The Diversity Dividend

Key takeaways:

• Credible research suggests that companies with diverse teams make better decisions and crucially make for better investments.
• Our voting and engagement policy encourages companies to increase the participation of women and ethnically diverse candidates at senior levels by growing and encouraging a diverse talent pipeline.
• We also push for improvements in diversity and inclusion-related disclosures and strategies.

It is now widely understood that diverse groups make better decisions because they are less likely to suffer from the ‘group-think’ which can lead to sub-optimal decision making. More recent research goes further and suggests a causal link between greater diversity and stronger financial performance where diversity is achieved at a sufficient level and is normatively accepted.¹

Diversity is a lead indicator of wider corporate culture. We are all aware of companies failing because the board is populated with directors unwilling, or unable, to challenge a single domineering personality. As investors, we may not know what goes on behind closed doors, but we still need to be able to evaluate corporate culture. Often, we glean insights into the effectiveness of a company’s decision-making processes and the health of its corporate culture from a combination of scrutinizing published information and, critically, via engagement meetings.

Our voting and engagement policy has two aims. First, we aim to encourage companies to increase the participation of women and ethnically diverse candidates at senior levels by growing and encouraging a diverse talent pipeline. We also aim to improve diversity and inclusion-related disclosures and strategies where a company has a diversity strategy but disclosure is limited, or where a company has an insufficiently rigorous diversity strategy.

In order to determine how we vote, we study a company’s publicly disclosed diversity and inclusion policies. We expect a company to disclose openly its diversity and inclusion policies and practices, not just in relation to gender but encompassing a wider understanding of diversity and inclusion. We expect to find this on the company’s corporate website, and on its careers page, as well as in its annual report or corporate social responsibility report. We also consider the gender split of a company’s board, and any other workforce data that has been disclosed. When examining workforce data, we believe it is appropriate to split our policy geographically to account for regional differences.

Data is often scarce and incomplete in relation to diversity across an entire company. Gender diversity at the board level is a data point which is accessible to investors. But, at an executive or management level, data is often unavailable or inconsistent, which leaves us as investors with insufficient information to make meaningful comparisons.

Obtaining Data on Ethnic Diversity Can Be Challenging

We face additional challenges obtaining data on ethnic diversity within companies, and data provision varies significantly between regions. The European Union General Data Protection Regulation (GDPR) allows the collection of personal and ethnicity data for the purposes of equality monitoring, but in practice it is often difficult to source the data. It must be proved that the information is collated legally, which requires individuals to consent. This explains why ethnic diversity data provision across Europe is often patchy. Where it is collected, the information often pertains only to a small group of individuals, rather than to all employees. There may also be country-specific legal and practical challenges. For example, in Germany, census forms do not allow for identification of ethnicity, and limitations on data collection exist in France.

At present, the lack of consistent data surrounding ethnic diversity within companies is an obstacle to our making fully informed voting decisions. Nevertheless, ethnic diversity is a key consideration for us – both when researching companies, and in our stewardship activities. Where ethnic diversity data is disclosed, as is often the case in the US, this forms part of our analysis of a company when researching it for investment and engagements.

Constructive Engagement

Our approach is designed to facilitate a constructive engagement with companies on diversity and inclusion. Via our engagement, we ask that companies interpret diversity in its broadest sense, considering, for example, ethnic and socio-economic diversity. We also explain, where we need to do so, that diversity can make a positive contribution to a company and its long-term resilience. We believe firmly that diversity cannot be a tick-box exercise. The benefits of diversity can only be realized where companies are truly diverse across a range of factors, from gender and ethnicity to socio-economic and professional backgrounds, resulting in cognitive diversity, and diversity of thought.

Initiatives to Accelerate the Pace of Change

We also participate in a range of initiatives designed to accelerate the pace of change. We are active members of the 30% Club Investor Group. In 2020, this group expanded its targets from focusing solely on gender to also encouraging UK company boards and executive committees to include one person of color by 2023.² Our work with this initiative has included engaging with proxy advisers on the range of data which is collected on diversity, with a focus on ethnicity. These discussions were intended to highlight a number of practical insights, such as the specific data that can be collected, what the challenges are, how this varies by region, and how this landscape is evolving. We welcome the recent update from proxy voting provider ISS³ that it is now highlighting Russell 3000 and S&P 500 companies with no apparent racial or ethnic diversity, and that it will recommend taking voting action from 2022. We also welcome Glass Lewis’s collection and disclosure of ethnic diversity data for S&P 500 companies.⁴

We are also members of the Workforce Disclosure Initiative (WDI), and use this as a platform to enhance the management of human capital and engage with companies on social issues, and to advocate the need for improved disclosures.

Finally, as the quality and coverage of diversity data expands beyond gender diversity at the board level, we expect to evolve our voting policy to encompass other aspects of diversity such as ethnicity more explicitly.