Macro Insight
Different People: Human Capital Management and Diversity
 
 

Macro Insight

Different People: Human Capital Management and Diversity

 
He and she, two different people
With two separate lives
Then you put the two together
And get a spectacular surprise
— Different People, by No Doubt
 

An increasing proportion of millennials in the workforce, many of whom seek employers offering greater flexibility and who reflect their own values, means that companies need to evolve their strategies to attract the best young talent. Add to this the trends of an ageing global population, low unemployment and countries tightening immigration policies, then good Human Capital Management (HCM)—which falls primarily under the Social ‘S’ pillar of ESG—becomes clearer than ever for a company’s competitiveness.

For the stereotypical 20th century business, big factories and heavy equipment may have been perceived as the keys to gaining competitive advantage. In reality, the latter part of the century saw significant changes in many businesses to the extent that today, many firms are focusing instead on cultivating smart labour forces that can adapt quickly to change. The advantages can be, in the words of the rock band No Doubt, “a spectacular surprise.”

As many readers will be aware, the philosopher and economist Adam Smith had an opinion on most things including human capital, which he defined as “the acquired and useful abilities of all the inhabitants or members of the society.” 1 More than 200 years later, this definition still provides an appropriate starting point for our latest monthly outlook.

Dominant trend: An ageing global population

With declines in fertility rates and increased life expectancy, the global labour force is ageing rapidly. The median age of the advanced economies is now around 40, but even China and Korea are rapidly catching up.2 In fact, Korea is projected to have the highest median age in the world by 2050.2 The net effect of these trends has been a reduction in aggregate labour supply as older workers retire.

While this trend has been in place for developed countries for some time, the global dependency ratio—the ratio of nonworking-age to working-age population—has also been rising since 2011, following 45 years of improvement.3 This has been partially offset in three ways: increased female labour force participation, delayed retirement and increased immigration. The question is whether this is enough.

More women working

Because the increase in female labour force participation has been pronounced in most developed nations for some time, this low-hanging fruit has likely been exhausted for those economies. However, Japan provides a good case study. Their workforce is among the world’s oldest, with a historically low level of female participation—which Prime Minister Abe’s “Womenomics” campaign explicitly aimed to increase. He was elected in 2011, and from 2012 Japan saw a big shift in female participation (Display 1).

Display 1 : In Japan, a sharp increase in women at work
 
 
 
 

Source: Financial Times, Japan’s Culture of Discrimination Saps ‘Womenomics’, 28 August 2018. https://www.ft.com/content/2d05e910-a45e-11e8-8ecf-a7ae1beff35b


 

Retirement dates delayed

Delayed retirement keeps people working longer and eases pressures on pensions. It also ties in with other social forces like the breakup of the family. Whereas in the past the family unit generally took care of its senior members, now people tend to take care of themselves. And in places like the United States where divorce rates are high, even the nuclear family is no longer a reliable unit.

Migration could relieve labour shortages

Positive net migration has been the third way by which countries have been able to increase their labour supply. However, a recent shift towards more stringent migration policies makes it more challenging for companies to find the necessary skilled labour—a dynamic that is starting to hurt some economies.

Major economies including the U.S., U.K., Germany and Japan are either at or very close to full employment (Display 2). They simply do not have enough people to fill jobs. For example, Germany—where a shortage in skilled labour is clashing with citizens’ anxiety over immigration—is planning to introduce a new law to attract skilled migration from outside the European Union (EU) by the end of this year.

Display 2 : Low unemployment is causing shortage of skilled labour
 
 
 
 

The new normal: Flexible work arrangements

Against this backdrop of labour shortages, companies are competing with one another to attract high-quality employees. The demands of the workforce—particularly new entrants—are evolving. Flexibility is one of the main job attributes they seek.

According to a Timewise-Ernst & Young study,4 87% of all U.K. full-time employees either work flexibly already or say they would like to. This number reaches 92% for young workers. Failing to offer flexibility could hurt share-price performance: Companies without flexible working schemes have underperformed the MSCI World Index over the last six years.5

The desire for flexibility is often driven by family responsibilities such as the need to pick kids up from school. Morgan Stanley’s Global Gender Diversity Composite looks into 14 indicators, including flexible working schemes and found that the percentage of companies in MSCI World reporting such programmes increased from 32% to 45% between 2008 and 2015. North America trails Asia-Pacific and Europe in terms of percentage of companies offering such schemes, at 32%, 56% and 51%, respectively.5

Where companies do not offer sufficient flexibility, people are increasingly moving to freelancing. According to the Freelancers Union, by 2027 freelancers could make up more than 50%6 of the U.S. working population—including everyone from Uber drivers to lawyers and accountants. Between 2014 and 2017, the biggest increase in individuals working as freelancers was within the youngest cohort of 18 to 34.7

Let’s examine the implications of these structural trends for businesses.

Investment implication #1

Diversity has improved performance

There appears to be a linear relationship between a company’s level of diversity and its financial performance. In 2017, companies that ranked in the top quartile for gender diversity in executive management were 21% more likely to experience above-average earnings than those in the bottom (4th) quartile (using a ‘global data set’ of 12 countries). Ethnic and cultural diversity also contributed to profitability: Top quartile companies were 33% more likely to outperform, compared to bottom quartile (less diverse) companies.8 (Display 3).

Display 3 : Earning more with a mixed workforce
 
 
 
 

Source: McKinsey Diversity Matters Database.

Average EBIT margin, 2010-13 in Why Diversity Matters and 2011-15 in Delivering Through Diversity; Gender executive data: for 2014, N = 383; for 20173, N = 991; Ethnic/cultural executive data: for 2014, N = 364; for 2017, N = 5894


 

These statistics are so striking that they warrant an explanation. Diversity expands the talent pool and strengthens customer orientation. A salesperson marketing products in Latin America is more likely to understand the customer if others on the sales team include someone from Latin America. According to research from the Center for Talent Innovation, when teams had one or more members representing the gender, ethnicity, culture, generation or sexual orientation of the team’s target customer, the entire team was significantly more likely to say they understood that customer. 9

These studies suggest that diversity also improves employee satisfaction by reducing conflicts between groups and increasing collaboration and loyalty. Instead of an “us versus them” mentality, diverse companies tend to have a more inclusive environment. Diversity tends to counteract groupthink-type situations, which can dampen innovation and lead to subpar decisions. Company reputations are also enhanced through diversity. Importantly, by casting a wider net in sourcing skilled workers, diversity-focused companies can win the war for talent and thus gain competitive advantages. 

Along with the promise of improved performance, reputational consequences and legal requirements, employees and consumers are directly pushing companies to adapt their human capital practices, including those around diversity.

Investment implication #2  

Employee satisfaction also drives tangible results

Increasingly, employees are exerting pressure on companies to provide both flexible work arrangements and an engaging work environment. But building a happy, engaged workforce takes more than money: A recent study10 found that 89% of respondents said they would consider making a lateral career move with no financial incentive in order to find greater personal satisfaction, pursue an entirely new career path or to take up a professional challenge.

Creating a work environment that is engaging and satisfying is proving to be good for companies’ health: Those in the top quartile of employee engagement have had 22% higher profitability, 21% higher productivity and 10% higher customer satisfaction.  (Display 4). 

Display 4 : Key metrics are higher when employees are engaged
 
 
 
 

Source: Gallup; Workplace, 20 June 2013. “How Employee Engagement Drives Growth”. Susan Sorenson.


 

Companies with engaged workforces also recovered from the last recession at a faster rate (Gallup). Even companies’ safety records seem to benefit from higher employee engagement, with more engaged work units having 49% fewer safety incidents (Gallup).

Implication #3

Customers: The other human resource

While engaged employees exert internal pressure on company behaviour, consumers—particularly younger ones—apply external pressure. For example, 51% of millennials said they would be more likely to buy products from a company where they agree with a CEO who actively speaks out on hotly debated current issues. Baby boomers, the least likely to factor the views of the CEO into their buying decisions, are diminishing in number. The future seems to favour companies whose customers agree with their outspoken views—a shift from the traditional approach of companies trying to stay out of current debates (Weber Shandwick).

Display 5 : Millennials influenced by outspoken CEOs
 
 
 
 

Source: CEO Activism in 2017: High Noon in the C-Suite. Weber Shandwick. https://www.webershandwick.com/wp-content/uploads/2018/04/ceo-activism-in-2017-high-noon-in-the-csuite-1.pdf


 

 

Human capital:  Key to sustainability

An ageing workforce, more recently the trend of rising populism and countries adopting tighter immigration policies, has reduced the pool of employees available to companies in those countries. Like any scarce resource, human capital needs to be protected and nurtured.

To compete effectively, companies should consider engaging employees, offering flexible work arrangements, providing training and promoting diversity. All are crucial to maintaining and attracting talent, the lifeblood of innovation and productivity.

Over time, we believe companies that are good stewards of human capital will build sustainable competitive advantages that will translate into shareholder value.  We therefore pay attention to companies’ social scores —which encompass human capital issues —in building our portfolios. The social pillar includes working conditions, discrimination policy, diversity programmes and employee turnover rate.

Together, we believe that strong social behaviour can lead to significantly better financial results —a “spectacular surprise” in the words of the rock band No Doubt

 

1Adam Smith: An Inquiry Into the Nature and Causes of the Wealth of Nations Book 2 – Of the Nature, Accumulation, and Employment of Stock (Published 1776).

2Reserve Bank of Australia (RBA), Bulletin – December Quarter 2017.  https://www.rba.gov.au/publications/bulletin/2017/dec/5.html

3United Nations World Population Prospects. Morgan Stanley Research. Projections refer to UN projections.

4Past performance is no guarantee of future results. The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment. Timewise,Research produced in partnership with EY, Cite study, 19 September 2017. https://timewise.co.uk/wp-content/uploads/2017/09/Flexible_working_Talent_-Imperative.pdf.

5MS Sustainability Research. Lack of Flexible Working Can Impact Performance. Published 29 November 2017.

6Upwork and Freelancers Union Press Release. https://www.upwork.com/press/2017/10/17/freelancing-in-america-2017/. Published 17 October 2017. https://www.upwork.com/press/2017/10/17/freelancing-in-america-2017/.

7MS Sustainability Research. The Freelance Economy. Published 8 May 2018. Freelancers Union.

8Earnings cited are before interest and taxes; peer comparisons are made based on industry and geography. McKinsey & Company’s Diversity Matters. Published January 2018.

9 Diversity’s Positive Impact on Innovation and Outcomes. Sylvia Ann Hewlett, Ripa Rashid and Laura Sherbin. Center for Talent Innovation and Hewlett Consulting Partners LLC.

10 Cornerstone. Career Trends Report. Study as of September 2015. https://www.cornerstoneondemand.com/careertrendsreport.

 

Risk Considerations

There is no assurance that the strategy will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Accordingly, you can lose money investing in this portfolio. Please be aware that this strategy may be subject to certain additional risks. There is the risk that the Adviser’s asset allocation methodology and assumptions regarding the Underlying Portfolios may be incorrect in light of actual market conditions and the portfolio may not achieve its investment objective. Share prices also tend to be volatile and there is a significant possibility of loss. The portfolio’s investments in commodity-linked notes involve substantial risks, including risk of loss of a significant portion of their principal value. In addition to commodity risk, they may be subject to additional special risks, such as risk of loss of interest and principal, lack of secondary market and risk of greater volatility, that do not affect traditional equity and debt securities. Currency fluctuations could erase investment gains or add to investment losses. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall. In general, equities securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks.  Stocks of small-capitalisation companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Exchange traded funds (ETFs) shares have many of the same risks as direct investments in common stocks or bonds and their market value will fluctuate as the value of the underlying index does. By investing in exchange traded funds ETFs and other Investment Funds, the portfolio absorbs both its own expenses and those of the ETFs and Investment Funds it invests in. Supply and demand for ETFs and Investment Funds may not be correlated to that of the underlying securities. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. A currency forward is a hedging tool that does not involve any upfront payment. The use of leverage may increase volatility in the Portfolio. Diversification does not protect you against a loss in a particular market; however, it allows you to spread that risk across various asset classes.

DEFINITIONS

Earnings Before Interest and Taxes (EBIT) is essentially net income before deducting interest, and taxes and can be used to analyse and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. Volatility is measured by calculating the standard deviation of the annualized returns over a given period of time. It shows the range to which the price of a security may increase or decrease.

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto. The MSCI World Index (MSCI World) is a free float adjusted market capitalization weighted index that is designed to measure the global equity market performance of developed markets. The term “free float” represents the portion of shares outstanding that are deemed to be available for purchase in the public equity markets by investors. The performance of the Index is listed in U.S. dollars and assumes reinvestment of net dividends

DISCLOSURES 

The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all portfolio managers at Morgan Stanley Investment Management (MSIM) or the views of the firm as a whole, and may not be reflected in all the strategies and products that the Firm offers.

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific Morgan Stanley Investment Management product.

Except as otherwise indicated, the views and opinions expressed herein are those of the portfolio management team, are based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date hereof.

Certain information herein is based on data obtained from third party sources believed to be reliable. However, we have not verified this information, and we make no representations whatsoever as to its accuracy or completeness.

The information herein is a general communications which is not impartial and has been prepared solely for information and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The material contained herein has not been based on a consideration of any individual client circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

Past performance is no guarantee of future results. Charts and graphs provided herein are for illustrative purposes only.

This communication is not a product of Morgan Stanley’s Research Department and should not be regarded as a research recommendation. The information contained herein has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This commentary is only intended for, and will be only distributed to, persons resident in jurisdictions where distribution or availability would not be contrary to local laws or regulations.

There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Prior to investing, investors should carefully review the product’s relevant offering document. There are important differences in how the strategy is carried out in each of the investment vehicles.

DISTRIBUTION

This communication is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

United Kingdom: Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA, authorised and regulated by the Financial Conduct Authority. Dubai: Morgan Stanley Investment Management Limited (Representative Office, Unit Precinct 3-7th Floor-Unit 701 and 702, Level 7, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, 506501, United Arab Emirates. Telephone: +97 (0)14 709 7158). Germany: Morgan Stanley Investment Management Limited Niederlassung Deutschland Junghofstrasse 13-15 60311 Frankfurt Deutschland (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG). Italy: Morgan Stanley Investment Management Limited, Milan Branch (Sede Secondaria di Milano) is a branch of Morgan Stanley Investment Management Limited, a company registered in the UK, authorised and regulated by the Financial Conduct Authority (FCA), and whose registered office is at 25 Cabot Square, Canary Wharf, London, E14 4QA. Morgan Stanley Investment Management Limited Milan Branch (Sede Secondaria di Milano) with seat in Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy, is registered in Italy with company number and VAT number 08829360968. The Netherlands: Morgan Stanley Investment Management, Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. Telephone: 31 2-0462-1300. Morgan Stanley Investment Management is a branch office of Morgan Stanley Investment Management Limited. Morgan Stanley Investment Management Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Switzerland: Morgan Stanley & Co. International plc, London, Zurich BranchI Authorised and regulated by the Eidgenössische Finanzmarktaufsicht (“FINMA”). Registered with the Register of Commerce Zurich CHE-115.415.770. Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland, Telephone +41 (0) 44 588 1000. Facsimile Fax: +41(0)44 588 1074.

U.S.
A separately managed account may not be suitable for all investors. Separate accounts managed according to the strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the strategy carefully before investing. A minimum asset level is required. For important information about the investment manager, please refer to Form ADV Part 2.

Please consider the investment objectives, risks, charges and expenses of the funds carefully before investing. The prospectuses contain this and other information about the funds. To obtain a prospectus please download one at morganstanley.com/im or call 1-800-548-7786. Please read the prospectus carefully before investing.

Morgan Stanley Distribution, Inc. serves as the distributor for Morgan Stanley Funds.

NOT FDIC INSURED | OFFER NO BANK GUARANTEE | MAY LOSE VALUE | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | NOT A BANK DEPOSIT

Hong Kong: This document has been issued by Morgan Stanley Asia Limited for use in Hong Kong and shall only be made available to “professional investors” as defined under the Securities and Futures Ordinance of Hong Kong (Cap 571). The contents of this document have not been reviewed nor approved by any regulatory authority including the Securities and Futures Commission in Hong Kong. Accordingly, save where an exemption is available under the relevant law, this document shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong. Singapore: This document should not be considered to be the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor under section 304 of the Securities and Futures Act, Chapter 289 of Singapore (“SFA”); (ii) to a “relevant person” (which includes an accredited investor) pursuant to section 305 of the SFA, and such distribution is in accordance with the conditions specified in section 305 of the SFA; or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.   Australia: This publication is disseminated in Australia by Morgan Stanley Investment Management (Australia) Pty Limited ACN: 122040037, AFSL No. 314182, which accept responsibility for its contents. This publication, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act.

Japan: For professional investors, this document is circulated or distributed for informational purposes only. For those who are not professional investors, this document is provided in relation to Morgan Stanley Investment Management (Japan) Co., Ltd. (“MSIMJ”)’s business with respect to discretionary investment management agreements (“IMA”) and investment advisory agreements (“IAA”).  This is not for the purpose of a recommendation or solicitation of transactions or offers any particular financial instruments. Under an IMA, with respect to management of assets of a client, the client prescribes basic management policies in advance and commissions MSIMJ to make all investment decisions based on an analysis of the value, etc. of the securities, and MSIMJ accepts such commission. The client shall delegate to MSIMJ the authorities necessary for making investment. MSIMJ exercises the delegated authorities based on investment decisions of MSIMJ, and the client shall not make individual instructions.  All investment profits and losses belong to the clients; principal is not guaranteed. Please consider the investment objectives and nature of risks before investing. As an investment advisory fee for an IAA or an IMA, the amount of assets subject to the contract multiplied by a certain rate (the upper limit is 2.16% per annum (including tax)) shall be incurred in proportion to the contract period. For some strategies, a contingency fee may be incurred in addition to the fee mentioned above. Indirect charges also may be incurred, such as brokerage commissions for incorporated securities. Since these charges and expenses are different depending on a contract and other factors, MSIMJ cannot present the rates, upper limits, etc. in advance. All clients should read the Documents Provided Prior to the Conclusion of a Contract carefully before executing an agreement. This document is disseminated in Japan by MSIMJ, Registered No. 410 (Director of Kanto Local Finance Bureau (Financial Instruments Firms)), Membership: The Investment Trusts Association, Japan, the Japan Investment Advisers Association and the Type II Financial Instruments Firms Association.

IMPORTANT INFORMATION

EMEA: This marketing communication has been issued by Morgan Stanley Investment Management Limited (“MSIM”). Authorised and regulated by the Financial Conduct Authority. Registered in England No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA.

Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the applicable European regulation or Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.

MSIM has not authorised financial intermediaries to use and to distribute this document, unless such use and distribution is made in accordance with applicable law and regulation. MSIM shall not be liable for, and accepts no liability for, the use or misuse of this document by any such financial intermediary. If you are a distributor of the Morgan Stanley Investment Funds, some or all of the funds or shares in individual funds may be available for distribution. Please refer to your sub-distribution agreement for these details before forwarding fund information to your clients.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without MSIM’ express written consent.

All information contained herein is proprietary and is protected under copyright law.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.

This document may be translated into other languages. Where such a translation is made this English version remains definitive. If there are any discrepancies between the English version and any version of this document in another language, the English version shall prevail.

 

It is important that users read the Terms of Use before proceeding as it explains certain legal and regulatory restrictions applicable to the dissemination of information pertaining to Morgan Stanley Investment Management's investment products.

The services described on this website may not be available in all jurisdictions or to all persons. For further details, please see our Terms of Use.


Privacy & Cookies    •    Terms of Use

©  Morgan Stanley. All rights reserved.