Towards a Better Future Part II – Women and Finance

Through the process of researching the best way to bring socially responsible investment portfolios to the forefront at our firm we have been pleasantly surprised to see gender become a focus area. There is a small subset of the investment world that is actively applying a gender lens to investing. We are proud to count ourselves in that group.

It has always been our view that gender balance in the world, and specifically in the world of business, would lead to improvements – improvements in corporate culture, business activities, profits, and more. We believe this because we believe that diverse viewpoints and voices give rise to better understanding of complex situations. Making a business successful is certainly complex. However, the vast majority of corporate officers and members of corporate Boards of Directors are men.

In researching both investment topics and topics of personal interest, we have noticed a recurring theme in the world: things that make perfect sense at an intuitive level often require data driven studies to be accepted as valid. Another way of saying this, to borrow from Voltaire, is that “common sense is not so common”.

In our thinking that more women in positions of power would be good for companies and the world, the driving thought is simply that it seems perfectly obvious to us that the wisdom women can bring to the corporate world is largely untapped. If this is correct, there is potential for improvement simply by adding women to the ranks of corporate officers and directors – and that is exactly what some new studies are showing. The bullet points below are quoted from a whitepaper titled “Gender Equality as an Investment Concept”, by Joseph F. Keefe, President & CEO of Pax World Management, LLC. Pax World is a mutual fund company with which we enjoy a close relationship. We include funds managed by Pax World in our socially responsible investment portfolios.

Gender has begun to emerge as an investment theme

• A 2011 Catalyst study of companies over the 2004-2008 time period, showed that companies with three or more women corporate directors (in at least four of the five years) outperformed those with no women on the board by 84% on return on sales (ROS), 60% on return on invested capital (ROIC) and 46% on return on equity (ROE). An earlier, Catalyst study found that the highest quartile companies in terms of percentage of women on the board outperformed the lowest quartile companies over the period of 2001-2004 by 42% on ROS, 66% on ROIC and 53% on ROE.
• A study of the profitability of Fortune 500 firms between 1980 and 1998, determined that the 25 firms with the strongest record of promoting women to the executive suite were more profitable than the median firms in their industries.
• A 2008 study by McKinsey found that companies with greater numbers of women in senior management scored higher than lower-ranked counterparts on nine dimensions of organization, such as leadership, accountability and innovation, and that higher-scoring companies were more likely to have above average earnings and financial valuations.
• A study of French companies found that those with more women in their management withstood the 2008 market downturn better than those with fewer women, and attributed this success to gender diversity contributing to managerial efficiency and the fact that women tend to be more risk-averse than men.
• A study of the relationships between gender and trust concluded that gender diversity on corporate boards is one indicator of trustworthy corporations. Trustworthiness, in turn, is an important element of reputation and brand value. “If there is a locus of trust in the corporation, it is the board…Based on existing research in the social sciences, [a] promising focus for enhancing trust in the corporation is gender diversification of boards of directors.”
• A July 6, 2010 Newsweek article reported on a McKinsey survey that found, of companies that had made efforts to empower women in emerging markets, 34 percent reported increased profits, and another 38 percent said they expected to see profit as a direct result of those efforts.
• Other studies have shown that the quality of companies’ reported earnings is positively correlated with greater gender diversity in senior management, as well as greater gender diversity on corporate boards.

Needless to say, these studies represent a starting point for making what we see as common sense more common, and they are exciting to us. There is still a long way to go on this issue. Many more studies are needed to establish the concept of a gender lens as a widely accepted investing tool. We are actively advocating and working with investment companies that are interested in this theme. As well, in our portfolio building work, we include the gender of a mutual fund manager as a factor in deciding allocations.

As we mentioned in our last Investment Commentary, “Toward a Better Future”, we would love to talk to you about your values. We are also available to share with you what we have learned about socially responsible investing. It is our goal to represent your values in your portfolio.

Solomon Halpern

Sol is president of MIFI Wealth. He has over 20 years of experience in financial markets and managing businesses.