The link between minority representation and company performance

Companies with greater minority representation in management roles perform better than their peers on at least a half dozen business metrics, according to a new study.

Nonprofit shareholder advocacy group As You Sow leveraged the sharp increase over the past two years of firms that publicly disclose workforce demographic data they must confidentially share with the U.S. Equal Employment Opportunity Commission. The data shows that, across 277 publicly traded companies, the number of managers who are Black, Hispanic, Asian American or Native people is positively correlated with cash flow, net profit, three- and five-year revenue, five-year return on equity and stock values, according to As You Sow's report. 

Those findings follow many other studies showing that diversity enhances companies' results. In an investor statement last year, As You Sow and a group of major registered investment advisors and asset managers representing a combined $4.7 trillion in client holdings included mention of five previous studies that "have pointed to the benefits of a diverse workforce." The new study, which was sponsored by a dozen foundations and compiled by As You Sow and ESG consultant Whistle Stop Capital, adds to the literature that has already gained notice among asset allocators such as the California State Teachers' Retirement System.  

"Monitoring and ensuring that portfolio companies are seizing opportunities and mitigating risks helps us meet our goals to provide a secure retirement to more than 980,000 members and beneficiaries," Rekha Vaitla, the head of sustainable investment and stewardship strategies at CalSTRS, said at a virtual panel held by As You Sow last week. 

The EEOC data is "extremely important to investors," Vaitla added. "We believe that diversity of experience, background skills, gender, race, culture, and all the different ways that people can differ from one another visibly or not produce a diversity of thought that leads to better decision-making and better results."

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The As You Sow study suggests that more data is needed to draw stronger conclusions but that much of the investment industry may be ignoring the positive association between diversity and performance. Using stock analysts' consensus expectations for publicly traded firms from the Institutional Brokers' Estimate System, the report found that analysts are "mispricing stocks that have more diverse management teams, on average," in a way that could "provide an opportunity for outperformance to some enterprising investment managers." In addition, across 46 financial firms, the study analyzed the relationship between the gap of female representation in management and the overall number of women working at the companies.

"The gap between overall female representation in the workforce and female representation in management has a negative performance association for the financial sector; the larger the gap between overall representation and women in management, the larger the underperformance," according to the study.

That correlation held true for most industries and for the number of minorities in management positions as well, said Meredith Benton, As You Sow's workplace equity program manager and the founder of Whistle Stop Capital.

"If you have a diverse employee base and those employees are not represented in management — that gap in representation — there's a negative association with performance across each one of these indicators," Benton said. "Across almost all of them, you're seeing a negative association that holds true for diverse employees, and it holds true for women. That gap between overall employee diversity and diversity of management harms the financial performances of companies."

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The surge in companies reporting the data publicly gave As You Sow the opportunity to analyze the results, which would have been impossible only a couple of years ago. At least 441 publicly traded firms are now disclosing their EEOC data, with 343 companies listed on the S&P 500 doing so and another seven that have pledged to make it public, according to Josh Ramer, the founder of diversity, equity and inclusion research firm DiversIQ. That means 70% of the S&P 500 have shared the data or committed to disclosing the figures, he pointed out.

"Besides the pressure from stakeholders, a lot of companies were frankly embarrassed to share the data because of what it showed," Ramer said. "And so as their peers started to share it, that reason kind of went away in terms of why they didn't share it."

Until more firms follow suit, researchers, financial advisors and investors will be stuck without the full picture, Benton said.     

"It's statistically significant, but within each of those sectors, we don't yet have enough data," she said. "We need to have a stronger call from investors and legislators and others for this information to be released. We need to have a better understanding of what's happening within each sector for each company to best understand how to move forward within their own programs."