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ESG Focus: Gender Diversity Pays Dividends

ESG Focus | Dec 23 2020

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

It's all hands on deck heading into the fourth industrial revolution, China is in the game, and companies will need the best of the best to survive: well informed and well-heeled ESG investors know it; and sovereign nations are legislating

– ESG funds looking for diversity
– All hands on deck for the fourth industrial revolution
– Legislation rising for boards and senior management
– Rivals gaining jump on sleepy Australia 

By Sarah Mills

The time is approaching when investors would do well to pay female board and executive representation on ASX-listed companies more than cursory attention.

Advancing gender equity is a key United Nations Sustainability Goal and is one of the key metrics attracting ESG investor focus.

Post-covid, and heading into the fourth industrial revolution, investment risks are rising substantially, and it could be argued that one of the strongest strategies during the next few years will be risk management.

One way to mitigate risk is through board and management diversity.

Dozens of studies show that companies with at least one female board representative outperform those with none. Similar results are borne out for female representation in management.

Whether this reflects more on the calibre of the men on the board who make such assiduous appointments, or on the women per se, it is difficult to say.

But broad-based evidence suggests that diversity of any kind improves company performance, expands a company’s vista and strengthens its competitive position. It provides scope for enhanced value creation and risk awareness.

It also helps ward off “matesy” slackness; “like think”; and the more dangerous “pack think", in the predatory sense, all of which not only threaten competitiveness and productivity, but pose considerable risks for major corporations’ reputations and enhance opportunities for fraud and non-compliant /criminal behaviour; which have in the past cost investors billions.

Hence gender diversity is a key investment criteria for best-in-class ESG investors in particular. 

Why pay women more, if you can get away with paying them less?

The simple answer is: because you don’t get away with it.

Another less-easy-to-calculate metric is that of gender pay. Thousands of studies show that females are paid less than their male counterparts across all levels of management for exactly the same role.

What many people may not be aware of is that persistently promoting men over women (and paying them more) is consistently hurting corporate bottom lines.

By routinely promoting a person based on gender, it is clear that the best people are not always being promoted, resulting in a net loss in efficiency and opportunity with each ill-considered promotion.

Those who believe this is not the case, often assume that women will continue to pick up the slack for their less-competent boss, but if anyone gives that premise even cursory consideration, they will see how hollow that is.

Most women worth their salt will suddenly lose a considerable amount of loyalty to the company. They are, after all, smart enough to compare and contrast skills and productivity. 

Some may start looking elsewhere, or decide to go out on their own, or simply slow the pace and refuse to work free overtime. Others may throw the towel in altogether and have children. 

Most would rather feather their own nests with their labours than the nests of their rival colleagues.

And then there is the widely held view that it is also okay to pay a woman less than a man for the same job.

This view is often premised on the basis that employees are too intimidated to share information about remuneration. This is true to a degree. But women often find out. And they tell other women.

It is also based on the assumption that women will accept less, which is often the case because they have no choice. But they don’t like it, and they have feet. 

Demoralised, their engagement and investment in outcomes fall, reducing productivity and reducing female workforce participation.

This latter is critical and is one reason governments across the globe are eyeing legislation.

As S&P notes: "Acceleration in US GDP growth under increased female labour force participation could add a whopping $5.87 trn to global market capitalisation in 10 years."

All of the above behaviours cost a company big time: it costs them in churn, engagement, productivity and future performance. 

It also costs them in diversity of thought, robbing them of the broader contribution needed to survive periods of change, such as those ahead.

So it stands to reason that companies who get the gender card right, will outperform their peers – and certainly the studies back this up.

It also costs companies reputation. Women carry information from one company to another, warning female colleagues off companies with gender-hostile environments, while praising good ones, resulting in a net loss of talent to some companies.

ESG fund managers calculating their odds

The best female candidates will make their choices accordingly.

And so will the world’s ESG fund managers channeling trillions of dollars based on performances against several criteria, including gender.

And so will governments as they distribute stimulus to corporations.

As the world forges into a fraught transition, minimising risks will be critical and gender is one a relatively easy ESG marker for investors to monitor.

Most corporations publish their board compositions on their websites and in their annual reports. 

The pressure is also rising globally for companies to include gender reporting in their company and tax filings.

Diversity is a window into value creation

Whenever I invest in companies, for example, I look first at present profitability, performance metrics, strategy and growth prospects. 

Then I roughly match it against megatrends and ESG criteria. I always check out the website and the board, and I scan the board members for quality and diversity. I generally view female representation favourably.

I may still invest in companies with all-male boards but if presented with a series of companies in an industry with similar metrics, I will plump for the diversified board. ESG fund managers do the same.

Hence a slow and steady flow of capital accumulates to the diversified boards, strengthening their prospects. It's all about the money.

As the Value Reporting Foundation noted at its recent launch, ESG metrics provide investors with a window through present profitability into future value creation – and value creation, a key element of sustainability, is the crucial factor heading into the transition.

Navigating the Fourth Industrial Revolution 4IR

The evidence on the benefits of female representation on boards and in management has been in for some time, but the ante is about to rise.

Electrification and the fourth industrial revolution is barrelling down.

Trillions of dollars are about to be created and destroyed. 

Even the most powerful of corporations can no longer rest on their on laurels, or rely exclusively on the boys’ club’s backroom power brokers. China is in the game. 

For the first time in a long time, corporations are going to face serious competition.

Many will fall. It took just two decades of disruption and ill-prepared management for the nearly 200-year old Fairfax Media to meet its demise. General Electric was one of the few majors to survive the changes of the second half of the 20th century but even GE’s 100-year inclusion on the Dow Jones Industrial Average came to an end in 2018.

Energy companies have been dropping like flies from leading indices. 

While a reversal is on the cards, pending the pace of the post-covid economic recovery, investors can expect to settle in for a yo-yoing of companies on and off the boards as the transition runs apace.

Companies will need to use all the resources at their disposal to survive, let alone flourish. 

Visionaries will be in high demand, as will qualities such as mental dexterity and flexibility. 

A broad range of experience and perspectives will need to be brought to bear. Strategies must comprise a nimble attack and a solid defence. 

Clear sight is required. Biases, including gender and racial bias, are unnecessary ballast. 

In a recent study, S&P Global found women to be the most under-utilised source of growth that could send global market valuations soaring.

"For every 1% of GDP growth, the S&P 500 returns 3.4% on average annually. An additional 0.2 percentage point of GDP growth would therefore boost the S&P 500 another 0.7%—and could increase U.S. market capitalisation by $2.87 trillion in a decade," notes S&P.

"Around the world, each additional percentage point of U.S. GDP growth has also translated into a 4% jump in equities in Germany, 6.2% in China, and a staggering 9.3% in Korea—even more than the gains we can expect in the US.

"An increase in women’s participation to that of other advanced countries would add an average of 0.2 percentage points annually to U.S. GDP in the coming decade—or a cumulative $455 billion in output above S&P Global’s baseline forecast."

Hence gender becomes a key criteria for both ESG investors and growth investors.

Proof is in the pudding

It is always worthwhile throwing in a few statistics to back one’s case.

A recent report from Calvert Research and Management titled Evaluating the Glass Ceiling shows that companies that prioritise diverse and inclusive workplaces, demonstrated by a greater female presence in leadership positions, enjoyed a stronger financial performance over time.

An MSCI study shows that companies with at least three women on their boards experienced a median increase of 10% in return on equity, and a 37% increase in earnings-per-share between 2011 and 2016.

It also noted that adding any number of female directors correlated with higher increases in earnings-per-share whereas comparable losses correlated to losing women from the board during the same period.

Credit Suisse linked board diversity to higher return on equity, lower leverage and higher price/book ratios in studies conducted in 2012, 2014 and 2016. 

Surprise, surprise, the Calvert research also shows that women’s labour force participation tends to rise in line with strong and effective family friendly work policies.

Calvert also notes that investors have a role to play in ensuring boards and management support policies that promote gender equity. 

“Successful companies must be able to understand the various trends that will determine their competitive future and plan accordingly,” says the report.

Similar results are returned for studies of women in executive leadership.

A 2016 Peterson Institute for International Economics study of roughly 22,000 global organisations revealed a strong link between female representation in C-suite management and company profitability.

A 2018 McKinsey study found that companies rating in the top quartile for executive gender diversity were 21% more likely to outperform on profitability and 27% more likely to experience superior value creation.

Gender legislation

There are many men in power who resent the idea of equal gender representation and will actively oppose it and encourage others to do the same.

But given the UN has included gender equity as a sustainable development goal, the odds are against such a strategy’s medium to long-term success.

Keep in mind that sustainability is about preserving shareholder value during the transition.

According to the Institute of Leadership and Management, boardrooms in nations with stricter quotas are more diverse and of higher quality.

Globally, countries in which corporations have dragged their feet on gender equality have taken the decision into their own hands via legislation.

In late November, for example, Germany’s coalition government announced it would introduce a mandatory quota for the number of women working as senior management in the country’s listed companies.

Germany has a particularly low level of female representation of 12.8%, which compares unfavourably with roughly 30% in other developed countries.

Given Germany is determined to maintain its manufacturing base and retain its strength and productivity during the transition to a fourth industrial revolution, low female board representation was an oversight that could not be let pass.

When even the CEO of Volkswagen estimates that the company has a less-than-50% chance of surviving the transition to electrification and new technologies, the prospects of proceeding with a half its workforce demotivated, and the loss of dedication and perspectives of many powerful women, are not options. 

It’s all hands on deck.

Angela Merkel’s Christian Democrats and the Social Democrats have determined that management boards with more than three members must include at least one woman. 

It also set a minimum quota of 30% of women on supervisory boards for companies where the government holds a majority shareholding, and will introduce a quota for corporations operating under public law.

Germany’s federal minister for women, Franziska Giffe, said: 

We are putting an end to women-free boadrooms in large companies … We are exploiting all of our country’s potential so that the best in mixed teams can be more successful … because nothing is done voluntarily and we need guidelines to move forward.

Most of Europe requires 30% to 40% representation. 

Norway requires 40% of boards to be female. 

In the UK, by 2015 a soft voluntary ratio of at least 33% female representation was recommended for FTSE100 boards. The FTSE250 were advised to hit the same target by 2020.

In France, gender quotas require listed and non-listed firms with more than 500 employees and revenues greater than E50m to have a minimum 40% female board representation. Failure to comply incurs voided board appointments and suspended payment of attendance.

In Italy, publicly listed companies are required to have at least 20% of either gender at the first board renewal and 33% by the second renewal. Failure to comply results in heavy fines and the risk of voiding directorships.

Data suggests women only occupy about 20% of seats on the boards of United States Russell 1000 companies.

The US is the notable G7 country without formal federal government requirements or targets to advance gender equity in the private sector. 

However, many states are pushing ahead regardless, according to the Harvard Law School Forum on Corporate Governance.

“The (recent) statutes are grounded on a large body of empirical evidence that board diversity contributes significantly to ‘good governance’ and improved financial performance,” says Harvard.

“Businesses must focus on enhancing the diversity of their boards to both comply with the new statutory requirements and secure the underlying benefits to their performance.”

US corporations, however, are bucking the legislation.

“According to a March 4, 2020 report from the California Secretary of State … only 330 of 625 covered companies filed the required reports about their boards’s diversity,” says Harvard. 

“Of those that filed, 37 reported having zero women on their boards as of December 13, 2019, a violation of the requirement to have at least one female director by that time.”

What is interesting about the above quote, is that corporations are being forced to report on gender in their filings.

It is only a matter of time before Australia will have to do the same. The creation of the Value Reporting Foundation, with global reach, suggests Australian companies will soon have to report on many sustainability metrics, including gender.

First-mover benefits

The benefit to companies that sort gender representation out prior to enforcement is clear. 

First movers have an opportunity to select from a broader range of candidates and pick from the best, settle in to the new board dynamics and be prepared to push ahead when rivals are just getting their act together.

They are also likely to be favoured as best-in-class ESG recipients, giving them the added advantage of capital support – that is assuming ESG investment lives up to its press release.


Australia boasts female representation of almost 30% on ASX200 boards according to the AICD Gender Diversity Quarterly Report. However, we fair less well globally across the broader market.

Australia may have 30% female representation on ASX200 boards but the AICD and campaigners the 30% Club have made it clear that the 30% target represents “the floor and not the ceiling” for gender diversity and are aiming for a 40:40:20 target – 40% male, 40% female and 20% of either sex, or a person of other gender.

However, the competitive impetus is not as powerful in Australia as for a powerhouse such as Germany.

Successive governments have all but destroyed the nation’s prospects of competing globally in a post fossil-fuel world. 

Our best technology still goes overseas. We continue to drag the chain on renewables, an area in which we could have enjoyed a strong competitive advantage, and the culture, based on voting patterns and political campaigning is, compared to many OECD countries, racist and misogynistic. 

Australia’s backwater mentality could well ensure it remains a backwater, allowing our sovereignty to continue to be undermined by other more powerful nations.

In a nation dominated by an easy going, matesy culture, it is easier to dig “stuff” up out of the ground and create barriers to entry than it is to get smart.

Still, we have a chance of at least stepping up and carving some kind of niche in a post fossil-fuel world as an exporter of something other than copper, tin and iron-ore. But it is going to take a sharp shift in mindset. 

In the meantime, gender equity on boards and in senior management in good companies is almost certain to yield dividends to investors in the medium to long term.

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