Companies, and the investment managers that invest in them, are coming under pressure to add diversity to their top ranks.
In particular, companies are being pressed by institutional investors to accelerate the addition of women to their boards of directors. The New York City Retirement Systems are planning to introduce diversity as a formal criterion for evaluating and selecting external money managers. Others, such as the California State Teachers' Retirement System, have pressed managers to increase diversity in their investment staffs.
Companies and investment managers should get ahead of this pressure. This is not just social activism. Particularly in the case of boards of directors, adding diversity seems to improve corporate performance and share values. Research in the U.S. and Europe suggests that companies with female directors have better valuations than companies with no female directors.
The research might be one reason more investment managers, most recently BlackRock Inc., are starting to exercise their proxy voting to push for more women on corporate boards. The evidence shows it improves corporate performance.
For example, a 2012 Credit Suisse AG report found that companies with women directors outperformed those with no women directors in return on equity and price-to-book-value multiples. Studies by Catalyst and McKinsey & Co. confirmed the outperformance of companies with women on the board.
Likewise, a Norwegian study found that firms with at least one female director had Tobin Q values 0.26 higher than firms with no female directors (Tobin's Q is the ratio between the value the market puts on a company's physical assets and the cost of replacing those assets, and hence is a measure of how the stock market views a company's economic performance.)
So adding qualified women to the board can add to a company's economic and stock market performance. There is no reason the same performance gains should not accrue to investment management firms when they add diversity to their investment management ranks.
Obviously, the relative performance will equal out when most companies have female directors on their boards, but that is a long way away, given that women hold only 17% of the board seats of public companies in the U.S.
The outperformance might also disappear if the government were to mandate that a certain percentage of directors be women. That is what happened when the Norwegian government required 40% of board seats be held by women.
There, one study found, the higher valuation of companies with female directors before the mandate turned negative after the government action, perhaps because the new female directors on average had less CEO experience and were younger than the retained male directors.
In addition, many Norwegian public companies went private after the mandate.
The evidence suggests that investors should push companies to appoint women to their boards, and that adding women to all boards would improve U.S. corporate performance overall, if the change can be achieved voluntarily.
It also suggests that adding qualified women, and other underrepresented groups, to investment teams at money management firms might also improve investment performance.
Companies and money management firms would be advised to bring these changes about before the government or a regulatory authority seeks to impose a quota as in Norway, with detrimental effect.