Gender-lens investors - those who treat female empowerment as a key criterion when committing capital - have attracted growing interest in recent years. In particular, listed companies with a greater number of women on their boards have on average delivered bigger returns to shareholders. However, mainstreaming gender-lens investing may present a quandary.
Under current conditions, gender-lens investors believe they can outperform by focusing on companies where a greater proportion of management are female, sometimes as part of a range of metrics designed to reflect diversity of opinion. In part, the argument goes that more inclusive companies may be more likely to have a stronger corporate culture and thereby achieve better results.
However, if enough investors adopted this approach, the potential superiority of inclusive companies would already be reflected in valuations. Their share prices would be higher as a multiple of their expected earnings in anticipation of better performance. On average, estimates of their future profitability would also be higher. By investing in more inclusive companies, investors would not be buying into an undervalued story. Hence they might have a lower chance of outperforming.
If share prices start reflecting companies' differing degrees of inclusivity, profit-seeking gender-lens investors will likely need to set their sights on a new market dynamic. One area which might eventually prove promising is shareholder engagement. If shareholders recognize that, on average, more diverse companies should attract better valuations, they should also wish to vote for more diverse boards or boards with stronger diversity policies. If diversity became a broadly accepted influence on valuations, such voting might eventually push up the average valuation of such companies. At some point in the future, if shareholders pursue it systematically, this strategy could support returns.
Select large institutional investors like State Street have already announced they will promote diversity as part of their approach. But it would be most effective if institutions do so in tandem, where possible in coordination with proxy voters like Glass Lewis and ISS. If it is to deliver reliable results, it should also be accompanied by a broader campaign to ensure the market recognizes the importance of diversity in valuations.
Of course, it will never be enough to assemble a more diverse board and hope that management will magically improve. Companies must also ensure the board is fit for purpose and that diversity also translates into broader perspectives on decision-making. But if their dialogue with companies takes this into account, gender-lens investors can push for real change in addition to boosting their portfolios.