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Why gender diversity on boards can pay off for investors

December 13, 2017
Diversity & Inclusion

Should investors look more closely at how many women are on the board or in senior management at listed companies? Yes, say professional investors, who state that gender (and other) diversity in company management does boost the bottom line.

Dominica Ribeiro, State Street Global Advisors’ head of institutional marketing for North America, points to MSCI research in 2015 that found companies with strong female leadership generated a return on equity (ROE) of 10.1 percent a year, compared with 7.4 percent from those without. The same study also found that companies lacking board diversity suffered more governance-related controversies than average.

“A January 2017 report by the Conference Board suggests that the reason for the outperformance is largely attributed to the outside perspectives brought into the boardroom by adding women to the board,” says Ribeiro.

Last year, the Australian arm of global investment group CLSA took this a step further, with research showing that companies with more than 20 percent of women on their boards outperformed the S&P/ASX 200 index by 2.45 percent a year during 2010-2015. That’s just over 12 percent over five years.

Sub-headed “the empathy bonus”, the June 2016 report said: “It remains fascinating (not surprising!) that our top boards are led by women.”

In 2016, Credit Suisse found that companies with at least one female director generated a compound excess return each year of 3.5 percent since 2005, compared with companies where the boardroom was all-male. Its 2014 report (CS Gender 3000: Women in Senior Management) showed that companies where women made up at least 15 percent of senior managers had more than 50 percent higher profitability than those where female representation was less than 10 percent. This was still the case last year.

Better investor outcomes

“Boards that genuinely embrace cognitive diversity, as manifested through appropriate gender representation and a broad spectrum of skills and experience, are more likely to achieve better outcomes for investors. There is increasing research to support this hypothesis,” says Susan Roberts, former chief executive of Lazard Asset Management Pacific in Australia and chair of the Investor Working Group for the Australian 30% Club. The 30% Club aims to ensure that 30 percent of ASX 200 seats are held by women by end-2018.

Chris Stott, chief investment officer at fund manager Wilson Asset Management, says: “There is clear evidence to show that having the appropriate mix leads to superior shareholder returns. As investors, we have historically had very good experiences with females in senior management.”

When investigating the productivity of a listed company, Catherine Allfrey, principal of fund manager Wavestone Capital, uses gender as just one of a number of environmental, social and governance filters.

“As part of our investment filter we look for companies that have high employee engagement because it leads to better customer engagement, the sign of a successful company,” she says. “So we don’t want to pay lip service to having targets where the CEO doesn’t believe in it, but is dragged kicking and screaming. We do want genuine change and we know it’s hard. Just look at our industry.”

So if there is a magic number, what is it? At least three women on the board, according to the MSCI report. “Academic research suggests that three women may constitute a critical mass to allow women to contribute more equally to group decision-making,” it says.

SSGA backs gender diversity “as one of many ways a board can introduce a varied set of skills and expertise among its directors to help improve financial performance”. In March 2017 guidance notes to enhance gender diversity on boards, it found most large-cap companies in Australia, the UK and US had at least one female director “but have yet to fully embrace gender equality within their ranks”.

No excuses

Further, 4 percent of ASX100 (and 2 percent of S&P500) companies had no women on their boards. And 16 percent of ASX100 (and 24 percent of S&P500) companies did not meet a threshold of at least 15 percent of women on boards.

Retail investors could take a lesson from SSGA’s threat to vote with its feet: “[If] companies fail to take action to increase the number of women on their boards, we will use our proxy voting power to effect change – voting against the chair of the board’s nominating and/or governance committee if necessary.”

Many investors, says Allfrey, are already paying more attention to this.

“Given Gen Y are environmentally aware and socially engaged, they will want to see society reflected in the workforce. As a society, we are increasingly interested in where our products come from – food, the environmental impact etc. So it makes sense that investors would become more interested in how the companies in which they invest treat their employees and are skewed, or whether they reflect society today.”

When it comes to measuring the success of more women on boards, Allfrey is cautious about using ROE across industries.

“ROE is simply the net profit after tax of a business divided by the equity of a business,” she explains. “As equity is simply assets minus liabilities, the more leverage you have in business, the higher ROE. A company’s ROE moves up and down depending on the profit and investment cycle.

“As our economy moves away from tangible goods (manufacturing and mining) to service (healthcare, technology, retail) companies, these are generally higher ROE, as their assets are people or intangible intellectual property. So the percentage of women working in service companies tends to be higher than in tangible goods.”

A better comparison would be across the same sectors.

“For example, as Westpac now has 50 percent women in management roles, will it perform better than another bank with women at 30 percent? If employee engagement is, as a result, higher at Westpac, then one would expect customer engagement will rise, which should in turn lead to higher profit growth.”

Large super funds are increasing their focus on issues such as gender diversity, notes Roberts. “They want companies that are well governed and companies that are going to be sustainably put together in a way that they can deliver wealth over the long term. Diversity is a critical component of that.”

By Debra Cleveland

Source: Financial Review

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