Investing in diversity and inclusion
We’re in the homestretch of 2020—the perfect time to reflect on the events of a historic year and set our sights on the next one. This year offered no shortage of lessons to carry forward into 2021, but among the most important is the need to continue advancing diversity and inclusion (D&I) efforts—from the workplace, to boardrooms, to investment management teams.
Corporate America has begun heeding the public call for greater diversity across all aspects of business. Several CEOs and fund managers—and even a major stock exchange—have publicly committed to practices that embrace different genders, races, ethnicities, sexual orientations, ages, and professional experiences.
Just as importantly, it’s something investors can support when selecting assets and building portfolios.
Diversity and the bottom line
Many analysts agree diversity can foster innovation and sustainability and improve overall business outcomes. The Nasdaq cited research showing the benefits of board diversity, including better quality financial disclosures and a lower chance of audit problems.1 A 2018 study from consulting firm McKinsey & Co. actually put a number on it: Companies with diverse boards were 43% more likely to achieve higher profits.2
When it comes to investment performance, our colleagues at Morgan Stanley3 have found that more gender-diverse companies delivered slightly better returns—with lower volatility—compared with their low-diversity peers.4 Also, a 2018 analysis by London-based financial information firm CityWire showed that funds managed by mixed-gender teams outperformed both male-only and female-only managed funds.5
Research has shown that diversity improves innovation and overall business outcomes, and that, conversely, group-think can actually lead to outright failure.
D&I in Corporate America
Corporate boards have traditionally been dominated by white men, and while that is largely still the case, there’s been small progress over the past few years. According to the 2018 Board Diversity Census, a multiyear study from the Alliance for Board Diversity and Deloitte, women held nearly 23% of Fortune 500 seats in 2018, compared to 16% in 2010. Minority board members comprised 16% of seats in 2018, compared with roughly 13% in 2010.
But an increased focus on diversity—particularly this year—has driven many businesses to address these disparities. Here are some of the latest developments:
- On December 1, the Nasdaq filed a request with the SEC for permission to ask all the 3,200-plus companies listed on its US stock exchange to hold their boards to higher diversity standards. The rule would require companies to have at least one woman and one minority director represented on their boards—or to publicly disclose why they don’t.1
- In September, California passed legislation mandating publicly traded companies headquartered in the state to have at least one minority director by the end of 2021. The action followed a similar law passed in 2018 requiring companies to have at least one female board member.7
- A number of public and private firms joined the Board Challenge this year, pledging to add a Black director within a year or use their resources to further diversity efforts. Among the public companies that signed on were Zillow, Heritage-Crystal Clean, Nordstrom, and WW International.2
Bringing D&I to portfolios
For investors interested in putting their own resources to work for a social cause, here are a few ideas for more diverse and inclusive portfolios:
- Look at the leadership: If you’re interested in specific company or fund, find out about the people at the helm. Is there diversity on the management team and the board of directors? Who manages the fund? Does the strategy team include people from various backgrounds?
- Read the reports: Look to industry reports, benchmarks, and indexes to gauge social and corporate governance practices. Fortune's Best Companies to Work For, Forbes' Just 100, Glassdoor’s Best Places to Work, and The Human Rights Campaign’s Corporate Equality Index are good places to start. E*TRADE was named one of the best places to work in 2020 by Glassdoor and a best place to work for LGBTQ equality for two years in a row. Morgan Stanley was recognized by the Money Management Institute and Barron’s for its addition of “Commitment to Diversity and Inclusion” to its core values.
- Consider an ESG theme: Environmental, social, and governance (ESG) investing focuses on companies that adhere to certain standards in these areas, and there are many mutual funds and exchange-traded funds (ETFs) that reflect these principles. Keep in mind, though, that this strategy may eliminate or limit exposure to certain investments, and as a result, may underperform other funds or benchmarks that have a broader focus.
- Avoid the laggards: At a minimum, investors may choose to screen out companies with poor humanitarian records or those that don’t stress diverse and inclusive values. A company’s corporate site is a great place to investigate. Here you are likely to find regulatory disclosures as well as a firm’s corporate responsibility and sustainability reports, including D&I information. If it’s not prominent on their site, it’s a good indication it’s not a priority.
Of course, investors should also make sure that any decisions reflect their individual goals, timelines, and risk tolerance. If those boxes are checked, aligning investments with personal values is a solid next step.
- The New York Times, DealBook, “Nasdaq Pushes for Diversity in the Boardroom,” 12/1/20, https://www.nytimes.com/2020/12/01/business/dealbook/nasdaq-diversity-boards.html
- The Wall Street Journal, “Zillow, Nextdoor and Other Companies Pledge to Add Black Directors,” 9/9/20, https://www.wsj.com/articles/zillow-nextdoor-and-other-companies-pledge-to-add-black-directors-11599649200
- E*TRADE Financial, LLC is a business of Morgan Stanley.
- Morgan Stanley, “Why it pays to invest in gender diversity,” 5/11/16, https://www.morganstanley.com/ideas/gender-diversity-investment-framework/
- CityWire, Alpha Female report 2018, https://citywire.co.uk/Publications/WEB_Resources/Creative/Global/Alpha-Female-2018.pdf
- Morgan Stanley, “A Trailblazer’s New Journey,” 6/16/20, https://www.morganstanley.com/articles/seema-hingorani-investment-management
- Harvard Law School Forum on Corporate Governance, 10/10/20, https://corpgov.law.harvard.edu/2020/10/10/new-law-requires-diversity-on-boards-of-california-based-companies/