17 Oct 2019
If we suggested that diversity and inclusion (D&I) within a company improve its culture, performance and even national GDP, we think you would probably want to hear more. And if we explained that there are still huge improvements that need to be made in the area of diversity and inclusion, we think you would agree with us that it should be prioritised.
‘Diversity’ and ‘inclusion’ are no longer just buzzwords. They can have a profound impact on investment returns which is hard to ignore.
The IMF (International Monetary Fund) believes that less diversity leads to a loss in GDP. It has calculated that if female labour participation rose to match that of males, there would be a GDP increase of 5% in the US, 9% in Japan and 34% in Egypt. In an interview to celebrate International Women’s Day, Christine Lagarde, Head of the IMF, said some countries with discriminatory laws could boost the size of their economies by as much as 35% if they abandoned those laws and took advantage of women’s skills.
In the US, the Fortune list of the 100 best companies to work for looks at opportunities, benefits and diversity. Between 1984 and 2009, a value-weighted index of those companies outperformed the S&P 500 Index.
There is significant evidence of the benefits of a diverse corporate board and a diverse workforce (for example, MSCI research concluded that companies with at least three women on the board perform better than those without any women).
Diversity is not complex and can be defined succinctly. It means a mix of different genders, ethnicities and cultures and this needs to be present at both board and workforce level.
Why increased diversity and inclusion can improve company performance and investor returns
The research points to two key conclusions:
• Diversity promotes creativity and capacity for problem solving
• Inclusive environments attract and retain talent better than non-inclusive ones.
The benefits for problem solving
The idea that individuals with different thought processes and experiences could improve a team’s ability to solve problems makes intuitive sense. A diverse group has more collective wisdom than a set of individuals thinking about a problem in the same way.
Recent data provides empirical backing for this. Investigations have shown that, looking at research and development expenditure, if you increase female representation on a board by 10%, you achieve 6% more patents and 7% more citations.
Attracting and retaining talent
Positive, supportive policies towards diversity and inclusion have been linked with higher stock returns, share price valuations, productivity and profits.
One argument is that more gender equality increases a firm’s labour market competitiveness. Consider flexi-working and day care services, and how helpful these are for new parents or those taking care of others. Companies without sympathetic policies can lose talented employees over these issues.
Further research is needed into these links, and whether they’re due to correlation or causation, but the evidence seems to be telling us something. We know that employee satisfaction, good training and a progressive culture help to recruit and retain talent. It makes sense that gender equality helps too.
Has progress been made in improving diversity and inclusion within companies?
Women and minorities remain underrepresented, especially in leadership positions:
• McKinsey found that women account for an average of 16% of senior leadership positions in the US and 12% in the UK
• And a study by FundFire found ethnic and racial minorities similarly underrepresented in the US asset management industry: 88% of professionals at the executive committee level are white, while just 6.7% of such professionals are Asian, 2.4% are black, and 2.4% are Hispanic.
At board level:
• A Harvard study into why diversity matters found that “the percentage of women on boards overall in the United States is between 11% and 12% and has barely increased in the last decade”
• The October 2018 issue of the Harvard Business Review found that the number of Fortune 500 companies “with even a single racial or ethnic minority director has declined over the past 10 years.”
There are clearly real improvements to be made across the diversity and inclusion agenda and consumers might be the catalyst to push this. Companies are increasingly expected to make a positive contribution to social inclusion.
High-profile companies like Gillette and Nike are slanting their advertising to appeal to people in a more diverse way. For example, the latest Gillette adverts are anti ‘toxic masculinity’ and targeted beyond the usual ‘alpha male’. Nike has been even more explicit in its social message, focusing its campaigns on athletes like Colin Kaepernick and Raheem Sterling, who have highlighted racial discrimination in their respective sports. It’s no coincidence that both Procter & Gamble (which owns Gillette) and Nike have very diverse workforces.
This aggressive marketing is an important part of these companies’ brand strategies and has been well received. The effect is spreading to more companies, particularly those targeting millennial consumers, who want to see advertisements that reflect their own beliefs and concerns.
How diversity plays an important role in life at CGWM and our investment decisions
Diversity of thought is extremely important to us at CGWM, and we achieve it through an active diversity committee and recruiting and employing a variety of people of different backgrounds. It also influences our team structures and decision making.
Making sure our investment portfolios are diverse and inclusive
Our in-house fund selection committee always considers environmental, social and governance (ESG) factors when choosing funds on behalf of our clients.
Within our ESG portfolios themselves, diversity and inclusion is part of the ‘social’ criteria we use to assess fund strategies. We measure each fund’s positive impact, and search for those that are good at navigating social opportunities and risks.
We look at how a company balances the needs of its shareholders against its other stakeholders, including its employees and local community. This often has a positive impact on portfolio performance and is a good indicator of a management team that is concerned and paying attention.
We will continue to assess diversity and inclusion factors alongside more traditional financial metrics, as we believe they will become an increasingly important influence on long-term returns.
Patrick Thomas, Head of ESG Investments, Canaccord Genuity Wealth Management.
 'Female board representation, corporate innovation and firm performance' Jie Chen, Woon Sau Leung and Kevin P. Evans (2018)
 'Corporate sexual equality and firm performance' Liwei Shan, Fu Shihe, Lu Zheng (2017), 'Do LGBT-supportive corporate policies enhance firm performance?' Shaun Pichler, Janell L Blazovich, Kirsten A Cook, Janet M Huston, William R Strawser (2017), 'Soapbox: why women managers shine' Michel Ferrary (2009)