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Women Employees Boost the Bottom Line for Tech Firms

The better a tech company’s gender diversity, the greater its returns, on average, according to new research by Morgan Stanley.

The lack of women in technology companies isn't just a question for academic research and industry debate, it should also be of interest to investors, according to recent findings from Morgan Stanley's Sustainability and Global Quantitative Research teams.

Based on multiple measures, technology ranks among the lowest sectors in terms of gender diversity. Yet the Research teams discovered that those tech firms that do make an effort to boost gender diversity can generate significantly better returns than their less diverse peers.

A new report by the team ranks 108 tech companies, based on a common gender diversity investment framework. It found that, over the five years ended September, 2016, highly gender-diverse tech companies returned on average 5.4% more on an annual basis than the average yearly returns of their peers with less gender diversity.

Average % of Women at Various Job Levels By Sector

Source: FactSet, ASSET4, TRBI, Bloomberg, BoardEx, company reports, Morgan Stanley Research

What’s more, tech companies get a much greater boost to their returns from employing more women at all levels of the firm than do companies with similar levels of gender diversity in other sectors. The report adds that, over the same period, highly gender diverse companies in other sectors returned an average 1%-2% more on an annualized basis than their less diverse peers.

“What it means is that picking companies with higher gender diversity has had a better payoff in tech than in other sectors,” says Eva Zlotnicka, lead analyst on the report. What is apparent is that tech companies and their investors are missing a big opportunity by not employing more women.

Annualized Relative Returns: High vs. Low Gender Diversity

Source: FactSet, ASSET4, TRBI, Bloomberg, BoardEx, company reports, Morgan Stanley Research

After analyzing 1,600 corporates across all sectors, Morgan Stanley found that companies with better gender equality tend to have stronger fundamentals and better risk-adjusted performance. Yet for technology in particular, the link between gender diversity and performance is real. It stands to reason: More gender equality, particularly in corporate settings, likely corresponds with increased productivity; greater innovation; higher employee retention and better risk management—all critical factors for improving a tech company's odds of staying competitive.

The upshot: “Tech companies that aren't focusing on gender diversity are missing an opportunity," Zlotnicka says.

For female representation across all employment levels, the tech sector ranks near the bottom, on par with or below sectors such as energy, utilities and industrials. “Given that tech is a relatively new and growing sector, this is surprising," says Zlotnicka. 

The Pipeline Factor

As a newer sector, tech doesn’t suffer from entrenched structural issues that affect gender diversity in sectors like utilities. Yet it does have some issues of its own that can hinder its ability to hire and retain women. There’s the “pipeline” factor, with fewer females studying science, technology, engineering and math (STEM) subjects. There’s also a “brain drain” issue of women exiting STEM fields.

The report notes research by the Center for Talent Innovation, suggesting that a decline in the number of women in tech in recent decades could be attributed to hostile workplace culture (or the perception thereof), isolation, long hours, travel and “mysterious career advancement."

Conversely, the sector does well in terms of the number of women with positions in the C-Suite, and barely differentiates between the sexes when it comes to pay at the executive and board levels.

Percentage of Firms with Women in Key Positions

Source: FactSet, ASSET4, TRBI, Bloomberg, BoardEx, company reports, Morgan Stanley Research

There are examples of tech companies that have boosted their female employment levels with good recruiting programs. After it began factoring hiring and retaining diverse employees into its bonuses, one leading semiconductor company reported a 43% increase in female hires. When the world's leading search engine expanded paid maternity from 12 weeks to 18 weeks, the rate of new mothers quitting fell 50%.

Gender diversity differs across tech subsectors, with communications equipment and internet industries among the areas with the strongest gender diversity. Information technology is the most mixed, doing well in terms of women represented across employment levels, but poorly on equality of pay, at least compared with the rest of tech. Electronic instruments & components, semiconductors and tech hardware firms lag behind the most.

For more Morgan Stanley Research on the framework and quantitative model for gender diversity investing, including the selected tech stocks in the model, ask your Morgan Stanley representative or Financial Advisor for the full reports, “More Gender Diverse Tech Companies Generate Higher Relative Returns" (April 11, 2017), “A Framework for Gender Diversity in the Workplace" (March 31, 2016) and “Putting Gender Diversity to Work: Better Fundamentals, Less Volatility" (May 2, 2016). Plus, more Ideas.