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  • The Lagarde effect: Identifying true gender diversity in business

The Lagarde effect: Identifying true gender diversity in business

  • 09 October 2019 (5 min read)

Europe is witnessing something of a watershed moment – and it’s nothing to do with Brexit. International Monetary Fund chief Christine Lagarde and German politician Ursula von der Leyen are respectively set to take the top positions at the European Central Bank and European Commission.

This represents another key milestone for female empowerment.

To me gender equality and the empowerment of women is a clear societal trend. With a few exceptions, most countries – albeit while at different stages of progress – are moving in the same direction i.e. towards increased gender equality.

The latest World Economic Forum’s Global Gender Gap report found that several nations had achieved important breakthroughs in regards to gender parity.

In addition, at a corporate level, a report into global gender equality by Equileap found there had been an overall improvement in its global top 200 companies in 2018 from the year before.

For example, 34% of board roles were held by women compared to 30% in 2017, and 26% of executive roles, up from 20% in 2017. The best performing countries were Norway, Israel and Belgium.1

In July, the last firm in the US S&P 500 index that had an all-male board announced that it was appointing a woman2  – an encouraging step.

However, progress remains slow. The world is still largely led by men, whether in politics or in business.

There are a lot of opportunities for investors potentially wanting to put their capital to use in companies with good diversity and inclusion practices – but the challenge can be knowing where to look.

Most businesses look at diversity in terms of hiring and talent management – and keep statistics on the number of women, ethnic minorities, sexual orientation, and more, on the people they employ.

It can be relatively easy for investors to get hold of a company’s data around the number of female employees and of women in senior positions.

The reality of choice

There is, however, a difference between diversity and inclusion, and the latter is more difficult to quantify. It has been said that diversity is a reality – inclusion is a choice.

For me, inclusion is the culture that companies are building in their organisations which includes both tangible and intangible factors.

There are a few data providers and initiatives that are collecting granular and truly telling information on corporate practices around gender. For example, the extent to which employees take up parental leave and then continue to get promoted when they come back to work, and to what extent flexible working applies to all areas of the company.

It’s also important to look at the representation of women at all levels in development, mentoring and sponsorship programmes.

Meeting and engaging in a dialogue with a company’s management on the subject of diversity can help broaden our understanding of how inclusive a firm is. Does its culture allow women equal access to career development and promotions, flexibility and pay rises, among other things?

Importantly, it can also help shed light on whether a company is moving in the right direction, even if its diversity data doesn’t show that it is there yet.

It is also interesting to look at instances where a company has had a problem in some respects of diversity, or discrimination, and how it has addressed such issues. It is quite possible that in a company which employs hundreds of thousands of people, not everyone lives up to the corporate values. What is then important is how does its leadership team deal with a problem when it arises?

Diversity underpins financial performance

Of course, diversity and inclusion aren’t enough to use as a basis for investment decisions alone – the usual financial metrics still apply. But diversity and inclusion are long-term factors which have been shown to underpin financial performance.

Research from AXA IM’s Rosenberg Equities team suggests that diversity can act like a protective moat, enabling some highly-profitable firms to withstand competitive forces – such as pricing competition and strains on talent retention – better than their peers.

The analysis showed that the level of board diversity is not only associated with better current financial outcomes but may also be a predictor of a company’s ability to protect future profits.

Other studies have shown that higher gender diversity in organisations leads to lower staff turnover3  and higher employee engagement4 , which has been linked with higher productivity, employee commitment and retention.5

Further research has concluded that gender diversity of at least 20% female representation at management level has a positive effect on innovation, with the impact even greater for large and complex companies.6

The difference can also be seen in more conservative risk management; women have a better record in successful integration of mergers and acquisitions and pricing skill7 . Boardroom gender diversity has also been shown to improve corporate environmental, social and governance – ESG – standards via greater transparency, higher stakeholder engagement, stronger compliance with ethical principles and reduced risk of fraud8 .

McKinsey & Company re-asserted the relevance of the link between diversity and financial outperformance in its ‘Delivering through diversity’ report. It found that awareness of the business case for inclusion and diversity is firmly on the rise.

In addition, while social justice can often be the main trigger encouraging this trend, firms have increasingly begun to regard inclusion and diversity as a source of competitive advantage and as a key growth driver.

How investors can make a difference

Christine Lagarde is expected to bring a fresh perspective to the ECB – she is a lawyer rather than an economist by training, but most analysts, myself included, believe she will hence bring additional useful political and communication skills.

Similarly, in the corporate world, women are increasingly being valued for what they can offer – and for investors, I believe there are many potential benefits in looking beyond simple gender-based hiring and salary metrics and choosing to invest in companies with a good track record of diversity and female empowerment.

What’s more, by choosing to invest in these companies, investors can hopefully send a signal to other firms that their policies and practices aren’t good enough – and help create a world where there are as many successful female role models as there are male.

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