Gender diversity is not just fluff

By Larissa Fernand |  05-02-21 | 

Morningstar’s Dan Lefkovitz wrote about how the coronavirus pandemic has paradoxically highlighted the strength of female leadership and undermined the cause of gender equality.

Countries with women as heads of state have been relatively successful in their virus-containment efforts. The experiences of New Zealand (Jacinda Ardern), Taiwan (Tsai Ing-Wen), Germany (Angela Merkel), Finland (Sanna Marin), Iceland (Katrín Jakobsdóttir), Norway (Erna Solberg) and Denmark (Mette Frederiksen) testify to qualities of humility, honesty, cooperation, and empathy in their leaders. And K K Shailaja made news across the globe for her work in running the health ministry in the southern state of Kerala, India.

On the other hand, the pandemic has taken a disproportionate toll on working women and intensified the challenges they already face.

Research by McKinsey on Corporate America showed how women have been negatively impacted. Women—especially women of colour— were more likely to have been laid off, stalling their careers and jeopardizing their financial security. Working mothers have always worked a “double shift”—a full day of work, followed by hours spent caring for children and doing household labour. When the supports that made this possible—school and childcare— were upended, they were forced to scale back on work, derailing their career trajectories and exacerbating the gender wage gap. Lefkovitz noted that this was all the more telling in industries which gave substantial representation to women, but were hard hit: retail, travel, hospitality.

Gender equality is one area where businesses are increasingly striving toward and investors are considering. And for good reason.

The United Nations Sustainable Development Goal Number 5 describes gender equality as both a “fundamental human right,” and as the “foundation for a prosperous world.”

Societies that tap into the full potential of their populations are more competitive. The same principles hold in the business world, where women remain underrepresented and underpaid. Discriminatory companies not only deny equity and access, but they also act against their own best interests. Gender diversity can positively affect talent acquisition and retention, customer alignment, and brand strength.

Research shows that combining people of different backgrounds results in “cognitive diversity,” which enhances collective problem-solving. McKinsey and Credit Suisse have each produced research showing that companies serious about gender diversity and inclusion achieve superior financial results. 

But, gender diversity creates positive benefits when society believes in its intrinsic value, and not just as a mere obligation.

Professor Letian Zhang of Harvard Business School in his research of 1,069 leading firms across 35 countries and 24 industries, found that gender diversity relates to more productive companies, as measured by market value and revenue, only in contexts where it is viewed as “normatively” accepted.

(In the energy sector in the Middle East, which has historically not been gender-inclusive, firms’ gender diversity was unrelated to company performance.)

Normative acceptance means a widespread cultural belief that gender diversity is important. There were positive effects of diversity in societies with normative acceptance of working women, but not in societies with only regulatory support. Though regulatory support of working women is correlated with normative acceptance, they are not the same. Some countries have strong cultural support, but few legal structures in place. Others have established legal structures, but cultures that are strongly male-dominant.

(Japan has a patriarchal work culture but some of the most generous parental and homecare leave policies globally. Such countries do not much benefit as much from gender diversity when compared with firms in places like Western Europe that have more cultural acceptance.)

How Morningstar measures company-level gender diversity.

Dan Lefkovitz, who is a strategist for Morningstar's Indexes group, believes that good research on diversity and inclusion goes beyond the numbers; it is insufficient to view it only as the number of women represented at various levels of a workforce. Policies and practices also must play a role. For this reason, Morningstar partnered with specialist research firm Equileap, whose Gender Equality Scorecard assesses companies on 19 criteria across four broad categories:

  1. Gender Balance in Leadership and Workforce
  2. Equal Compensation and Work-Life Balance
  3. Policies Promoting Gender Equality
  4. Commitment, Transparency, Accountability

Equileap also examines a company’s legal record when it comes to gender discrimination and sexual harassment.

Morningstar’s gender diversity indexes exclude companies embroiled in major legal issues related to gender but otherwise include all securities in the broad equity universe. Security weight is determined by a company’s Gender Equality score. A top-scoring company receives significantly more weight than its market capitalization alone would drive. Companies are judged against peers within their region to account for varying norms, while the indexes’ regional weights are held constant with the market in order to deliver diversified exposure.

Examples of companies from different regions and sectors receiving above-market weight due to high Gender Equality scores are Johnson & Johnson, Diageo, and Westpac.

It was also found that companies demonstrating a commitment to gender equality have achieved above-market returns with lower risk.

You can read about it in this paper Investing Inclusively: Building Shareholder Value Through Gender Diversity.

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