For investors, board diversity is becoming a standard factor of governance assessment. (UBS)

Wolfe Herd co-founded Bumble in 2014 pitching it as a female-centric online dating app, where women get to control the conversation by making the first move. The app advertises enhanced safety features to attract women who feel vulnerable on other dating platforms. The Bumble app has one of the highest percentages of women paying users among dating apps, according to the Wall Street Journal.

It also has about 30% more female users for every male user compared with the gender mix of users in the North America freemium dating market who don’t use Bumble. The company prides itself for being a company run for women by women. In a recent interview with CBS, Wolfe Herd said the company was focusing on empowering women not only from the product standpoint but internally as well. "I t is really important to walk the walk. So we've really prioritized gender diversity in our business," she said.

Currently, the average S&P 500 board has just under 11 directors, with female members constituting a smaller fraction, averaging at three, according to leadership consulting firm Spencer Stuart. Their analysis also shows that companies led by women tend to have more female board directors than those led by men, although the difference is narrowing; on average, 35% of directors on boards of companies with a female CEO are women, versus 28% for companies with a male CEO.

The issue of gender diversity in corporate leadership gained momentum with the #metoo movement and is increasingly becoming the focus of stakeholders. For investors, board diversity is becoming a standard factor of governance assessment, and in recent years board and workplace diversity both have become more common subjects of shareholder resolutions, according to the US shareholder advocacy group Ceres’ shareholder resolutions database.

The shareholder activism appears to be moving the needle. According to Spencer Stuart, the S&P 500 added 413 new independent directors in 2020. Of the new additions, 47% were women, the most ever. The firm notes that the profiles of women and minority directors differ from non-minority men. They are more likely to be younger and first-time directors, and less likely to be current or former CEOs or have investment experience.

While companies may be responding to shareholder and regulatory pressure, there is growing evidence that companies that value gender and racial diversity perform better.

A study published in 2009 by the American Sociological Review revealed that companies with high gender and racial/ethnic diversity scores enjoyed, on average, higher revenues and sales than ones with low levels of diversity. An analysis by McKinsey showed that firms with a high degree of gender diversity on their executive teams were more likely to report above-median EBIT (earnings before interest and taxes) margins. Over time, this likelihood of outperformance increased to 25% for gender and 36% for race/ethnicity.

Previous studies by the UBS Chief Investment Office (CIO) have found that companies with a greater representation of women at senior management levels performed better across a variety of profitability metrics.

“While there is a correlation between diversity metrics and return, we cannot conclude that there is a causal link. However, this does not mean such metrics cannot serve as useful signals for investors,” says UBS Chief Investment Office (CIO) strategist Amantia Muhedini. “The logic underpinning much of the corporate diversity and equality conversation focuses on the potential competitive advantage for companies that can retain a larger portion of their talent.”

CIO expects investing with a gender and racial lens to gain momentum as regulators, governments, shareholders, and society in general sharpen their focus on diversity in the workplace.

“We think that companies able to improve their corporate diversity should benefit with a “diversity bonus” of sorts, enabling them to outperform their peers thanks to not only a higher degree of innovation, but also higher sales growth and profitability,” says Muhedini.

CIO recommends investing in a well-diversified portfolio of companies that demonstrate strong diversity, equity, and inclusion policies and practices across a wide range of diversity-related metrics.

Investors seeking exposure to this theme can invest in single securities or in fund approaches where the diversity-related metrics are the primary driver of the stock selection or the investment universe definition, as well as broader sustainable investing strategies where there is a diversity component in the sustainability evaluation.

For more on the drivers of the diversity and equality theme and a reference list of companies with strong diversity profiles, read the report Longer Term Investments: Diversity and Equality 29 Jan 2021 and the Diversity and Equality- US companion report.

Main contributor: Shanthi Bharatwaj