They Who Have The Gold

Impact Reflection | July 2, 2021

In our work with clients, diversification of investments creates more resilient portfolios and allows for flexibility. Similarly, gender diversity in corporate leadership creates resilient outcomes for companies, and therefore more consistent returns for their stockholders. 

“The world has been fighting for gender equality for decades, but progress has been slow,” announced Melinda French Gates this week, as she publicized the Gates Foundation’s $2.1 billion commitment on gender-equality work over the next five years. Indeed, progress has been slow, whether in increasing women’s participation in management and on corporate boards, creating broad access to flexible and predictable work schedules for all workers, or addressing specific policies that disadvantage women, such as mandatory arbitration for workplace sexual harassment and workplace discrimination cases.¹

The Gates Foundation investments are notable for their large dollar amounts, but many other investors of all sizes are similarly working to increase gender balance in corporate leadership.

Diverse leadership doesn’t always happen organically. Historically, most managers have a subconscious bias to hire and promote people like themselves. Innovative government policy can play a dramatic role in kick-starting change. In California, a groundbreaking 2018 law requires all companies with their principal executive office in the state to have up to three women on their boards by the end of 2021.² Eleven other states are now considering similar rules, with some applying to all companies, and others including a component to require racial diversity as well.³

There have been successes, although challenges remain. A recent report assessing progress at the 647 affected companies in California found that women now hold 26.5% of board seats, nearly double the 2018 level of 15.5%.⁴ There remain another 10% of board seats across two-thirds of the companies that need to be filled by December of this year for full compliance. Additionally, although women and girls of color comprise 32% of California’s population, fully 56% of companies have no women of color on their boards.

Gender diversity matters for the bottom line. Goldman Sachs changed its policy in early 2020 to insist on at least one “diverse” member on the board of any company they take public, with an emphasis on women. At the time, CEO David Solomon suggested better financial return was at the heart of their decision, saying “over the last four years the performance of IPOs where there has been a woman on the board in the US is significantly better than the IPOs where there hasn’t been a woman on the board.”

More broadly, a McKinsey study in 2020 found that there is a strong relationship between gender and racial diversity in executive teams and financial outperformance, and that relationship has strengthened over time. Covering more than 1000 companies from 15 countries, their study showed that companies with gender diverse boards are 28% more likely to outperform their peers in profitability, while gender diversity in executive teams increases the chance of outperformance by 25%.

McKinsey notes that there are a small number of leading firms successfully incorporating diversity both at the management and the board level; the large majority are making less progress.⁵ Most companies have internal policies to encourage diversity, but there is no transparency to clarify why they have not yet created measurable change. A key focus of shareholder engagement by investors in recent years has been to request disclosure of companies’ diversity data. That data provides an understanding of the effectiveness of existing programs and can guide further conversation to promote change.

When direct conversation doesn’t lead to results, activists file resolutions for change to be put to a shareholder vote. As You Sow, a local firm that works with investors to engage companies on a broad range of social and environmental issues, has recently filed diversity disclosure resolutions with companies such as Microsoft, Campbell Soup Company, and Nike.⁶ They also filed a resolution with Tesla requiring a report on the use of mandatory arbitration and its impact on employees’ ability to seek redress.

There have been decades of conversations between investors in public companies and company management to push for more diversity. Most mutual fund firms engage in these conversations to at least some extent, with some making it part of the mandate for their portfolio management. Some firms also initiate shareholder resolutions that can bring urgency to those conversations and include the voices of all shareholders. These efforts are buoyed by laws such as the one in California that accelerate the moment that diversity in corporate leadership is the norm.
 
Diverse boards and diverse management teams – both in terms of gender and racial diversity – can anticipate a broader set of needs, and come up with more innovative solutions. They have expanded participation and real gains in equity, as well as better financial performance, across many different industries. Equity may be fair, and because it is also profitable, it allows our investors to have a powerful voice in creating change.

References

¹ https://adasina.com/investor-statement-in-support-of-ending-forced-arbitration/

² “Since nation’s first law requiring women on boards, the number of female directors at California companies has doubled,” MarketWatch, May 4, 2021.

³ “States are Leading the Charge to Corporate Boards:  Diversify!” Harvard Law School Forum on Corporate Governance, May 12, 2020.

⁴ Since nation’s first law requiring women on boards, the number of female directors at California companies has doubled,” MarketWatch, May 4, 2021.

⁵ “Diversity wins:  How inclusion matters,” McKinsey & Company, May 19, 2020.

⁶ See As You Sow website listing of resolutions.