Are you collecting the diversity dividend?
Each year on the 8th of March, women the world over commemorate International Women’s Day. This year marks the 110th anniversary of the movement, and the fundamental reason for its existence is just as relevant today. Gender equality has long been an issue facing society and progress has been iterative. Pendal’s Head of Responsible Investment, Edwina Matthew, provides a detailed insight into not just the social imperative, but the economic value to corporations in adopting a broader focus on diversity that actually extends beyond the gender divide.
Diversity is an issue with growing prominence across corporate enterprises. Although the issue most readily raises a connection with gender equality, the concept of diversity has broad-reaching demographic variants that cover gender, age, ethnicity, religion, and much more. Collectively, these form a nucleus of economic value for a business that leverages diversity from the board level right through the company’s organisational structure.
Widening the lens
Historically, diversity within the business community has tended to be thought of as an “insurance policy” against brand or reputation or operational risk. More recently, diversity has become an important social and governance issue, heralding an era of closer scrutiny by customers, shareholders and other stakeholders on behaviours and actions of corporate leaders. Increasingly, companies need to earn a social license to operate from both internal and external sources.1
From an investor perspective, the focus on diversity may be linked to management quality, to others it may represent awareness of particular stakeholder priorities, while for others it may be associated with expected benefits related to fewer instances of bribery and corruption . Regardless of the motivation, recent trends across the investment industry have helped to widen the lens on diversity.
Building the (“smart”) business case for diversity
There is a growing body of industry reports and academic research supporting a connection between diversity and shareholder value. A 2016 Credit Suisse study found a positive relationship between gender diversity and return on equity. Their research suggests companies with at least one female board member earned an annual excess compound return of 3.5% over the MSCI All Country World Index since 2005.2
Looking at diversity from another direction, studies have also found a positive link between increasing participation of women in labour markets and a sizeable improvement in GDP and world leaders are taking note. Canadian Prime Minister, Justin Trudeau, has spoken strongly on the need to address the gender imbalance “not just because it’s the right thing to do, or the nice thing to do, but because it’s the smart thing to do.”3
In Japan, Prime Minister Shinzo Abe introduced a program (“womenomics”) incentivising Japanese companies to hire more women, especially at levels of leadership in an effort to alleviate pressures on the Japanese economy in relation to the nation’s aging population.
Diversity and the generational dollar
Another demographic influence supporting the business case for diversity is the growing influence of the millennial generation as consumers and members of the workforce. By 2025, millennials are set to make up 75% of the global workforce, revolutionising businesses from both an employee and consumer perspective.4 A number of studies report that millennials place a higher value on diversity than older generations and they actively look for diversity and inclusion programs in their prospective employers before making a job decision.5 This and other studies highlight the imperative for businesses to cater to the expectations of this generation, not only as employees, but as customers.6
Diversity and disruption
Today’s rate of technological change is a form of disruption and is challenging many business models. Advances in technology can ironically introduce the potential for unintended bias, including gender bias. For example, despite the technology intensity and specialist skills deployed in developing Artificial Intelligence, there is actually a role for corporate governance and ethics-based oversight. Companies need to better understand consumer patterns and need to design gender-neutral products that also work for 50% of the population.
For the sceptics, there are plenty of examples through history of what can happen in technology when homogenous working environments fall prey to group think. Take the example of the early incarnations of air bag design for automobiles. Researchers suggest a fundamental lack of diversity goes some way to explaining failures of the technology which resulted in casualties. Consider that the engineering and automotive design professions were heavily dominated by males, who only consulted height, weight and body structure metrics for the average male. This approach overlooked suitability for females and children who are naturally different in stature.
Diversity applies beyond the board room
Diversity is becoming an important attribute for analysing the effectiveness of boards and senior leaders of companies. Bringing a team together with differing views and experiences can and should lead to rigorous debate and stress testing of proposals at the board and management level. Leaders need to be conscious of their own biases and demonstrate objectivity in making decisions.
“It’s the combination of diversity and inclusion initiatives that drive sustainable organisation change and thus deliver the diversity dividend”
Edwina Matthew, Head of Responsible Investment, Pendal Group
However, to be successful, a diversity policy needs to go beyond the boardroom. Without education and reinforcement on the value to the company it merely forms a discretionary guideline and can be tokenistic in nature. A company that fails to empower people to share ideas and debate initiatives risks failure in innovation. In other words, it’s the combination of diversity and inclusion initiatives that drive sustainable organisation change and thus deliver the diversity dividend.
Asset owners share the prerogative
The growth trend of adopting responsible investing principles is promoting a focus on diversity within company engagement and proxy voting activities. In its analysis of the 2017 proxy voting season, PRI noted diversity-related shareholder resolutions as one of the three key global environmental, social and governance (ESG) themes in 2017. Regnan (leading Australian ESG data, research and engagement service provider) also notes growing attention to diversity as an engagement theme locally.
This week (8th of March) the world celebrates 110 years since the campaign behind International Women’s Day began. This year’s theme is #PressforProgress in support of gender parity. However, this call to action could also apply to a broader definition of parity. Attitudes are shifting as companies, policy makers, asset owners and consumers all come to understand the negative effects of a diversity deficit. All along the investment chain we are witnessing a greater sense of shared responsibility for ESG issues, and pressing for progress on diversity is a priority.
The bottom line
A company’s approach to diversity can be an important indicator of overall business resilience and management quality. In this new era of heightened stakeholder scrutiny, combined with the growing social conscience of the younger generation, means that explicit attention to ESG issues such as diversity will continue to increase in importance. Organisations that pursue diversity-smart leadership, operations, product design and technological innovation and take the steps to capture the opportunities it offers, will be better placed to understand the world in which we operate, better able to identify the risks and opportunities, and ultimately achieve better business outcomes.
This article is an extract of a more in-depth discussion on the social and economic value of broadening diversity practices.