Morgan Stanley Gender Diversity Investor's Guide

What's the impact of a better balance of men and women in the workplace on bottom lines and investment returns? See what we found.

RESEARCH | JAN 17, 2017

An Investor’s Guide to Gender Diversity

Gender diversity in the workplace can deliver returns with less volatility.


The social, cultural and political debate over gender equality seems never-ending. Calls for more female participation in the economy have grown louder, often based on political or cultural arguments founded on fairness. Yet, a persuasive argument for diversity and equality can also be anchored to the bottom line, where ensuring that more women are working and leading in the workplace is simply good business, especially for investors who not only care about the ethics, but also want returns.

“In essence, companies that screen better for gender diversity metrics are higher quality companies using our other standard financial metrics,” - Adam Parker, Chief U.S. Equity Strategist

Morgan Stanley’s Sustainable + Responsible Investment (SRI) and Global Quantitative Research teams took a crack at it. They collected and analyzed data from around the world, and created a proprietary gender-diversity framework for ranking more than 1,600 stocks globally. Their conclusion: more gender diverse companies offer similar return with lower volatility.

In other words: More gender diversity, particularly in corporate settings, can translate to increased productivity, greater innovation, better decision-making, and higher employee retention and satisfaction.

Gender Diversity Continues to Outperform

AVERAGE RELATIVE RETURNS


Positive Relationship Between Equity Returns and Gender Composition of Employee Base

Performance of Companies by Thirds of % Woman Employees

Annualized monthly returns relative to region, %women employees ranked into thirds within regional sector MSCI World, Equally Weighted Average Returns, 2010-2015, as of 3/22/2016 Sources: FactSet, ASSET4, Morgan Stanley Research

RISK ADJUSTED RETURNS


Positive Relationship Between Equity Returns and Gender Composition of Employee Base

Performance of Companies by Thirds of % Woman Employees

As of 3/22/2016 Sources: FactSet, ASSET4, Morgan Stanley Research

Global Conundrum

Despite improvements, women are still significantly underrepresented in the workplace, accounting for roughly a third of all employees globally and less than a quarter of management positions.

Women on
Boards by Region

Average % Women on Boards by Region

MSCI World, As of 3/22/2016

Europe 24%

Europe

North America

APxJ

Japan

Source:FactSet, ASSET4 and Morgan Stanley Research

Yet, a company’s percentage of female employees is positively correlated with its return on equity, says Eva Zlotnicka with the SRI team. Their key conclusions include:

  • High gender diversity companies can deliver slightly better returns, with lower volatility.
  • The top fifth of selected companies that consistently rank gender diversity among their priorities, outperformed their peers based on volatility and risk factors;
  • Gender pay gaps for directors and executives have been smaller in North America than in Europe or Asia-Pacific, excluding Japan, over the past 10 years (Japan lacks enough women executives and directors for a reliable assessment of the pay gap);
  • Globally, the pay gap is the highest in the utilities and materials sectors, and nonexistent in staples;
  • In Europe, female representation has increased on boards, but not at the executive, manager or employee levels.
Globally, technology has the lowest female representation on boards, whereas traditional defensives typically have better representation.

WOMEN ON BOARDS BY SECTOR


Average % Women on Boards by Sector, MSCI World, as of Mar 22, 2016

21%
TELECOM
19%
UTILITIES
14%
ENERGY
13%
TECHNOLOGY
15%
TELECOM
13%
UTILITIES
10%
ENERGY
9%
TECHNOLOGY

The Gender Data Gap

More than 6,000 companies globally now provide environmental, social and governance (ESG) disclosures, which may include information on women on boards and in the workforce. Generally, however, data on gender diversity remains scarce and isn't standardized, even when it is reported. “The contents, units and formats can vary greatly across companies or even over time for the same company, making comparisons difficult,” Zlotnicka says. While HR departments should have ready access to gender-related data, companies either don't consider this metric meaningful to investors or don't want to expose themselves, particularly when no requirement exists.

Placing Gender Diversity on a Scale

Morgan Stanley built its framework from three major elements: percentage of women in the workplace, company policies that promote equality and programs that accommodate the needs of women and working parents.

Women’s Representation

The largest weighting (50%) goes to gender diversity, which is a composite of the percentages of female employees, managers and directors.

Quality and Balance

The remaining weight is distributed evenly across five data items, including company policies that drive diversity and equal opportunity, as well as board diversity; plus, programs that provide better work/life balance, such as flexible work schedules, day care services, and maternity leave benefits.

Placing Gender Diversity on Scale

Morgan Stanley built its framework from three major elements: percentage of women in the workplace, company policies that promote equality and programs that accommodate the needs of women and working parents.

Women’s Representation

The largest weighting (50%) goes to gender diversity, which is a composite of the percentages of female employees, managers and directors.

Quality and Balance

The remaining weight is distributed evenly across five data items, including company policies that drive diversity and equal opportunity, as well as board diversity; plus, programs that provide better work/life balance, such as flexible work schedules, day care services, and maternity leave benefits.

Gender Diversity Performance & Reward

Using this framework, “We can do in-depth analyses to link gender diversity to all kinds of company attributes, including growth, profitability, corporate spending and accounting quality,” says Jessica Alsford, head of SRI research. Equal representation of the sexes is particularly key for sectors where employee engagement and satisfaction reflects directly on the quality of the product or service—financials, technology, retail, leisure and business services, among others.

Over a 6-year period, companies with more gender diversity tended to have a higher level of forward one-year return-on-equity:

0

basis points better on average

than their regional sector peers

0

basis points more on average

than companies with low women representation in the workplace

Broader Economic Impact

Women represent slightly more than half of the global population. In many countries, however, limited access to education, labor market conditions and cultural attitudes are major barriers to workplace entry. At the same time, women have fewer incentives than men to join the workforce: They are, on average, paid less, face more discrimination, while continuing to shoulder the bulk of responsibility for child- and elder-care and housework.

Yet the impact of increasing female participation to the workforce could be powerful. “The benefits of gender equality are multiple, including increased labor supply; higher incomes, productivity gains, and corporate bottom lines; and reduced poverty in developing countries,” according to Morgan Stanley’s report.

“Gender diversity can improve team decision-making and improve innovation capabilities for development of new products or services,” says Alsford. “It can also create alignment with diverse customer bases and, thus, open up untapped business opportunities.” - Jessica Alsford, Head of SRI Research




“In aging economies, particularly in the U.S., Europe and North Asia, higher female participation and employment rates can also help to counter a shrinking workforce,” the report adds. Indeed, the Organisation for Economic Cooperation and Development estimates that a 50% reduction in the gender gap in member countries could lead to a GDP gain of around 6% by 2030. That figure could increase by an additional 6% if the gap is completely closed in the next 15 years.

More investors are focused on ESG issues, such as gender diversity, and how they affect corporate and portfolio performance. To meet that demand, Morgan Stanley’s quantitative analysis now provides lists of stocks that screen well or poorly on gender diversity metrics, along with favorable/unfavorable stock selection model rankings. The framework is designed to compare companies vs. their regional sector peers on gender diversity indicators to avoid various regional and sector biases.

“Ultimately, it is our hope that we can more overtly incorporate diversity and other Social and Responsible behaviors into our investment discipline.”
- Adam Parker

For more Morgan Stanley Research on the framework and quantitative model for gender diversity investing, including the selected stocks in the model, ask your Morgan Stanley representative or Financial Advisor for the full reports, “A Framework for Gender Diversity in the Workplace” (Mar 31, 2016) and “Putting Gender Diversity to Work: Better Fundamentals, Less Volatility” (May 2, 2016). Plus, more Ideas.