15 March 2018
Returns to Gender
The economic costs of misogyny.
By Frank O’Nomics
Beneath the deafening clamour of companies trying to explain away their disgraceful gender pay gaps lies the beating heart of the problem – that of promotion. Data from the Chartered Management Institute showed that, while 73% of entry level positions were taken up by women, at director level the proportion was down to 32%. Recent evidence in investment banking shows a graduate intake running at 50% female, with only 10% of managing directors women. When one extends this further to board directors at quoted companies the situation does not look so bad – at FTSE 100 companies the percentage of female board directors has hit 28%, close to the target of the 30% Club. Creating a better balance at graduate and board level has clearly yet to translate to the bigger area that lies between, but the benefits accruing to companies that have the best approach to talent management and a fairer board representation point the way forward. Clearly there is a big issue of fairness to be addressed, and this should always be the overriding objective, but there is also a compelling financial motivation. There is a growing body of evidence, added to this week from a study by MSCI, which demonstrates that having a higher weighting of female board directors makes a significant positive difference to financial performance, with clear implications for a better balance throughout the pay grades.
Over the last few years there has been a range of studies trying to establish the correlation between corporate financial performance and environmental, social and governance factors (ESG). Three years ago a meta-analysis by the University of Hamburg of over 2,000 research reports demonstrated that not only was this correlation very clearly positive (businesses with a strong ESG record make more money), but that each element of E, S and G contributed to better performance. It was notable that the biggest contributor was G – that of governance. It is not easy to isolate the individual aspects of good governance that produce the benefits, and a number of key elements will be important – for example, having a good gender balance is unlikely to compensate for not addressing other areas of diversity or recruiting without a proper skills audit. The MSCI study looks at the influence of the overall talent management process on large companies and goes a long way to demonstrate the benefits on corporate performance of having female directors.
MSCI conducted a study comparing the talent management practices and financial performance of 617 of the world’s largest companies over the years 2012-2016. They found that those that engaged in the best talent management practices (engagement surveys, leadership training, workforce diversity etc.) were 4.6 times more likely to have a critical mass of female directors. Further, those with diverse boards, with over 3 women directors who had served more than 3 years, saw an annualised growth in revenues per employee averaging 1.2% above their industry median. Significantly, those with lagging talent management and predominantly male boards underperformed the median by an average of 1.2% – meaning that the difference between good and bad practice was on average of 2.4% per employee.
These percentages are compound annualised figures over the period, meaning that, over time, financial performance will be significantly different. It is not surprising then that average dividend payout ratios and return on equity (ROE) figures were higher for those with three or more women on their boards. Payout ratios over the period for the more board-gender-diverse remained stable at around 60%, while those for the laggards declined from around 40% to 25%. ROE data confirms this trend, with the leaders’ ROE increasing over the period and that for the laggards declining. The study demonstrates that not only were the gender diverse more profitable, but that they were becoming more so over time, while the worst examples saw declining profitability.
The results of the MSCI study may just illustrate what we should already have known: that those with the best talent management – including having a significant number of female directors – demonstrate better financial performance. To some extent this is reassuring in that, over time, gender diversity will improve as the poor performers go out of business. When one looks at the FTSE-100, we have come a long way. The 30% club, targeting 30% of women on FTSE boards, was started in 2010 when women directors were just 12.5%. This figure is now 27.9%. However, the experience in other countries is more mixed; the US is up to 23.6% but Ireland languishes at a mere 10.3%, somewhat worse than the MSCI-calculated 17.3% global figure.
There is a difference between the gender pay gap and the issue of women on boards, particularly as board diversity has been addressed more readily than pay. The World Economic Forum has assessed the gap between men and women in terms of economic and political power, education and health in 144 countries and has shown that the disparity has actually widened over the last twelve months from 31.7% to 32%. Overall the UK has managed to narrow the gap by 3% since it was first measured in 2006, but women still only get around three quarters of the achievements and opportunities afforded to men. We rank 53rd in terms of economic participation and opportunity and a shocking 95th in terms of disparity of income. That increased board diversity has not made any meaningful inroads into the gender pay gap suggests that the there are bigger issues to resolve down the food chain. Making career progression easier for women will help. Easyjet has a 52% gender pay gap, but this is in part due to the fact that only 6% of their (relatively well paid) pilots are women. Facilitating career breaks and establishing employment structures that help women get back into work will also help.
Lack of opportunity and the lack of income are closely related. There have been many studies trying to get to the bottom of the UK’s poor record on productivity and much written about how this is constraining economic growth. If both the government and the investment community encourage UK companies to address gender diversity from the board level down, one of the major constraints could be addressed. In the meantime we will get more and more reports of the size of the gender pay gap, but this risks merely illustrating the symptoms and not the cause. One hundred years on, it is perhaps time for a campaign of “Promotes for Women”.
