Is gender fairness a secret to investment outperformance?

I recently had an ‘a-ha’ moment. I was sitting in yet another room full of women talking about the importance of gender diversity. It dawned on me that we’ve talked about diversity for so long that we’ve become dulled to the issue. We’ve heard the arguments so many times that we’ve stopped listening.

Is gender fairness a secret to investment outperformance?

Advisers might have a similar numbed response: what has gender diversity got to do with delivering my clients’ financial goals?

As it turns out, a lot. Research shows that companies and fund managers with more women deliver better performance. That, of course, means better performance for your clients’ portfolios.

In an environment of low growth and low returns, focusing on gender diversity provides an edge.

And in a broader sense, to reignite the gender debate we need to reframe the gender issue from being about ‘fairness’, or being ‘smart’ — to being about the amazing benefits women bring to companies.

A long way, but more work to be done

I started at AMP 32 years ago when I joined the graduate recruitment program. It surprises me that after all this time we’re still talking about gender diversity.

There is no doubt that progress has been made. In 1984 Australia passed the Sex Discrimination Act to eliminate discrimination based on sex, marital status or pregnancy. Initiatives in Australia over the last five years have resulted in greater gender diversity on company boards. Pleasingly, in 2015 almost half of all new board appointments in Australia were women.

But much remains to be done. Most Australian boards and management teams are still predominantly male. The national gender pay gap in Australia is currently 17.3 per cent, so by the time women enter retirement they have superannuation balances around half that of men.

In Australia, women comprise 46 per cent of all employees, but despite women achieving higher levels of education than men, women hold only 14 per cent of chair positions, 15 per cent of CEO positions and 27 per cent of key management personnel positions.

From the right thing to the smart thing

With more to be done how do we overcome gender complacency? How do we reignite the gender debate?

I believe we need to start by highlighting the real results that gender diversity delivers. In the case of advisers, that’s smarter and better companies and funds to invest in, and better outcomes for clients.

When society first focussed on diversity and anti-discrimination based on gender, it was a moral and ethical issue. But we shouldn’t see it only as the ‘right’ thing to do, but increasingly the ‘smart’ and also the ‘necessary’ thing to do.

More women, better decisions

AMP Capital has long argued that advisers and investors benefit from digging deeper and looking beyond financial statements when valuing companies. The greatest driver of company value is not what you can see, but what lies beneath the surface.

If you accept that a company’s value is largely driven by the actions of its people, it follows that teams best able to generate strong returns for shareholders will be those that are happy, engaged, collectively intelligent but also cognitively diverse.

Research has found that when women are added to decision-making groups, the groups are likely to have increased focus on ethics, risk management, reputation and cooperation, as well as on the context of the problem and the broader impact of decisions.

That’s vital in a more complicated and fast-moving world. Companies are likely to be most successful when they have assembled diverse teams who not only understand customers and disrupters but can also brainstorm what can (and can’t) be done.

More women, better performance

What does that mean for company performance? The research is clear that gender diversity leads to better results.

Credit Suisse and Catalyst research shows that, even after adjusting for sectoral impacts, companies with more women generally demonstrate higher returns on assets, higher return on sales and higher return on invested capital. These companies also exhibit lower risk of insolvency and higher dividend payouts.

A 2015, McKinsey report, which looked at 366 public companies across the world, found companies in the top quartile for gender diversity are 15 per cent more likely to have financial returns above their national industry median. And on AMP Capital’s own assessment, there is a positive correlation between a company’s governance quality and the number of women directors.

The research also has implications for allocations to investment teams. If cognitive diversity improves decision making, it is logical to conclude that cognitively diverse investment teams will make better investment decisions.

Since investing began, trading rooms have tended to be full of competitive men, testosterone and risk-taking. While women are yet to have a significant presence, it is anticipated that when their numbers grow the culture will become a more socially perceptive one, with more focus on collaboration and inclusiveness and less on risk-taking.

So as advisers and investors, it is recommended you focus on investing in companies – and indeed investment managers — that promote gender diversity.

A role for all us

But more broadly, we need to remember that more needs to be done to create a fairer society, which as we’ve seen will deliver clients a broader investable universe of smarter more successful companies.

Yes, good progress has been made, but there is some way to go before women make up 30 per cent of every Australian board of directors.

Ideally advisers and investors should get involved by encouraging companies to promote an inclusive culture from the CEO down, make diversity a KPI and convince men that they have nothing to lose.

Companies need to level the playing field and make sure each person’s voice is heard regardless of gender, decrease bias in recruitment with gender balanced short-lists and interviewing panels, and pay men and women equally.

AMP Capital, for example, encourages the companies we invest in to address roadblocks such as unconscious bias and to cast the net more widely when recruiting. For the pool of talented women to be developed and recognised, there needs to be a clear focus on pay parity and the opportunities for women to gain executive experience.

Advisers and investors have a key role to play in driving these changes. Not only will we all benefit from a fairer society, but your clients will also benefit from smarter companies and better investment returns.

Author: Karin Halliday, Senior Manager, Corporate Governance, AMP Capital

Source: AMP Capital 10 Feb 2017

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.