johnson & Johnson, and Uber).25 Although diversity performance goals keep management strongly incentivized, any measurable objective where progress is tracked and reported is a positive indicator. The most successful companies develop a pipeline of talent throughout the entire organization, regularly assessing a succession plan and monitoring the turnover/retention rates of diverse candidates.
The conversation around diversity and inclusion is an evolving one, and companies that are on the forefront of change should be seen in a positive light. There will continue to be growing regulatory pressure as well as shifting social expectations around what is considered best practice. Companies that are seen to embrace diversity may find it easier to retain exceptional talent, have a more productive workforce and ultimately outperform less diverse peers on profitability.
Implementing best practices regarding diversity is a good indicator of a strong and adaptable company culture. Investors should consider a company’s level of disclosure, its diversity-related targets and any meaningful initiatives in place. Investors may benefit from discerning those companies that set a pioneering tone from the top, put actions behind their words and incorporate diversity in product design from those that do not.
1Credit Suisse Research Institute; September 2016; The CS gender 3000: The Reward for Change, https://www.wgea.gov.au/sites/default/files/documents/csri-gender-3000.pdf
2Hugo Dubourg; 9 August 2019; Exane BNP Paribas; More than a Woman 2019, https://cube.exane.com/slink/kXlS6PZ0rE9yMN5d
3Morgan Stanley; Jaiwish Nolan, Boris Lerner, Jessica Alsford CFA, Mark Savino, Diane Ding Ph.D., Michelle M. Weaver; 12 August 2019; Introducing HERS: Employing Diversity Pays Off, https://ny.matrix.ms.com/eqr/article/webapp/60246d20-a3e6-11e9-869f-9b5853a450d0?t=1565707383%3A0%3A10035%3Avmias1106660&m=1&ch=Outlook%20Blastmail
4McKinsey & Company; Vivian Hunt, Sara Prince, Kevin Dolan and Sundiatu Dixon-Fyle; May 2020; Diversity wins: How inclusion matters; https://www.mckinsey.com/featured-insights/diversity-and-inclusion/diversity-wins-interactive
5Boston Consulting Group; Rocío Lorenzo, Nicole Voigt, Miki Tsusaka, Matt Krentz, and Katie Abouzahr; 23 January 2018; How Diverse Leadership Teams Boost Innovation; https://www.bcg.com/en-us/publications/2018/how-diverse-leadership-teams-boost-innovation.aspx
6Coburn Ventures; July 2017; Discovering Cultural Advantage Version 2.0.
7Hugo Dubourg; 9 August 2019; Exane BNP Paribas; More than a Woman 2019, https://cube.exane.com/slink/kXlS6PZ0rE9yMN5d
8Jeffrey Karpf, Sandra Flow, and Mandeep Kalra, Cleary Gottlieb Steen & Hamilton LLP, 28 January 2020: Harvard Law School Forum on Corporate Governance: Board Composition and Shareholder Proposals, https://corpgov.law.harvard.edu/2020/01/28/board-composition-and-shareholder-proposals/
9Carmen Reinicke, Jan. 23, 2020; Goldman Sachs will stop doing IPOs for companies without at least one 'diverse' board member starting in July, https://markets.businessinsider.com/news/stocks/goldman-sachs-wont-help-companies-ipo-without-diverse-boards-member-2020-1-1028841276#
10Business Standard, 10 September 2020, Black Lives Matter: Firms pledge to add at least 1 Black director to board, https://www.business-standard.com/article/international/black-lives-matter-firms-pledge-to-add-at-least-1-black-director-to-board-120091000100_1.html
11CBI, 01 October 2020, British businesses to launch new campaign aimed at increasing racial and ethnic participation in senior leadership, https://www.cbi.org.uk/media-centre/articles/british-businesses-to-launch-new-campaign-aimed-at-increasing-racial-and-ethnic-participation-in-senior-leadership/
12McKinsey & Company; Vivian Hunt, Sara Prince, Kevin Dolan and Sundiatu Dixon-Fyle; May 2020; Diversity wins: How inclusion matters; https://www.mckinsey.com/business-functions/organization/our-insights/delivering-through-diversity
13Taffy Brodesser-Akner, 23 April 2019, New York Times Magazine: The Company That Sells Love to America Had a Dark Secret, https://www.nytimes.com/2019/04/23/magazine/kay-jewelry-sexual-harassment.html
14Lucinda Shen; 29 January 2018, Wynn Resorts Loses $3.5 Billion After Sexual Harassment Allegations Surface About Steve Wynn; https://fortune.com/2018/01/29/steve-wynn-stock-net-worth-sexual-misconduct/
15Au, Shiu-Yik, 2 September 2019; The real cost of workplace sexual harassment to businesses. https://theconversation.com/the-real-cost-of-workplace-sexual-harassment-to-businesses-122107
16(Based on paper by Au, Shiu-Yik and Dong, Ming and Tremblay, Andreanne, How Much Does Workplace Sexual Harassment Hurt Firm Value? (June 4, 2020).
17Adam McCulloch; 27 August 2020; BP fuels diversity and inclusion drive: https://www.personneltoday.com/hr/bp-fuels-diversity-and-inclusion-drive/
18Human Rights Watch: LGBT Rights, #Outlawed “The Love That Dare Not Speak Its Name”, http://internap.hrw.org/features/features/lgbt_laws/
19Patrick Hoge; 14 June 2018; For Salesforce, equality is at the center of everything (Video) https://www.bizjournals.com/sanfrancisco/news/2018/06/14/salesforce-equality-lgbtq-pride-marc-benioff.html
21Glenn Gow; 23 June 2020; Why Are Technology Companies Quitting Facial Recognition? https://www.forbes.com/sites/glenngow/2020/06/23/why-are-technology-companies-quitting-facial-recognition/#89399fc6994a
22Robert Iger, 2019; The Ride of a Lifetime: Lessons in Creative leadership from 15 Years pp169-172.
23Anjali Lai; 23 May 2018; Millennials Call For Values-Driven Companies, But They're Not The Only Ones Interested; https://www.forbes.com/sites/forrester/2018/05/23/millennials-call-for-values-driven-companies-but-theyre-not-the-only-ones-interested/#2b6d9de45464
24MSCI ESG Now Podcast, Episode 38, The ESG Weekly: Walmart’s CEO gets called out in the gun debate, and L Brands CMO resigns amid company turmoil on the week of August 5, 8 August 2019, https://www.msci.com/esg-now-podcast
25Jingcong Zhao, These Companies Are Tying Executive Bonuses To Diversity Goals, 07 March 2019, https://www.payscale.com/compensation-today/2019/03/tie-bonuses-to-diversity-goals