Why invest in companies that focus on inclusion and diversity?

In her inaugural post, Jessica Huang talks about the investment case for inclusion and diversity.

We believe companies that fail to take inclusion and diversity (I&D) issues seriously cannot fully understand the forces shaping their business, the economy and the world.  Today’s most difficult challenges come from a diverse, inter-connected world; a diverse and well networked group of professionals have the best chance of responding to such challenges. Inclusion and diversity is therefore not just a values-based focus, but instead a meaningful investment consideration.

The investment case for I&D

We first must address that data quality and availability has been an obstacle in determining the materiality of I&D issues on company performance.   However, we at BlackRock believe there is a fundamental reason to consider I&D as a long-term investor today.  As societal preferences evolve-whether as an employee, consumer, or investor–issues such as I&D may become increasingly important to a company’s bottom line. Further, there are select studies today that point to the potential positive correlation of select I&D factors and corporate performance indicators.

Diversity, whether it be cognitive or experiential, improves problem solving and creativity. Modeling evidence shows that best-performers inevitably become similar and lack the diverse ways in problem-solving when the group size become larger, and hence under-performed a randomly selected diverse group.[1] Think of it this way, in a collaborative environment, a person’s value does not depend on her absolute wisdom but on her ability to improve the collective decision.[2] Similar minds cannot add to group wisdom the way diverse minds do. Increased creativity is another illustration of the power of diversity. Empirical evidence finds firms with 10 percentage points of more female directors on board are associated with 6% more patents and 7% more citations for a given R&D expenditures.[3] Again, we see that people with different gender, race and experiences can jointly contribute to more robust and innovative ideas which companies are likely to benefit from.

Beyond just gender diversity, some research has found that LGBT-supportive policies are linked with higher stock returns, higher firm value, higher productivity and profitability. [4],[5] While further research is needed to understand the underlying mechanism, one theory is that sexual-orientation equality increases a company’s competitive advantages in the labor markets.[6] Further, policies such as flexible hours and day care services, make sure that all talented employees–whether new parents or those taking care of elderly family members–can thrive in the companies and thus may help retain talent and reduce employee turnover.

Looking at more traditional human capital metrics–internal promotion, employee satisfaction, and management training, coupled with systemic change around employees to help them form new habits and practices–can further help companies grow and retain talents.  Research from University of Pennsylvania showed that a simple value-weighted portfolio of the Fortune’s list of “100 Best Companies to Work for in America”-which has looked across various metrics inclusive of opportunities, benefits and diversity-generated a four-factor alpha of 3.5% from 1984 to 2009, which was 2.1% higher than the benchmark.[7]  A meta-analysis on 7,939 business units in 36 companies further confirms that higher employee satisfaction levels are associated with higher profitability, higher customer satisfaction, and lower employee turnover.[8] We therefore believe, companies with happy and productive employees can be smart long-term investments.

Inclusion and Diversity at BlackRock

At BlackRock, we believe “inclusion and diversity” is a skill which managers and leaders can improve, and, if they do, they would have a better chance of improving the engagement and output of the people working for and around them.  We invest heavily to build a culture where all talents are offered equal opportunities to thrive and all voices–not just the loudest or the most familiar–can contribute the ideas that help our clients achieve their goals. We have committed to increase our female senior representation to 30% by 2020 across the globe; and we are proud in 2017, we have 45% outstanding female in our global new hires and 47% ethnic minority in US new hires.[9] In order to serve our diverse set of clients, we need to have a diverse and inclusive form.

We pay so much attention to I&D, because we truly understand and recognize that a diverse and inclusive workforce can effectively translate into innovation and better decision-making. And companies that fail to treat inclusion and diversity seriously will lose out on the opportunity to fully understand the dynamic business environment where they operate.

We have also been focused on I&D as an investment offering on our Sustainable Investing platform. We are seeing increasing interest from our clients, and are working on solutions to help investors gain exposure to companies that are leaders in promoting inclusion and diversity principles within their operations.

Jessica Huang, is a Director on the BlackRock Sustainable Investing team.

[1] Hong, Lu, and Scott E. Page. “Groups of diverse problem solvers can outperform groups of high-ability problem solvers.” Proceedings of the National Academy of Sciences 101, no. 46 (2004): 16385-16389.

[2] Hong, Lu, and Scott E. Page. “Problem solving by heterogeneous agents.” Journal of economic theory 97, no. 1 (2001): 123-163.

[3] Chen, Jie, Woon Sau Leung, and Kevin P. Evans. “Female board representation, corporate innovation and firm performance.” Journal of Empirical Finance 48 (2018): 236-254.

[4] Shan, Liwei, Shihe Fu, and Lu Zheng. “Corporate sexual equality and firm performance.” Strategic Management Journal 38, no. 9 (2017): 1812-1826. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2873851

[5] Pichler, Shaun, Janell L. Blazovich, Kirsten A. Cook, Janet M. Huston, and William R. Strawser. “Do LGBT‐supportive corporate policies enhance firm performance?.” Human Resource Management 57, no. 1 (2018): 263-278. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2243189

[6] Ferrary, Michel, “Soapbox: Why Women Managers Shine,” The Financial Times (March 2, 2009). Available at: https://www.ft.com/content/27836d74-04e4-11de-8166-000077b07658

[7] Edmans, Alex. “Does the stock market fully value intangibles? Employee satisfaction and equity prices.” Journal of Financial economics 101, no. 3 (2011): 621-640. Available at: http://faculty.london.edu/aedmans/Rowe.pdf

[8]Harter, James K., Frank L. Schmidt, and Theodore L. Hayes. “Business-unit-level relationship between employee satisfaction, employee engagement, and business outcomes: a meta-analysis.” Journal of applied psychology 87, no. 2 (2002): 268.

[9] BlackRock Diversity in Action. https://careers.blackrock.com/diversityinclusion

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

There is no guarantee that any company or investment strategy with a sustainable focus will be successful or achieve any particular level of results.

Prepared by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

©2018 BlackRock, Inc. All rights reserved. BLACKROCK is a registered trademark of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

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