For super funds and their advisers

Commonsense case for D&I action

•8-Diversity

In recent years, the global surge towards ensuring diversity and inclusion within corporate leadership has intensified.

In 2020, industry super fund HESTA launched an initiative called ’40:40 Vision’. It advocates for more diversity in executive leadership in corporate Australia by setting a gender balance target of at least 40 per cent men and 40 per cent women in executive roles in ASX 200 companies by 2030. This comes nearly a year after the ASX 200 reached an important milestone of 30 per cent female representation on boards in 2019.

But as momentum for creating a more just and equal economic system gathers force and begins to translate into real action, so do its detractors. One global example of this is the backlash against NASDAQ’s proposed rule that all companies listed on their exchange publicly disclose statistics regarding gender and racial diversity on their boards of directors. The rule would also require most listed companies to have at least two directors who identify as female, as an underrepresented minority, or as a member of the LGBTQ community. Companies whose boards don’t have two such directors would be required to explain why.

The source of tension on rules of this nature tends to be disagreement on financial merit and the meaning of diversity itself. But this misses the point. Let’s look at why the discussion around diversity and inclusion is so complex and how we can make sense of it all.

How should we measure the benefits of diversity?

It’s popular to claim that companies with “diverse” leadership perform better financially. This is appealing to hardheaded analytical types, but it rests on shaky ground. The critical question is: “Perform better than what?” The trouble is that we can never really measure how much egalitarian business practices improve companies’ financial performance, because we don’t have a true control group to measure them against. Even with all the best statistical efforts, it’s simply impossible to isolate diversity from all the other characteristics that drive financial performance—let alone the vexing matter of trying to define diversity itself. This makes it easy to dismantle claims that diversity improves company financial performance.

So, let’s look at this another way. Let’s pretend there were no left-handed people in leadership positions. None of the CEOs, or board members, or senior managers were left-handed. Everywhere we look, no lefties. Not now, not ever. Should we conclude that left-handed people just aren’t interested in leadership? Should we conclude that they’re incapable of it? Should we undertake a careful study to determine whether they have some deficiency that’s causing this gap? Should we work diligently to prove that companies that include lefties are superior to those that don’t?

So, let’s look at this another way. Let’s pretend there were no left-handed people in leadership positions. None of the CEOs, or board members, or senior managers were left-handed. Everywhere we look, no lefties. Not now, not ever. Should we conclude that left-handed people just aren’t interested in leadership? Should we conclude that they’re incapable of it? Should we undertake a careful study to determine whether they have some deficiency that’s causing this gap? Should we work diligently to prove that companies that include lefties are superior to those that don’t?

Now imagine if the limiting factors in our hypothetical case included family structure, favorite hobbies, stature, hairstyle, or pet preferences. Presumably few would argue that selecting leaders from an increasingly narrow set of people on factors that have nothing to do with leadership will yield the best outcomes or that expanding the pool would be detrimental. Yet too often we seem unwilling to examine the factors that determine our pool of potential leaders and too ready to believe those factors are the pure outcomes of equal opportunity.

How should we define diversity?

This brings us to our second problem: the notion of diversity itself. I’ll be the first to admit it’s not the most satisfying term. It’s frustrating that much of the conversation starts and ends with external characteristics, with little discussion of less observable characteristics. It’s hard to reconcile the desire to live in a world in which external characteristics don’t matter with the reality that they still do. It’s unnerving to imply differences are an end in themselves and that we’ve abandoned the pursuit of commonalities. It’s exhausting to feel like we don’t have the solutions and can’t solve the problem, even when we want to.

But we don’t need to fall into these traps. The case for diversity and inclusion isn’t that any singular characteristic makes a person superior at leadership to another. It’s simply that a continual absence of a characteristic that’s common among the population but nonexistent among its leaders should be cause for introspection. In some communities this might come in the form of gender or skin color or sexual orientation. In other communities it might come in the form of accent or caste. We’re not actually asking why the people in the boardroom aren’t more different from one another. We’re asking why they tend to be so different from the people in their community.

How should we improve diversity?

The limiting barriers that we face in the real world are no less arbitrary or damaging than the imaginary examples we’ve discussed here. It’s hard not to think they continue to exclude high numbers of competent and deserving human beings from consideration. This has real costs, even if those costs are hard to measure precisely and the term diversity doesn’t quite do full justice to our intentions.

Some are concerned that the NASDAQ listing requirement is too costly and unjustified. It doesn’t force companies to take any real action to improve the diversity of the board—only to explain its absence. Even then the level at which that explanation is required is well below that found in the general population. In other words, many NASDAQ-listed companies can still carry on with business as usual, even if their boards barely mirror their communities at all. This sentiment also rings true in the Australian corporate landscape, where there still exists over a third of companies in the ASX 200 that have not yet reached the target of at least 30 per cent women on their boards.

But all is not lost. The value of the rule is to prompt introspection and make that introspection publicly available. If we return to our imaginary example, the worry isn’t whether every company has exactly the same proportion of left-handed leaders as found in the general population.

Some companies might have more, and some might have less. The worry is when the gap is universal and large. This is simply the reality right now, and it seems clear it won’t change on its own.

This is an area where super funds can play a major role by using their growing influence. It’s an exciting time for funds to use their immense footprint to move equity of opportunity forward. There are more tools available for just that purpose than ever before, whether they choose to use screens or indices such as the Calvert Diversity Research indices to own the leading companies, or active ownership to encourage lagging companies to become better. One good place to start is by demanding better disclosure of company progress on diversity, just like the NASDAQ rule would provide, which can better inform investors’ proxy votes or engagement activity. But let’s not forget that disclosure is just a start, and true progress takes more time and more work.

The bottom line

The logic around diversity and inclusion should be straightforward, but it’s frequently misconstrued by both proponents and detractors. The case for diversity and inclusion simply recognises that limiting leadership and decision-making to arbitrary subsets of the population is no way to run things, even if we can’t measure exactly how much it matters. It also recognises that meritocracy doesn’t just naturally manifest—it requires continued attention at all levels and in all spheres.

*Jennifer Sireklove is managing director, investment strategy, for Parametric, based in Seattle. Whitlam Zhang is manager, research and strategy, for Parametric, based in Sydney.

Note: Parametric is a client of The Inside Network, publisher of Investor Strategy News.

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