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Should diversity matter to investors?

August 27, 2019
Diversity & Inclusion

Most investors understand the importance of diversification in their portfolios. They know that concentrating their investments in one particular area can be risky. But not all investors believe it’s important to invest in diverse companies, as I discovered at the San Francisco MoneyShow earlier this month.

A few weeks ago, I was on a Forbes panel at the MoneyShow. I noted that companies that have more women on their boards tend to do better, but another panelist disagreed with me. “That’s hogwash,” he said.

Many people, even investment professionals like the people on the Forbes panel, haven’t kept up with the growing industry and academic research on the advantages of gender diversity. And many would be surprised to learn how little diversity of thought and experience exists in the corporate boardrooms and executive suites of American businesses. Yet good corporate decision-making requires the ability to hear and consider different points of view, which comes from people who have different backgrounds, experiences and perspectives.

Here’s a quick overview of four industry studies (there are also many academic studies that came to similar conclusions):

McKinsey & Company, “Delivering through Diversity,” 2018

McKinsey initially found a correlation between diversity and corporate performance in a 2014 study; it confirmed this in a follow-up study in 2017, noting that “companies in the top quartile for gender diversity on their executive teams were 21% more likely to experience above-average profitability than companies in the fourth quartile.”

Bank of America Merrill Lynch, “Women: The X-Factor” 2018

Bank of America found that companies with more diverse boards had higher subsequent return on equity (ROE) than companies with less diverse boards for “nearly every year over the past decade.” In its research, companies with more diverse boards were also less volatile.

Morgan Stanley, “Why It Pays to Invest in Gender Diversity,” 2016

Morgan Stanley looked at 1,600 stocks around the world and found “high gender diversity companies have delivered slightly better returns, with lower volatility, compared with their low diversity or sector peers, and they have moderately outperformed on average in the past five years.”

MSCI, “The tipping point: Women on boards and financial performance,” 2016

MSCI’s analysis of U.S. companies over the five years from 2011-2016 found that the companies with at least three women on their boards had higher median gains in return on equity and earnings per share.

Companies are paying attention to diversity. Are you?

Even if you aren’t personally convinced by all the research, many companies and corporate boards are paying attention to it.

BlackRock, one of the largest money managers in the country, stated in February 2018 that the companies in which it invests should have at least two female board members.

California now requires all California-based publicly traded companies to have at least one female director by 2020. Norway, Spain, France and Iceland all have similar laws.

Many board members see diversity as an asset. Nearly all (94%) of the directors in Pricewaterhouse’s PwC’s 2018 Annual Corporate Directors Survey agreed that diversity brings unique perspectives to the boardroom, and 84% said it enhances board performance. Still, as I experienced at the Forbes panel at the MoneyShow, some directors told PwC that they see diversity as just “political correctness.”

Boards are starting to become more diverse, but there’s still a ways to go. In 2018, 87% of S&P 500 boards had at least two or more women—up from 56% in 2008. While this is a step in the right direction, two women out of 9-13 people on a corporate board shows that boards remain overwhelmingly male.

How to invest in a way that supports diversity in the workplace

Many investors came up to me after the Forbes panel in San Francisco to find out more about how they can invest in a way that supports diversity.

Perhaps the easiest way to invest in companies that value diversity is to invest in sustainable funds. These funds seek out companies with strong environmental, social and governance (ESG) practices, and diversity is considered good governance. Funds have teams of people analyzing companies on your behalf. (Full disclosure: My firm manages a sustainable impact fund.)

You can find a list of sustainable funds at the Forum for Sustainable and Responsible Investment (USSIF) website. Keep in mind that this list does include some load funds; I suggest investors focus only on no-load funds.

You can also use As You Sow’s gender-equality fund screener to identify funds that invest in companies with a good gender balance between their leadership (including their board of directors) and their overall workforce, as well as companies with strong policies on issues like equal pay.

Sustainable funds can help you build a truly diverse portfolio that supports the issues that matter to you and helps you reach your long-term goals.

By Janet Brown

Source: Forbes

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