Diversity as a decisive factor
Sustainable corporate management pays off: a UBS study surveyed 22,000 companies in 91 countries and found that companies that fill at least 30 percent of executive positions with women can expect a higher net margin than companies without women in executive positions. Sustainable investment strategies make it possible to promote equal opportunities and diversity whilst generating returns and promoting precisely these kinds of companies at the same time.
While corporations and even many governments in the world today are less homogenous than a decade ago, a significant body of research suggests that future economic growth depends on greater inclusivity in terms of gender, race, religion and sexual orientation.
“Diversity is an integral part of a sustainable business strategy,” says Simon Smiles, UBS Wealth Management's Chief Investment Officer for Ultra-High-Net-Worth Clients. “Conversely, discrimination or prejudice against people based on their personal characteristics risks lowering potential profits today and harming future prosperity. Exclusionary strategies are unsustainable and bad for business.”
What’s more, evidence suggests that inclusive companies are more likely to hire the best workers, meet the needs of the widest consumer base and potentially post the biggest profits. While that’s no guarantee against being blindsided by market shifts, diversity may well keep companies sharper, more reactive and better prepared for the next crisis-in-waiting.
Diversity drives performance
Draw together a group of people of the same gender, color and educational pedigree and the prevailing wisdom can keep an organization on one track until accumulated changes derail it. The hierarchical structure of some organizations may exaggerate the problem.
Over the past 10 years, many companies have already become more diverse in terms of gender. For example, in 2016, women held just over 20 percent of board positions in Fortune 500 companies — up from 10 percent in 1996. Reporting is improving, too, with investors and policy makers pushing for greater disclosure on areas such as the gender pay gap.
There also are indications that diverse companies perform well. UBS has found evidence that a gender-focused portfolio, built from companies where women occupy more than 20 percent of leadership positions, outperformed an index of developed market stocks (MSCI World) by an average of 1.6 percentage points per year between 2011 and December 2017.
If gender diversity is considered as a bellwether, investors committed to long-term economic sustainability would do well to examine companies that are exploring all avenues of inclusivity and integration, including age, culture and other factors.
A McKinsey analysis of more than 1,000 companies across 12 countries found that firms ranked in the top quarter for the gender and ethnic diversity of their senior management were 21 percent and 33 percent more likely, respectively, to post above-average profits compared to their least-diverse peer.
These advantages are likely to become self-reinforcing. As reporting improves and more investors incorporate diversity considerations into their selection of companies, the stock market penalty for poor management will become greater. Increasingly, it makes intuitive sense that work force diversity is a proxy for a well-managed company. Companies need to understand their customers, who will present a mix of races, genders and sexual orientations.
Also, a diverse board is likely to be better attuned to the multiple and varied preferences of its customer base — a critical factor as countries and regions become more heterogeneous.
Measuring diversity to manage it
How can firms improve their diversity? Turning it into a performance metric is one way. Indices measuring corporate commitment to diversity are proliferating. For example, the Solactive Equileap Gender Equality Index, launched in April 2017, comprises companies selected on a variety of gender-equality criteria, including workplace diversity across the firm, commitments to equal pay and other factors affecting women's ability to remain in the work force (such as parental leave and child-care provisions).
McKinsey suggests companies “make fewer excuses” and make a visible commitment to diversity with sustained action through the organization. Its view is that companies need to expand their criteria when recruiting new leaders, look beyond current leadership demographics and take steps to ensure that a wide range of candidates are moving through their pipelines.
The goal is not to hit targets, but to encourage a sustainable business culture. There is no single diversity formula that works across all industries and within all market conditions. Some pioneering companies have successfully promoted employees on the autism spectrum, but it’s not necessarily a component of every diversity plan.
Rather, decision makers need to keep their eyes on the strategic goal: becoming a business of many backgrounds and points of view that can perceive early threats and, ultimately, outperform monolithic competitors.
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