Responsible investors have long advocated for greater diversity on corporate boards and on executive teams. The rationale has been simple: it's the ethical thing to do for organizations to include more women and visible minorities in leadership roles to reflect the markets they serve and provide advancement opportunities for the full range of skilled people within their organizations.
It also makes good business sense. A growing body of evidence links diverse leadership with stronger financial performance compared with more homogenous boards and executive teams. A working paper from the International Monetary Fund released this past March examined the link between gender diversity in senior corporate positions and financial performance of two million companies in Europe. It found companies with a higher share of women in senior positions had a higher return on assets, especially for firms in sectors that employ significantly more women in their labour force and have greater demand for higher creativity and critical thinking.
In addition, companies in the MSCI world index with strong female leadership had a 36.4% higher return on equity as well as a 12.8% higher price/book value compared with companies without, according to MSCI's Women on Boards report released in November 2015. (The report defined companies with strong female leadership as one with three or more women on its board, having a percentage of women on the board above its country average, or a company with a female CEO and at least one woman on the board.)
Furthermore, a McKinsey & Co. report released in early 2015 also found that there was "a statistically significant relationship between a more diverse leadership team and better financial performance." In its analysis of hundreds of companies in the U.K., Canada, Latin America and the U.S., organizations with higher gender diversity were "15% more likely to have financial returns that were above their national industry median. Companies in the top quartile of racial/ethnic diversity were 35% more likely to have financial returns above their national industry median."
These results were not surprising to responsible investors. Mutual fund families such as Northwest & Ethical Investments LP's.Ethical Funds, OceanRock Investments Inc.s' Meritas Funds and the IA Clarington Investments Inc.'s Inhance SRI Funds have incorporated board diversity into their investment decision-making and shareholder engagement processes for years. Seeing these trends, Bank of Montreal launched its Women in Leadership Fund this past April, which invests in North American companies that promote gender-diverse leadership.
There are several reasons why companies with diverse leadership are linked to stronger corporate performance. Various studies have linked gender and cultural diversity to greater capacity for creativity and innovation, greater employee productivity, commitment and satisfaction, and a stronger focus on responding to customer needs — all of which contributes to a company's bottom line. In an increasingly interconnected and globalized economy, a diverse leadership with broad, international experience could also tap new opportunities that less diverse leadership may not realize exists or has the ability to exploit.
Although there has been progress with respect to leadership diversity, there's still significant room for improvement. Various studies have found that unconscious bias against diverse candidates remains one of the strongest hindrances to increasing leadership diversity. In fact, a Catalyst report on gender diversity on boards in Canada suggests there's a need to consider various strategies to recruit and retain women in the corporate sector given that women are twice as likely as men to choose a non-corporate job as they progress in their careers. To ensure that businesses tap the benefits of cultural diversity, there's also a need to encourage women of diverse backgrounds as it's estimated that almost a third of women in Canada will belong to a visible minority group by 2031.
Various jurisdictions have employed different means to address board diversity. Several countries in Europe, including Germany and Norway, have established quotas to increase the percentage of women on boards. Other countries, such as Canada and Australia, have adopted a "comply or explain" disclosure rule in which companies are required to disclose their approaches to board diversity and, if they don't have any, explain why. Some jurisdictions, such as the U.K., and most recently Ontario, have employed voluntary targets to spur greater diversity.
Each option has its strengths, weaknesses, nuances and track record of success. But if the evidence about the value of board diversity is any reason to spur action, the sooner company leaders embrace and champion diversity, the sooner all stakeholders can benefit.