There are several compelling reasons why companies should care about having diversity amongst their workforces. From enhanced creativity, improved decision-making and expanded talent pools to increased earnings and more effective action on topics such as climate change. In this article I will examine the main reasons why companies should care about diversity and look at how companies that have prioritised diversity have benefitted.

Collective intelligence

Collective intelligence refers to the ability of groups to solve problems, make decisions and generate ideas that are superior to what any one individual could come up with alone. The below example illustrates the benefits of collective intelligence:
“In the popular game show Who Wants To Be A Millionaire, the contestants, stuck on a question, can use one of three ‘lifelines’ to try to get to the right answer. One of these is to ‘ask the audience’ where the people at the live filming of the show answer any question asked of them using a keypad. The contestant can then choose to follow the wisdom of the crowd or not. After 15 years of the show, the ‘ask the audience’ success rate is between 91% and 92%, compared to a 66% success rate for the ‘phone a friend’ lifeline where the contestant can phone someone they know for advice.

This is a rather unscientific demonstration of the power of the crowd. But it makes an important point, which is that when a crowd is involved, they are unlikely to be wrong.” 1
This shows how diversity can play a critical role with regards to collective intelligence. The benefits of leveraging diversity include bringing in broader perspectives, enhanced creativity and increased problem-solving abilities within a company. Collective intelligence has been studied in academia and it would seem intuitive that the best performing businesses would want to harness this effect to their advantage. In the 2010 paper: “Evidence for a Collective Intelligence Factor in the Performance of Human Groups” the authors attempted to investigate what drives collective intelligence. They found converging evidence of a general collective intelligence factor that explains a group’s performance on a wide variety of tasks. This “c factor” is not strongly correlated with the average or maximum individual intelligence of group members but is correlated with the average social sensitivity of group members, the equality in distribution of conversational turn-taking, and the proportion of females in the group.

One finding they emphasised were groups where a few people dominated the conversation were less collectively intelligent than those with a more equal distribution of conversational turn-taking.

Other studies have yielded similar results. In a series of experiments conducted in Texas and Singapore, scientists put financially literate people in simulated markets and asked them to price stocks. The participants were placed in either ethnically diverse or homogenous teams. The researchers found that individuals who were part of the diverse teams were 58% more likely to price stocks correctly, whereas those in homogenous groups were more prone to pricing errors. In addition, when bubbles burst, they found that homogenous markets crash more severely. The findings suggest that price bubbles arise not only from individual errors or financial conditions, but also from the social context of decision making. The report postulates that diversity facilitates friction that enhances deliberation and upends conformity.

In a world where environmental change and risks to a business are high and accelerating, we would argue the greater ability of a management team to accurately identify approaching threats and challenges to a business and equally move to position a business to benefit from opportunities they can identify ahead of their competition is essential. We would actively look for CEOs who have created a diverse team leading their business who will be encouraged to challenge the status quo and who will come up with solutions and business opportunities that a non-diverse team would not identify. This then brings us to the opportunities thrown up by changing demographics, as one of the fastest growing wallets out there is that belonging to women.

Demographics

According to Boston Consulting Group (BCG): “women are amassing greater wealth than before, and that share is likely to grow significantly in the years ahead. From 2016 to 2019, women accumulated wealth at a compound annual growth rate (CAGR) of 6.1%.4 Over the next four years, that rate will accelerate to 7.2%. BCG’s analysis finds that women are adding $5 trillion to the wealth pool globally every year – faster than in years past. With future growth expected to accelerate, that tally will get even larger.”

Given this huge opportunity to find and finance products that will suit this growing wallet we would urge management teams to appropriately staff with talent that understand how to serve this demographic.

In another report BCG writes: “Companies that reported above-average diversity on their management teams also reported innovation revenue that was 19 percentage points higher than that of companies with below-average leadership diversity – 45% of total revenue versus just 26%.”5

The answer to increasing your company’s innovation is intuitive: People with different backgrounds and experiences often see the same problem in different ways and come up with different solutions, increasing the odds that one of those solutions will be a success.
Education

The NY Times published an article last year titled: “More Women Than Men Are Going to College. That May Change the Economy.” Women have edged ahead in prestigious programs like medicine, law, and masters and doctoral degrees. While men still hold the lead in business schools, women are gaining ground. And so the usual hothouses that grow captains of industry and political leaders are now dominated by women – though men are still a majority of students in some of the highest paying fields like business, computer science and engineering.

 

Mary Ann Sieghart writes in her book The Authority Gap: “From an early age, girls outperform boys. They develop faster, talking earlier, learning self-discipline at an earlier age, and using a bigger vocabulary. They get better grades at school, particularly in the humanities, but also in maths and science in some countries, and outnumber boys at university. In the US, they win 57 per cent of masters degrees and 53 per cent of doctorates. So there is no question that they are better educated and qualified than men, at least in the younger generations, who weren’t held back from going to university. On average, girls and women are exactly as intelligent as boys and men.”6

 

For us, if an organisation is not taking the necessary steps to tap into this source of talent at the top levels of its organisation, it is selling itself short.

Who are doing well and how are they achieving it?
As Dame Mary Beard points out, many organisations are changing their culture7 , and if the intention is there then the organisation can change quickly if it wants to. For a while Dame Mary Beard was the only woman with a university teaching job in the classics department in Cambridge. Today she cites a teaching staff of 8-9 females and 18-19 men. When she walks around campus, she sees a diverse landscape both in gender and ethnicity. As an undergraduate in 1973 she was part of a 20% intake of women. Today she says there is equal male and female intake at the undergraduate level. There is clearly still work to be done but the change has been dramatic, and that shows what a good institution can do if it wants to change itself.

A concise way of laying out what practical steps can be taken can be found in the Women in Finance Charter authored by Dame Jayne-Anne Gadhia, former CEO of Virgin Money in 2015.

“Empowering Productivity: Harnessing the talents of women in financial services” was published in March 2016. The review found that in 2015, women made up only 14% of Executive Committees in the Financial Services sector. In response to the recommendations in that review, HM Treasury launched the Women in Finance Charter.

There are now over 400 firms, covering over one million employees, voluntarily signed up to the commitments of the Charter – from global banks
Women in Finance Charter
Women in Finance Charter
Some of our investee companies who we see as following this charter and actively increasing their senior female percentages are:



Equally of note would be steps taken by the FCA.

We are introducing new Listing Rules (LR 9.8.6R(9) and LR 14.3.33R(1)) to require, as an ongoing listing obligation, issuers that are in scope to include a statement in their annual financial report setting out whether they have met specific board diversity targets on a ‘comply or explain’ basis, as at a chosen reference date within their accounting period and, if they have not met the targets, why not. This allows companies flexibility to provide relevant context on their approach to board diversity, whether or not these targets are met.

The targets are:

  • At least 40% of the board are women.
  • At least one of the senior board positions (Chair, Chief Executive Officer (CEO), Senior Independent Director (SID) or Chief Financial Officer (CFO)) is a woman.
  • At least one member of the board is from a minority ethnic background (which is defined by reference to categories recommended by the Office for National Statistics (ONS)) excluding those listed, by the ONS, as coming from a White ethnic background).

Why Having diversity at the senior level is vital

Hopefully it is obvious from both the women in finance charter and the FCA listing rules above that diversity at the senior level really matters. We meet many companies who are simply trying to “fix” their wide gender pay gaps and lack of corporate diversity by hiring more junior women. This simply is not enough to change a corporate culture, and as a strategy has been proven not to work.

Mathematically, the gender pay gap widens in companies using this strategy and retention becomes even more of a problem as many of these junior women don’t see the culture as something they want to be part of and end up leaving.

“When a young woman hits a hard point in her career, if she looks up and does not see any women at the top, she wonders if she will make it – if all of the sacrifices she will have to make will pay off. That is one key reason why women leave the industry”
Marisa Drew, Managing Director, Co-Head EMEA Investment Banking and Capital Markets, Credit Suisse

The solution for us is to think creatively as pull in talent from other pools:

“It is not just one thing – we need to work on this on multiple fronts: we need more women at the top to set the example and set the tone. We need to deal with unconscious bias. And we need a whole set of programs to help development and career mobility for women”
Maria Morris, Executive Vice President, MetLife

“Today, you cannot get enough talent from one demographic pool, so banks that do a good job at diversity and inclusion will win because they will have better talent. Talent comes from so many diverse sources, to be successful all of them need to be tapped”
Jenn LaClair, Chief Financial Officer, PNC Businesses

Organisations such as Nurole and the Return Hub are providing invaluable services but more is needed to be done in terms of lateral thinking in hiring processes at the senior level. Biases need to be addressed as why women without a traditional career path to a senior role cannot be seen as a potential candidate for that role, and we have little time for the argument that it is hard to find good female candidates in a global pool comprising circa 4bn people.

An interesting case study is that from Aviva:

“Aviva became one of the first UK employers to introduce an equal parental leave policy, offering new parents in its UK business 12 months’ parental leave, with six months at full basic pay. The company introduced the policy to help remove barriers to career progression, challenge traditional gender roles and level the playing field for women and men at home and at work when a new child arrives. It has also given men the opportunity to spend more time caring for their young families, an overwhelmingly positive outcome shared by many parents at Aviva.”

  • Equal parental leave has now been taken by over 2,500 people at Aviva, almost half of which (1,227) were men
  • The average length of paternity leave taken has increased by three weeks over the four years: in 2021 it was 24 weeks, compared to 21 weeks in 2018.
  • The average length of maternity leave has slightly decreased over the last four years, from 45 weeks in 2018 to 43 weeks in 2021.
  • 268 Aviva parents have now taken equal parental leave more than once, including 131 men taking it twice.


In terms of what individuals may do to achieve change, this is very useful:

“We can accept that, however liberal and intelligent we are, we probably suffer from unconscious bias, whether against women, or people of colour, or people of a different class, or a different country, or a different sexuality. If we’re extroverts, we may be biased against introverts. If we live in the country, we may be biased against city-dwellers, or vice versa. We can’t stop this unconscious bias or put a lid on it. We don’t need to feel ashamed of it. But we can recognize that the bias is based on incorrect assumptions and then correct for it. The more we become aware of our bias in our everyday interactions, the easier it is. We should resist starting, when we first meet her, with the default assumption that a woman will be less knowledgeable, competent or interesting than a man. When we’re assessing a woman’s ability, we can ask ourselves if we’d think the same if she were a man. We can try to integrate the evidence that women are just as intelligent, qualified and authoritative into our working assumptions about people. We can notice if, when walking up to a man and woman together, we address the man first.”8
What are the benefits of focussing on diversity?

Profit Margins increase.

A report from McKinsey in 2020 found that a sense of inclusion is strongly linked with employee engagement. Respondents who feel very included are much more likely than others to say they feel fully engaged – that is, excited by and committed to their organizations. When respondents say leaders at their organizations are diverse, they are 1.5 times more likely than peers from organizations without diverse leaders to feel very included.

Employees’ sense of inclusion can contribute to an organization’s performance and talent retention. This is key – employee turnover costs money and can be disruptive.

Bank of America Merrill Lynch wrote in 2022, “Happy employees tend to stay put. Labor represents 40% of total corporate costs. Turnover is paramount today, given labor tightness: this year the US had 11mn job openings but 3.5mn jobs added. Not only does higher turnover lead to lower productivity, it costs money: the bulk of a US company’s cost is hiring, training and paying people and companies with happy workers have outperformed peers (~3ppt p.a.). Culture matters 2X as much as compensation, but it’s hard to fix and impossible to game.”9

This highlights how focusing on diversity can contribute to a company’s financial performance by increasing productivity, reducing staff turnover and lowering recruitment costs.
More job applications received
Survey data from McKinsey suggests that an inclusive environment, in which employees feel strong positive bonds that enable better performance, is an important consideration as people plan their careers. 39% of all respondents say they have turned down or decided not to pursue a job because of a perceived lack of inclusion at an organisation. LGBTQ+ and racial- or ethnic-minority respondents are more likely than others to report choosing not to pursue a job for this reason. Even among respondents who don’t identify as LGBTQ+ or as ethnic or racial minorities, 38% say they have made such a decision. Overall, respondents often indicate that their organisations should do more to build inclusion in the workforce. 35% say their organisations put too little effort into creating a diverse, inclusive environment. By comparison, just 6% say too much is being done. The results point to several issues that might hinder employees’ sense of inclusion.10
Attracting the younger talent pool
Diversity & Inclusion will be driven by Gen Z, who are the largest and most diverse generation in the US:

“By 2019, it’s predicted that Millennials will surpass Baby Boomers as the largest generation in the US. And due to their sheer size, their choices and preferences will make an outsized impact. They’ve grown up and are reaching the peak of their spending power and fundamentally shifting the ways people work – and live their lives. Millennials want everyone to have a voice at work, and they expect companies to contribute by allowing – and even encouraging – people to express different ideas, values and perspectives. In fact, 77% of Millennials surveyed say it’s important for them to work for a company that respects diverse opinions.” 11
Higher Return On Equity and lower Earnings Per Share risk
Gender diversity appears to lead to better operating results and lower risk. S&P 500 companies with at least 25% female executives saw consistently higher subsequent 1-yr median Return on Equity (ROE) since 2010. Although causation is difficult to establish, the past decade indicates that gender diversity has been correlated with superior future results. Companies with at least 30% women in management positions have also seen a bigger median improvement in annual ROEs over this period. Board diversity was an effective signal of improving ROE in almost all sectors, the exceptions being Financials and Utilities.12
Climate Change: more women in boardrooms = better climate action response
In recent years, companies have been under increased pressure to appoint more female and minority directors to their boards. Companies with diverse leaderships usually have higher ESG scores; firms with 30% or more female directors typically score better on environmental disclosures. This is because women are more willing to show companies’ environmental performance, with detailed data and information.

A study published by BNEF and the Sasakawa Peace Foundation13 found that:

  • Early adopters of the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) show higher gender diversity, and greater transparency on climate related data, than peers. International initiatives are expected to play a prominent role in climate governance and strategies in the near term and in cutting emissions in the long term.
  • Leading integrated oil companies that have strategies for decarbonization and digitalization tend also to have higher female board representation. Gender diversity in that sector, however, does not directly contribute to lowering emissions and expanding digitalization.
  • Gender-diverse firms also tend to make more investments in renewable power generation and energy efficiency improvement, according to a study by Haas School of Business, University of California, Berkeley. The study suggested that the presence of more women corporate directors encourages proactive pursuit of sustainable business practices and opportunities.
Conclusion – hope for the future
It is our hope that readers of this paper will now understand why we are so passionate about engaging our investee and potential investee companies on diversity and inclusion.

It not only makes business sense, but also builds a better society and serves our future generations. However, most importantly it is diversity at the senior levels of an organisation that is the game changer and the marker of this in an organisation can be observed through the gender pay gap. Therefore, investing in genuinely diverse companies can lead to better financial performance, reduced risk, and contribute to positive social outcomes.

We conclude with a quote from Dr Katherine Phillips, a professor of leadership and ethics management at Colombia Business School:

“The fact is that if you want to build teams or organizations capable of innovating, you need diversity. Diversity enhances creativity. It encourages the search for novel information and perspectives, leading to better decision making and problem solving. Diversity can improve the bottom line of companies and lead to unfettered discoveries and breakthrough innovations. Even simply being exposed to diversity can change the way you think.”14
1 Who wants to ‘ask the audience’: the benefits and pitfalls of social media – Freestak
2 Evidence for a Collective Intelligence Factor in the Performance of Human Groups | Science
3 Ethnic diversity deflates price bubbles | PNAS
4 Managing the Next Decade of Women’s Wealth | BCG
5 How Diverse Leadership Teams Boost Innovation (bcg.com)
6 Sieghart, Mary Ann, ‘The Authority Gap’
7 Rachel Johnson’s Difficult Women: 79 – Mary Beard on Apple Podcasts
8 Sieghart, Mary Ann. The Authority Gap (pp. 282-283). Transworld.
9 Bank of America Global Research, ESG Matters, ‘Follow the numbers, not the naysayers’.
10 Not inclusive? You’re losing 39 percent of job applicants | McKinsey & Company
11 https://www.facebook.com/business/news/insights/4-ways-to-matter-to-millennials-at-work-and-beyond
12 BofA – Thematic Investing (baml.com)
13 BNEF Long Form Template (Grid) (spf.org)
14 How Diversity Makes Us Smarter | Greater Good (berkeley.edu)

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