Guest Contributed by Lawler Kang, CEO, League of Allies
Socially responsible and impact investing models have been around for decades (centuries, in fact).
What has changed is the amount of money that is being managed to these ends. CalPERS and CalSTRS, two pension funds for the State of California employees that manage upwards of $550 billion, are on the forefront of integrating ESG factors into their investments and the NYC and NY State pension funds, worth roughly $350 billion combined, are nipping at their heels. And European pension and sovereign wealth funds, some with a trillion in the bank, are considerably ahead of the United States.
Larry Fink, CEO of Blackrock’s recent clarion call to capitalism that managing “environmental, social, and governance [ESG] matters demonstrates the leadership and good governance that is so essential to sustainable growth” should not fall on CEO deaf ears. The proxy shareholder voting power in those companies in which it actively or passively invests (with $6 trillion under management) means companies who don’t make concerted and palpable efforts to service their communities as well as their stakeholders they could find themselves with a new board, and management team, who will.
What is behind this shift in thinking? Doing the “right thing” aside, immense amounts of research from organizations such as Sustainable Accounting Standards Board (SASB) reveal that proactively coming up with ways to either minimize or mitigate businesses’ impacts related to ESG issues can have material positive effects on financial performance, traced down to the level of income statements, balance sheets, and costs of capital. And while there are a few frameworks companies can use to measure and report, leveraging women and talent appear across the board in the mix of proscriptions companies should use to deliver these performances.
What has this got to do with women at work?
In the returns context, McKinsey estimates a $12 trillion bump in global GDP by 2025 if management gender parity were realized. A Credit Suisse study of 3,000 listed firms reports companies with 50% senior front office management who are female outperformed the growth of the market index from 2008 to 2016 by upwards of 60%. A MSCI review of 1,600+ public firms has correlated companies with three women on their boards in 2011 as outperforming those with none by median gains of 37% EPS and 10% ROE over the last five years. Certain prescient asset managers, such as Boston Common Asset Management, founded by a woman, have been generating market-beating returns for 15 years.
It can be argued that there is no other singular factor can have such a pronounced impact on company performance, again irrespective of industry, as gender parity. And what’s more, women are not only accretive to financial performance, they are at the core of the sustainable and ethical part of the equation.
A study by the UC Berkeley Haas School of Business of 1,500+ traded firms concludes that companies with women on their boards are more likely to address a litany of ESG factors. A research paper coming from The University of Toronto’s Rotman School of Management found that women bring six important skills that have been lacking in board composition and that are vital to decision-making: corporate governance, an eye for regulatory/compliance issues, human resources, sustainability, politics/government relations, and risk management. Of note, the last four are presently the least represented of all skills on boards. Another report from MSCI cross-referenced gender board composition with a likelihood of “fewer instances of governance-related controversies such as cases of bribery, corruption, fraud and shareholder battles” and general overall reductions in risk. Dealing with these issues, many of which result in fines, can be distracting and expensive, in both outlays and reputation/brand. Findings published in the Journal of Financial Economics noted that female directors have better attendance, can actually increase men’s attendance, and are more likely to be assigned to committees that monitor performance. The same study found that boards with more gender diversity are more likely to hold CEOs’ feet to the fire for sub-par execution.
Where are the women going to come from?
A recent Lean In/McKinsey report reveals that while 45% of the entry level workforce is female, only 37% are Manager level, 27% are Vice Presidents, 17% occupy C-level positions, and the vast majority of these roles are in Administrative functions: Human Resources, Legal, etc. Women run only 5% of the S&P 500 and represent 22% of those companies’ Board seats. To say that opportunities for advancement aren’t abundant is akin to postulating our climate is not changing. The problem is the pipeline: the entire system, from recruiting to manager training to development and succession planning, is institutionally biased in a variety of unconscious and conscious ways. Expanding and re-weighting our definition of leadership and the skill sets required to succeed, per the afore-mentioned Board study, is a great example of a change that will have profound ripple-down effects on the entire system’s mechanics. And there are many more dials that can be turned, levers pulled, that will increase the flow of diverse talent that increase profit and valuations.
In his February letter Mr. Fink stressed the importance of diverse boards, and in that same month BlackRock requested all companies on the Russell 1000 in which it has positions and that have less than three female board members to share their rationale. State Street, with $2 trillion in assets under management, made similar Board-related waves when it unveiled its Fearless Girl statue last year and a similar call to action. And organizations such as The 30% Coalition and Paradigm 4 Parity are making great strides in signing up backers from both the investment and corporate communities who are taking the pledge to increase female representation in executive and director ranks. The stage is being set.
Mainstream momentum for sustainable and ethical business is growing. PE shops and hedge funds are now donning ESG garments and are flaunting them to both investors and the general public. Mutual funds and ETFs with organic flavors are flooding the market; Barron’s recently had a cover article on the top 200 sustainable funds, though marketing and reality must be further examined.
We must let women lead, because if parity is left untested, we have much to lose financially and otherwise.
Disclaimer: The opinions and views of guest contributors are not necessarily those of theglasshammer.com