Why investors (should) care about diversity
In an increasingly complicated and fast-moving world, companies are likely to be most successful when they have assembled diverse teams who understand customers and disrupters.
AMP Capital has long argued investors benefit from looking beyond financial statements when valuing companies.
Over the long-term, the way companies approach the environmental, social and governance (ESG) risks and opportunities they face is likely to have a far greater influence on company value than the tangible factors traditionally considered by investment analysts. The greatest driver of company value is not what you can see, but what lies beneath the surface.
Diversity is one such issue. Investors care about diversity for two main reasons: it’s not just the right thing to do but increasingly it’s also the smart and necessary thing to do.
In an increasingly complicated and fast-moving world, companies are likely to be most successful when they have assembled diverse teams who understand customers and disrupters. Such teams are well equipped to build, communicate, implement and evaluate appropriate strategy.
In diverse teams alternate points of view will be offered and considered. By having diverse boards, companies signal that a range of people and points of view are valued.
Investor action: what should companies be encouraged to do?
Companies can do much to improve gender diversity. But what is likely to be most effective depends on each company’s starting point and the roadblocks holding them back.
Drawing on the work AMP Capital has done on this issue, it has been helpful to encourage companies to step back and consider the value they place on diversity and where they are in this journey. Without first acknowledging a need for improved diversity progress is likely to be slow.
Generally, those companies that perform well are those that respect people, whether they are staff, suppliers, customers or others in their community. We want to buy products and services from these companies. We want to work for them and we can’t help but speak highly of them.
As we want to see them achieve greatness we will even go out of our way to play a part in their success. They inspire, unite, they stand for something; and actions match their beliefs. If good companies prosper, we all do.
The business case for improving gender diversity at senior levels of organisations is continually being strengthened. AMP Capital has found companies with two or more women directors tend to exhibit better governance, with fewer issues around board composition, the quantum and structure of remuneration, audit integrity and also related-party transactions.
This can be attributed to the different perspectives that women bring to the table. When issues are approached from different points of view, it is likely discussions will be more robust and decisions more rewarding.
While good progress has been made, there is some way to go before women make up 30 per cent of every Australian board of directors.
AMP Capital therefore encourages the companies we invest in to address roadblocks such as unconscious bias and to cast the net more widely when recruiting. For a pool of talented women to be developed and recognised, there needs to be clear focus on pay parity and the opportunities for women to gain executive experience.
When can investors stop talking about gender diversity?
Investors who are focused on long-term sustainable value gain insights from considering the intangible factors that drive company value. One such driver of value is the quality of a company’s people.
As such it is important for companies to attract, motivate and maintain the best team and create an environment where the best ideas can be implemented.
For as long as companies choose to narrow their pool of talent and limit their cognitive diversity and collective intelligence, it will be in investors’ best interest to engage with companies on this issue. Each of us has some understanding of the need for greater diversity.
Yet it appears we also have roadblocks and bias that are so deeply entrenched they make us part of the problem and contribute to the inertia. It’s no longer OK to simply agree that someone needs to do something. As employers, employees, educators, men, women and investors, we can all be part of the solution.
It’s likely we’ll have to keep talking about diversity until we not only understand the importance and complexity of the issue, but when we see that we are also part of the problem and the solution. Only then will we be able to help hurry up history.