The Business Case for Gender Diversity—Beyond Quotas

As evidence mounts that gender diversity can help profitability and reduce risk, investors are increasingly scrutinizing companies’ diversity, equity and inclusion (DEI) policies through a gender lens. A group of Morgan Stanley Investment Management’s female investing leaders recently discussed the future of progress for workforce parity, why leadership teams should think beyond quotas and how investors can advance gender equality. Participating in the conversation were:

•  Seema Hingorani, senior leader focused on strategic client relationships, investment talent development and diversity initiatives,
• Marte Borhaug, Head of Sustainable Outcomes and Portfolio Manager on the International Equity team, and
• Yijia Chen, ESG Quantitative Research Analyst and Index Manager on the Applied Responsible Investment Solutions team at Calvert Research and Management

(This Q&A was shortened for clarity. Read the full version here.)

Marte Borhaug: In addition to being the right thing to do, gender inclusion is good for business, which makes it good for investors. One of the most quoted studies, by McKinsey, finds that companies in the top quartile for gender diversity on executive teams are 25% more likely to have above-average profitability than companies in the bottom quartile.¹ As an investor, it’s important to understand why we see this outperformance. For starters, gender diversity helps promote innovation. A study by the Boston Consulting Group found that companies with leadership teams that have above-average diversity generate, through product innovation, revenues that are 19 percentage points superior to companies with less diverse leadership teams, and enjoy earnings, before taxes and interest, that are 9 percentage points higher.²

Improved risk management is another potential benefit. According to a study by MSCI, boards with higher levels of gender diversity tend to experience fewer instances of governance-related controversies, including bribery, corruption and fraud, and overall stronger management of ESG-related risks.³

Yijia Chen: The McKinsey study shows that the rewards and penalties that accrue to the best and worst performers compound over time and can lead to dramatically different long-term performance. Companies that demonstrate leading or improving DEI practices can attract and retain better talent, which promotes productivity that can help the company position better for long-term value creation. Diverse viewpoints can be additive to the decision-making process precisely because they bring in new perspectives and challenge traditional thinking.

Seema Hingorani: Different perspectives are particularly important for risk management. The global financial crisis is a case in point. Within markets, we saw a situation where the same type of people were making the same types of decisions. When I founded Girls Who Invest, a nonprofit organization designed to bring more young women into investment management careers, the need to challenge traditional thinking, as Yijia said, was very much in my mind. The idea is to make sure that these young women are well prepared to enter the industry and understand that their voices are needed at the decision-making table.

Hingorani: Developing the talent pipeline is critical. Companies have to broaden their scope for recruitment to attract candidates with different backgrounds and experiences. We have found that diversity in the workforce enhances our investment capabilities—whether that be better understanding the end markets of a publicly traded company or helping facilitate deal origination in private markets.

As a firm, we partner with great nonprofit organizations to help foster the next generation of talent. Girls Who Invest, Sponsors for Educational Opportunity, the Toigo Foundation and the Greenwood Project are just some of the nonprofit organizations that aim to engage women early, often during high school and university, to foster the talent pipeline.

Borhaug: Research has shown that the problem isn’t that women aren’t qualified or don’t have the right aspirations, but that leaders must also look at processes such as recruiting, interviewing and career advancement, among others, to address how we provide unseen talent an opportunity to shine. Unless we look at the rules of the game, we are not going to see the improved outcomes that diversity can bring to a company.

Chen: In addition to recruitment, we are seeing companies introduce workplace diversity councils and networks, not solely for gender but for all types of diversity, such as racial/ethnic, sexual orientation, gender identity, disabilities. There are also many group activities focused on intersectionality as an individual’s identity is multi-dimensional. With the growth in DEI efforts, it is becoming clearer that companies must commit dedicated resources. Frequently, members of underrepresented groups will volunteer and take responsibility to change the organization’s diversity culture, a role that is in addition to their day job. It is important to understand not only what these companies are doing, but also how specifically the leadership teams are supporting these actions, for example, by recognizing and compensating the time and work contributed by employees involved. 

Chen: At Calvert, we have always valued the power of proxy voting to hold boards accountable for their attention to diversity. While we have exercised this power for three decades, in recent years, we have placed an added emphasis on DEI to strengthen our proxy voting guidelines. For example, if a company has fewer than two women on the board, Calvert’s guidelines would direct us to vote against reelecting the board directors who serve on the nomination committee. In addition, for companies in the U.S., the U.K., Australia and Canada, Calvert will vote against the nominating committee at companies that have fewer than two people from racially or ethnically underrepresented groups or that are less than 40% diverse. We will also vote against the chair of certain boards that do not disclose racial diversity information.

Another important area where shareholders can advocate for change is transparency. For this reason, Calvert launched a campaign to facilitate EEO-1 disclosure in July 2020. The campaign targets the largest 100 U.S. companies and advocates for the disclosure of their EEO-1 reports, which are mandatory demographic reports collected by the Equal Employment Opportunity Commission of the U.S. government. At the beginning, only 16 companies were making their data public. We engaged the other 84 companies and, today, nearly 90 of our target companies publish the report. Now, about half of S&P 500 companies disclose, demonstrating the power of engagement.

Borhaug: As an equity investor in large public companies, it is important to evaluate every potential investee company’s DEI approach to assess the risks and identify possible areas for engagement should we invest. Recently, we engaged with a large spirits and wine company based in Europe. Despite being a global company, with a vast geographical footprint, particularly in emerging markets, the company had an all-white European board. We saw this as an opportunity to discuss the benefits of diversity in their leadership and urged the company to diversify their board. We were pleased to see that last year the company appointed a woman of Indian heritage with business experience from Asia, including Australia, Malaysia and Myanmar. Her nomination adds a unique perspective to the board, helps broaden the company’s horizon and thinking and brings valuable business experience. On a one-on-one basis, engagement can help influence change.

Joining forces with like-minded investors can also be highly effective to compel companies to change. In the U.K., Investment Management recently joined the 30% Club Investor Group, which comprises 42 financial investors representing more than £20 trillion in assets under management. The group has engaged with U.K. companies for the last decade to improve board and executive gender representation.

Hingorani: If we step back to think about environmental, social and governance (ESG) investing, the “E” and the “G” are often easier to measure and thus to highlight and talk about. We can count carbon reduction to assess climate impact, for example, and we can look at the proportion of women on boards when we think about corporate governance. The “S” is more difficult to measure: How do we treat our people? How does this impact the women in our workforce?

The pandemic has brought home the importance of confronting “S” issues for corporate leaders. They have had a duty to ensure that workers are kept secure and safe. They have had to look at policies around caregiving, as it relates to childcare or even elder care, which affects the growing number of us who have aging parents. For firms, this is critically important. In the aftermath of the pandemic, fewer women are returning to the workforce relative to men, a sign of sliding backward. To remain competitive, we need to be harnessing that talent. By spending more time focused on the “S” issues, women, companies and investors will all be better off.