Analysis of companies that scored well on these criteria revealed that they have also delivered higher return on equity (ROE), have done better in terms of five-year price performance and exhibit better risk-adjusted returns relative to the benchmark (using the Information Ratio).
The ROE - company earnings divided by value of ordinary shares - is a key indicator of the quality of a company. Today's chart shows the relationship between this performance measure and gender diversity. Looking back over a 10-year period, the Morgan Stanley team compared the subsequent three-year performance of high- and low-diversity baskets of shares. They also measured the gender-diverse stocks relative to their sector peers. Splitting the research by regions, it was found that in both Europe and North America there was a significant differential, of around 1 per cent in annualised ROE, favouring gender-diverse companies. There was not a meaningful differential in Asia, but then companies in these countries were not found to have enough senior women to give statistical validity to many of the criteria.
Putting gender diversity to work for investors
The intuition of the authors before carrying out the study was that the inclusion of women's points of view at various levels would help companies achieve a better balance in reaching robust long-term decisions. This hypothesis seems to be borne out by the lower volatility in ROE experienced by more gender-diverse companies, as well as their lower accruals - another indicator of long-term earnings quality.
Cynics may, of course, question causality - do these companies exhibit higher quality characteristics because of their diversity or is diversity a symptom of developed established businesses being able to afford policies such as generous maternity benefits? What is clear from the study, however, is that implementing a policy of gender equality certainly does not hamper companies' performance and the strong quality correlation is proof that diversity should be viewed as a positive indicator by investors.
