The numbers are striking. Though women account for half of the world’s working-age population, they comprise only 40% of the global labor force and generate a mere 37% of the world’s GDP.1 While there are a myriad of social, cultural and economic reasons for this disparity, closing the gender gap isn’t merely an issue of fairness; failure to achieve parity between men and women in the workforce is expected to have significant economic implications both in the U.S. and abroad. A recent McKinsey Global Institute report finds that advancing women’s equality could boost global GDP by $12 trillion by 2025.2
Meanwhile, the research behind the benefits of gender diversity at the corporate level is also compelling as numerous studies by Mercer, Credit Suisse and others have found.3 While correlation does not necessarily imply causation, we recognize the overall business case for diversity. McKinsey research finds companies ranking in the top quartile for gender diversity are more likely to deliver financial returns above their national industry medians, suggesting a potential investment opportunity for those willing to consider these benefits in conjunction with their traditional security analysis.4
As we discuss in this paper, the Neuberger Berman Socially Responsive Investing (“NB SRI”) team’s overall investment framework focuses on identifying high quality companies positioned for growth that are well-managed and give thoughtful consideration to ESG issues that are most relevant to their businesses. The team believes that thoughtful managements can enhance firm value by minimizing a broad range of business risks while building on opportunities that can increase their competitiveness over the short and long term. Within this context, the NB SRI strategy strives to invest in companies that appreciate the value of gender diversity in the workplace, an attitude that manifests itself in such behaviors as appointing women to their boards of directors; promoting women into senior positions; innovative hiring, training or other programs for women; offering diversity training and support groups for employees; and promoting diversity throughout their supply chains.
NB SRI and ESG Integration
Investors focused on impact investing seek to invest in companies that contribute positively to outcomes across a range of environmental, social and governance (ESG) issues, from local concerns such as community impact to more universal issues such as diversity and climate change.
The NB SRI team believes that responsibility is a hallmark of quality. This belief underlies the investment process which integrates business, financial, investment and ESG criteria. The NB SRI team measures an investment’s impact by assessing the relevant ESG factors of a company’s business, including the net benefits its business can have on the broader environment and community. First we look to identify the source and sustainability of a company’s competitive advantage by understanding its business model, the dynamics of the industry in which it operates, management's track record, and its approach to corporate governance and shareholder disclosure. From there, we can drill down to the company’s performance and trajectory in terms of ESG factors. We examine company management and its commitment and leadership on sustainability issues, and what policies and incentives are in place to encourage good behaviors. We additionally look at the products and services offered, and the degree to which these provide beneficial impacts to customers. Companies can further support their cause by disclosing their ESG activities and associated impacts. And we further engage companies in areas where we feel additional transparency could be beneficial.
We believe our integrated business, financial and ESG analysis leads to a more granular understanding of the business and enables us to better identify good quality, responsible managements that stand to have a beneficial impact within their community and across stakeholders—and our portfolio.
SRI Impact Process Overview
Measuring the Impact of Gender Diversity
We consider a number of factors when reviewing gender diversity. In general, we seek to invest in companies with:
- Women on the board of directors
- Women in the C-suite, as board chairs and/or in executive management with P&L responsibility
- Established diversity programs, policies and commitments
- Established supply-chain diversity programs
- Products and services that benefit women
Below we discuss the importance of each of these factors and report on how they stack up in the 40-company equity portfolio holdings of our NB SRI strategy as of September 30, 2016.
NB SRI Strategy Diversity Impact
As of September 30, 2016, approximately 99% of the NB SRI strategy portfolio holdings by weight had at least one or more women on their board. About 52% had at least one woman in C-suite/board chair and/or executive management with P&L responsibilities. The NB SRI team seeks to invest in companies that have diverse boards. We encourage companies to consider a broad and diverse pool of director candidates that can bolster the overall diversity of their boards. The NB SRI team believes that a diverse board of directors is more likely to have a robust forum for discussions relating to governance that can allow the company to navigate the many and varying opportunities and challenges facing businesses globally.
Women on the board of directors or in leadership. It is widely recognized that companies with women in leadership positions often perform better than those companies who do not. And according to a recent report by Catalyst, a nonprofit organization focused on workplace inclusion, gender-diverse boards are also associated with higher scores across four dimensions of “corporate social performance”: community, customers, environment and supply chain.
Despite this, only 19.2% of the board seats of S&P 500 companies were held by women at the end of 2015, about flat against 2014. The report also finds that just 14.2% of S&P 500 companies were on the path to parity (or at or approaching 50% women on their boards), having women filling 30% or more seats.5 Given that women comprise about half of the total U.S. workforce and management positions and are responsible for the majority of consumer spending, we believe the number of women on boards—and throughout the executive suite—should increase to better reflect the country’s changing dynamics.
A 2016 Credit Suisse analysis of over 3,000 companies globally from 2005 through July 20166 found that large cap companies with more than one woman on the board had an annualized compound excess return of 3.5% over those that have none.
The research also found that companies with higher female representation at the board level or in top management exhibited higher returns on equity, higher valuations and also higher payout ratios.7 While the research does not make any claims for causality, these and other similar findings have piqued investor interest into better understanding the impacts of diversity on corporate boards as well as senior management.
Women hold just over half of management, professional and related positions in the U.S. but only about 4% of CEO positions at S&P 500 companies.8 Promoting women into roles with P&L responsibilities provides further opportunities for career growth and a path into senior management and executive level roles.
Impact of Female Board Directors on Performance
From 2005 through July 2016, companies with at least one female director have outperformed companies with no female directors by 3.5% annualized.
Global performance: companies with a market cap of >$10bn. Source: Credit Suisse Gender 3000 (“The CS Gender 3000: The Reward for Change,” Credit Suisse AG, September 2016).
NB SRI Strategy Diversity Impact
As of September 30, 2016, approximately 82% of our portfolio holdings by weight had established diversity programs and initiatives, including employee networking groups, mentorship programs and recruiting practices. The NB SRI team seeks to invest in companies with internal mechanisms in place to recruit, train, mentor and promote a diverse workforce, as well as to proactively address any pay gaps within their workforce; we believe these companies are better prepared to respond to the workplace issues relevant to employees and thus keep them motivated and engaged. There is no single solution when it comes to promoting a culture of diversity or building a successful diversity program, but having strong support and commitment from management is critical. The NB SRI team, in its engagement with companies, strives for disclosure since it allows us and other investors to evaluate companies and the intent/actions/outcomes of management’s diversity initiatives.
Diversity programs, policies and commitments. Companies that proactively manage diversity issues may benefit from positive reputational effects and potential hiring and retention advantages. Established diversity programs are characterized by a variety of conditions that promote a culture of diversity and inclusion across the company, including a high-level commitment from management, recruiting and training programs, employee networking groups and mentorship programs. According to Sustainalytics, a global sustainability research firm, 52% of the 1,012 US firms they sampled do not disclose any diversity programs, with initiatives particularly lacking in the energy, information technology and health care sectors.9 A study conducted by Mercer found that leadership needs to be engaged in promoting and managing diversity and that organizations with diversity programs and initiatives have more women at the top.10 Companies that are proactively recruiting and retaining women as well as minorities, are fostering an inclusive workplace, improving their right to operate and enhancing their competitive advantage.
The wage gap is perhaps the most bedeviling issue within workplace diversity. It has been well documented that women earn less than men across industries; according to the U.S. Census Bureau, women in the U.S. earn approximately 79 cents for every dollar men earn for comparable work as of 2014, a disparity that has not improved significantly over the last decade. While we know this has been a persistent issue across and within industries, lack of transparency and disclosure makes the issue difficult to address. Many businesses, recognizing that this could be detrimental to talent recruitment and retention, have begun to conduct internal gender pay gap analysis and implement policies to correct any disparities.
NB SRI Strategy Diversity Impact
As of September 30, 2016, approximately 63% of our portfolio holdings by weight had implemented supplier diversity programs to benefit women entrepreneurs and/or promote workplace practices benefitting women throughout the supply chain. The NB SRI team encourages companies to implement and monitor best labor practices throughout their supply chains that can have beneficial impacts in the workplace. We believe a reliable supply chain is an essential characteristic of a high quality company.
Supply chain diversity programs. Supply-chain programs typically are put in place to ensure that a company includes diverse groups in the procurement of goods and services. For example, some companies commit to sourcing from businesses that are at least 51% controlled and operated by one or more members of a diverse group and/or and that are certified minority- and women-owned business enterprises (MWBEs). Not only do such programs provide the opportunity for diverse businesses to compete, they also help corporations to remain competitive as they tap into a growing and diverse supplier base. Beyond procurement programs, sensitive supply-chain management can result in the adoption of best practices that may extend opportunities to working women across global supply chains; this is particularly true within the garment and agriculture industries, in which women comprise the majority of the workforce.
NB SRI Strategy Diversity Impact
As of September 30, 2016, approximately 28% of our portfolio holdings by weight generated revenue from products and services that directly benefit women (for example, women’s oncology, workforce training, etc.).
Products and services that benefit women. We also take into consideration the beneficial impacts of a company’s products and services and how they can positively impact women and female entrepreneurs. By the year 2028, it is estimated that women will control close to 75% of discretionary spending worldwide. As of 2013, women already owned about a third of all businesses in the world.11 Whether it is health care products that can have a profound effect on women’s health and wellness or brands that are committed to environmental and social causes, companies can design products and services to meet market demand in these areas. The NB SRI team seeks to invest in companies with products/services that have a robust and sustainable customer value proposition that can meet unmet needs globally.
NB SRI Strategy Diversity Impact: As of September 30, 2016, approximately 28% of our portfolio holdings by weight generated revenue from products and services that directly benefit women (for example, women’s oncology, workforce training, etc.).
Neuberger Berman SRI Impact Scorecard: Gender Diversity
|Criteria: Companies with…||Percentage of Portfolio by Weight Meeting Criteria|
|At least one woman on Board of Directors||99%|
|At least two women on Board of Directors||74%|
|Women in C-suite/Board Chair and/or Executive Management with P&L responsibility||52%|
|Established diversity programs||82%|
|Established supply-chain programs||63%|
|Products and services that directly benefit women||28%|
Representative NB SRI strategy information is as of September 30, 2016.
As long-term shareholders, the NB SRI team actively engages management teams on issues material to their respective businesses. Over the last four years, for example, the team has engaged with several of its portfolio holdings where it felt that management could improve the diversity of its board of directors. The majority of these companies now have at least one woman on their boards and a commitment to diversity.
For more than two decades, the NB SRI team has evaluated the impact of a company’s environmental and social criteria and its impact on its bottom line. We believe that company managements with proactive leadership strategies in place to identify, monitor, and manage related ESG risks and opportunities have the potential to be industry leaders with sustainable competitive advantages. As research has shown, a commitment to diversity can enhance a company’s ability to attract and retain a productive workforce. In addition, in our view, as customers and suppliers become more diverse, having a workforce that reflects this diversity can lead to new business opportunities.
Key Questions in Evaluating a Company’s Commitment to Diversity
- What is the business model and does the customer value proposition have a gender/diversity implication?
- What is the corporate culture and how are employees incentivized?
- Has management taken a leadership role on diversity?
- What programs and initiatives are in place to attract and retain a diverse workforce?
- Is the company transparent about its diversity-related data? What diversity metrics does it disclose?
- What is the prevalence of women in leadership positions?
- How does the company compare to its industry peers in terms of diversity metrics?