Gender Diversity Delivered: Results from Five Years of Investing in Women

PAX World FundsThe Financial Case for Gender Equality [Exerpt]

Research shows that women’s empowerment is connected to economic performance. The largest share of nations’ wealth comes from people: According to

The World Bank, two-thirds of global wealth comes from the value of future earnings of the labor force. Because there is a global gender gap in earnings, women account for only 38% of labor force earnings. McKinsey estimated that closing that gap could add between $12 trillion and $28 trillion to global gross domestic product (GDP) by 2025. That makes sense, considering what GDP consists of: consumption, investment, government spending, and trade. If women earn more, the contribution to consumption, in particular, is significant.

 The link between gender diversity and financial performance may seem less obvious at first than the link between women’s empowerment and economic development, but it is just as robust. Much academic work has found that more diverse groups tend to have better decision-making processes: They are less vulnerable to group-think and herd behavior, and they evaluate options more thoroughly than homogeneous groups. This should make for better governance, oversight and management in firms. The research suggests that this is true, and our approach to gender lens investing is built on this foundation.

Increasingly, analysts in both finance and academia are examining the relationship between financial performance and gender diversity, and there is abundant evidence that having more gender-diverse leadership is connected to better financial outcomes.

A Credit Suisse Research Institute study looked at 3,000 global companies and found that those with at least one woman on the board outperformed the companies with no women for more than 10 years, from 2006 through mid-2016. Morgan Stanley also weighed in on the value of gender diversity in 2016, taking a very comprehensive approach to what “gender diversity” means in business. That approach included five themes: gender diversity in executive ranks and on boards; pay equity; representation of women at employee, manager, executive and director levels; policies promoting equal opportunity and diversity; and work-life balance programs. The study found that companies with better gender diversity had better financial performance (return on equity) and lower volatility than less diverse peers, and that outperformance stretched over a five-year period. Moreover, the top fifth of companies, in terms of gender leadership score, had much better performance than peers, indicating that having greater gender balance was better for companies than a tick-box approach of having token women in decision-making roles.

Several papers examine how companies with greater gender diversity may be better able to generate value through channels such as better human resource management and innovation. For example, a 2019 paper found a positive correlation among companies with more diverse boards and the number and novelty of patents. Boston Consulting Group found that companies with more diverse leadership teams tended to have a significantly greater proportion of total revenue from innovation. Another study, from MSCI, noted that companies identified as more innovative were significantly more likely than their peers to have three or more women on their boards — what some consider to be “critical mass” for delivering the positive benefits associated with gender-diverse boards. The innovative companies were also 1.5 times more likely than their peers to have quantitative diversity targets. For companies in industries where competitiveness is driven by innovation, gender diversity may provide a crucial advantage.

Companies can also create value through excellent management of human resources. MSCI produced a paper in 2018 linking human resource practices with board diversity. The links that MSCI found were strong: Companies in the international MSCI ACWI Index with leading talent management programs were 4.6 times more likely than talent management laggards to have a critical mass (three or more from 2014 to 2016) of female directors. Furthermore, the companies with at least three women on their boards and leading talent management practices saw combined annual growth in revenue per employee that was 1.2 percentage points higher than the mean for their industries between 2012 and 2016.

To summarize, there is robust evidence that gender diversity is positively and significantly linked with competitive strength and financial performance through better group decision-making and better use of workforce talent.

This whitepaper was originally published by Pax World Funds and is reprinted here with permission.  Ori Art


...we find that banks with more gender diversity on their board perform better once the composition of these boards reaches a critical level of gender diversity, corresponding to a board female share of around 13-17 percent.

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