How do you improve business performance?

Investing
August 13, 2018

Businesses wanting to give investors a better return than they’re currently providing may do well to follow the advice of Sam Stubbs, Managing Director of the Simplicity Kiwisaver Scheme.

Sam’s advice: tap into a larger and more diverse talent pool.

More women and ethnic minorities around the board tables do help companies to maintain their competitive edge and increase their returns to investors, says Sam.

Is it a message that ought to be taken up? Sam’s firm invests in all companies of the NZX. So we had a look at the diversity record of New Zealand and overseas companies. It is tempting to think that there’s more attention paid to window dressing than action. What do you think?

What makes a Board diverse?

Using gender diversity as an example, MSCI says that just having a single woman on a board does not necessarily lead directly to more profits. They suggest that at least three women are needed for board dynamics to change substantially.

This is a far cry from the current state of our private sector where, according to the article "The KiwiSaver Fund Planning to Buy Back New Zealand", just 4% of all CEOs and Chairpersons of NZX50 companies are women.

A closer look at gender diversity and share performance

In the area of gender diversity, Sam’s statement is supported by Business Insider citing “[a study of] companies in the MSCI World Index with strong female leadership generated a Return on Equity of 10.1% per year versus 7.4% for those without”.

In New Zealand in 2014 Fletcher Building signed a principal partnership with Global Women and declared it was a strong supporter of the organisation and its breakthrough leaders’ programme. As of 11 June, Fletcher Building have one woman on their board of nine (11%) which is well-short of the minimum of three to make a difference. The performance of their shares went from increasing 13% in the 12 months to June 2016 to -17% in the last 12 months.

On the other hand, Fisher & Paykel Healthcare have two females on their board of nine (22%) increasing slightly from 1 of 7 (14%) this time last year. Their share price went from a whopping 30% increase in the 12 months to June 2016 to a 9% increase in the last 12 months.

Similarly, Auckland International Airport’s Corporate Social Responsibility Report in June 2016 stated “we continued to develop our female employees by taking part in Global Women Activation Series events. We were also a founding partner in the Champions for Change movement which aims to raise the value of diversity and inclusiveness in the New Zealand business community.” They seem to be one of the only companies in New Zealand taking gender diversity seriously, as is reflected in their representation of three females out of the eight board members. Their shareholder value went from a good 23% in the 12 months to June 2016 to a 2% increase in the last 12 months.

Another New Zealand company taking this seriously is Spark NZ. In June 2016 Spark NZ only had one female director out of seven (14%). They achieved their goal of having increased female representation to three of their eight board members (38%) by 30 June 2017. Spark NZ's share performance, like Auckland International Airport's, went from a good 26% in the 12 months to June 2016 to a 2% increase in the last 12 months.

Looking at these trends in isolation supports Sam’s statement conclusively. Gender diversity in New Zealand boardrooms appears to boost good performance higher and mitigate the lows.

Many large organisations overseas also understand the importance of diversity in gaining greater value of shareholders.

Last week, General Electric (GE) announced a gender diversity target: GE's goal is to hire 20,000 women in Science, Technology, Engineering and Math roles by the year 2020. This was a significant stake to put in the ground in terms of GE’s position on the business benefits of diversity. GE's share performance was similar to Fletcher Buildings as it went from increasing 17% in the 12 months to June 2016 to -24% in the last 12 months.

While Apple’s gender ratios of leadership positions has not changed since June last year (28%) efforts to change the gender ratios of its global workforce up one point from the end of June 2015, at 32% women. Women held 23% of Apple's technical positions, also up one point from a year ago which flies in the face of the number of women completing Computer Science majors (having fallen to 18% from 37% in 1984). Interestingly, Apple's share price dropped 31% in the 12 months to June 2016 but increased 32% in the last 12 months.

Given the huge number of macro and micro-factors that would also affect share performance, it’s safe to say there’s no magic bullet to what will provide the best investment return. But the overall trend suggests greater gender diversity is a consideration to better investment returns over the longer term.

What about other diversity metrics?

Racial and ethnic diversity has a stronger impact on financial performance in the United States than gender diversity, perhaps because earlier efforts to increase women’s representation in the top levels of business have already yielded positive results.

Spark NZ Corporate Social Responsibility report 2016 highlighted New Zealand now has 213 different ethnic groups, with Auckland, in particular, being identified as one of the most diverse cities on earth. Accordingly, Spark NZ has 50% of employees who are non-European and part of its long-term goal is for 50% directors, leaders and people leaders to be female or non-European.

Sam doesn’t stop there though. “Diversity can also be skills-based” he says. Digital natives are generally a lot younger and currently unlikely to be represented on Boards. “Boards can get more comfortable moving forward in this digital landscape by looking at having junior board members co-opted to sit in and add value by contributing. In this day and age, companies can’t afford not to move forward digitally. How else can they get comfortable in this space?”

How can companies become more diverse?

Sam says change is not as easy having a statement in the Annual Report which supports gender equality. The governance and processes surrounding the requirements to change the gender balance is one factor. Initially companies need to look at their recruitment intake. Factors affecting intake might include what these companies offer in respect of maternity and paternity leave, how they ensure balanced, if not flexible work hours, provision of creches and/or mentoring and training programmes. Pay is also a consideration.

Despite companies like Spark NZ aiming for a long term goal of 100% gender-pay equity, the pay gap between men and women remains at 12%, according to the research undertaken by Auckland University of Technology for the Ministry for Women. This equates to women earning $600,000 less on average than their male counterparts. Different occupations and industries, the amount of work experience and women's qualifications relative to men accounted for less than 20% of the pay gap between the sexes. The gender inequality topic was epitomised by the #LikeAGirl campaign in 2014 where bias against women was both conscious and subconscious. In fact, it accounted for as much as 83%. For change like this to occur, we need to recognise and acknowledge these bias’. Otherwise how can we drive this change at a company level?

In the case of Johnson & Johnson’s top managers, they have since 2015 had a portion of their bonuses tied to meeting certain diversity metrics, including how many women they hired in the previous year.

When asked about the extent he thinks these companies will go to make these changes, Sam says it’s up to the companies themselves to decide what diversity means for them, and how they will go about implementing it. His role, on behalf of Simplicity and its investors is that of a persuader; an agitator for change in the interests of its investors.

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