Over the past few years, public attention has turned to the lack of women in business leadership roles. Many businesses are taking active strides to close this gap and welcome women to the table, but this shift has not gained global traction. Women are still significantly underrepresented in corporate leadership, particularly in emerging markets: Of the largest listed companies across 20 Asian countries (mostly emerging markets), women held just 13% of board seats in 2016, compared with 36% in Northern Europe and 21% in North America.
Beyond the obvious social argument in favor of gender parity, improving gender diversity is a huge opportunity for both companies and countries to create value. This fact is well documented: research shows that across regions, companies in the top quartile for executive team gender diversity are 21% more likely to experience above-average profitability than companies in the fourth quartile. Further studies show there is a link between greater gender diversity and levels of innovation, as well as productivity.
In our own research of more than 100 of India's Nifty 500 companies that disclose data on board composition and gender, those with 20% or more female representation on their boards had a 26% higher five-year adjusted return on equity and a 36% higher return on invested capital than firms with less than 10% female board representation. The shares of firms that disclosed having more inclusive boards also exhibited lower volatility. Improving gender equality also presents increased opportunities for emerging markets' economic development. For example, McKinsey found that India alone could add $770 billion to annual gross domestic product by 2025 through advancing women's equality — 18% higher than business-as-usual GDP. This increase could have huge economic growth implications across the region and world, especially for investors.
Some emerging markets are trying to address the lack of gender diversity with tools like gender quotas and tenure limits for corporate boards, which provide an opportunity for companies to re-evaluate their leadership makeup. These policies can sometimes be effective — in India, a 2015 mandate requiring at least one female board director helped push the percentage of women on boards to 13% in 2017 from 5% in 2012 — but these improvements are nowhere near enough. Quotas improve the data, but the voice of just one woman might not be enough to effect meaningful change — especially in the predominantly family-owned emerging market companies, where someone's wife or sister-in-law can fill the quota. Similarly, tenure limits can create more opportunity for diverse board placements but cannot enforce them.
From our perspective, investors — particularly activist investors — are uniquely positioned to encourage more diversity in emerging market companies. As the focus on gender diversity trickles down to emerging markets, investors can get in on the ground floor and foster this social change while reaping the financial benefits from diverse company boards.
Cartica engages directly with our portfolio companies on board composition and turnover. Far too often, we are told by management and majority shareholders that there are not enough qualified female candidates for the board. But this claim does not hold water anymore, if it ever did. According to a 2017 study by MSCI ESG Research LLC, 59% of countries and 53% of companies had larger female talent pools than male. Furthermore, women in both emerging and developed markets tend to be better represented in the top government ranks than in C-suites and boardrooms, which demonstrates there is no dearth of women qualified to hold leadership positions. Often, companies apply more constricting requirements in searches for female candidates — for example, requiring that women must have held a CEO title or board seat previously, while they omit to require the same experience of male candidates. This double standard limits the perceived pool of "qualified female candidates" available to companies.
Activist investors have the power to promote value creation by approaching portfolio companies on these issues of board composition and refreshment. Investors can require that companies have a process for assessing diversity in all aspects (including gender, ethnicity, age, industry experience and education). We can help companies broaden the candidate pool by starting a conversation about their boards' skill mix, and if they argue the "lack of female candidates," we can provide lists of qualified candidates.
Another approach is to get a critical mass of support for board diversity from the CEO or current board members. Some of the best practices include public commitments to diversity and inclusion, possibly by including the NFL's Rooney Rule in corporate governance or nominating committees' charters, as well as efforts to build an inclusive organizational culture through talent development and training. For minority shareholders investing in such firms, advocating for diversity through these channels should encourage an independently minded board, free from groupthink, to oversee management.
Activist investors also can support diversity through public policy efforts on a market level. We support organizations like the 30% Coalition, which works to get more women on public company boards. We recently worked with the coalition to advocate that authorities in India, Singapore and Hong Kong strengthen rules to increase the level of female representation on corporate boards.
By taking active strides to reform policy and evoke change from board members down to entry level employees, we believe emerging market companies and countries can create a mutually beneficial, virtuous cycle of higher standards for gender diversity. Activist investors in the region have a significant opportunity to take the lead in this movement, and unlock a significant growth opportunity for countries, companies and women.