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Social equality and inclusion

Investing in diversity for economic and social benefit

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Untapped Potential

Approximately 35% of the U.S. workforce is made up of White men, yet they account for 64% of the senior management ranks and 68% of board seats (Exhibit 1). This disparity goes well beyond differences explained by education, experience, or skills, and is often attributed to organizational bias (unconscious or otherwise).

Exhibit 1: Representation in the Corporate Pipeline by Gender and Race

Exhibit 1: Representation in the Corporate Pipeline by Gender and Race

Source: and McKinsey, 2019.

While some progress has been made at improving corporate diversity, the pace of change has been glacial despite mounting empirical evidence suggesting that there are measurable benefits associated with more well- rounded workforces and leadership teams. Further, the progress to date has been limited to small gains along gender lines; the overall rate of people of color serving on corporate boards, for example, has been stagnant over the past decade.1 Indeed, most U.S companies do not even measure the racial composition of their workforce and leadership, much less publish data to enable accountability. Some companies have acknowledged this shortcoming and introduced programs to foster gender, racial, age, and sexual orientation equality. Yet the results have been underwhelming as detailed in recent research by McKinsey and LeanIn.Org:2

  • People of color are significantly more likely to leave their company than White people.
  • Women of color face the greatest obstacles and receive the least support. Black women, in particular, receive less support from managers and view the workplace as less egalitarian than their White peers.
  • At senior levels, the gap in promotions for women is even more pronounced for women of color: 21% of senior managers are women, but only 4% are women of color.
  • The pay gap for Latina (47%) and Black (38%) women is even wider than women overall (20%).
  • Hispanic workers have lower rates of paid-leave access and use than their White non- Hispanic counterparts and this analysis also found some evidence of differences in paid-leave access between Black non-Hispanic and White non-Hispanic workers.3
  • 53% of Lesbian, Gay, Bisexual, Transgender and Questioning (LGBTQ) workers report that discrimination negatively affected their work environment; 10% have left a job because the work environment was unwelcoming.4

The reasons for the persistence of this uneven playing field are complex and they often start at the top. According to a study by the Center for Talent Innovation, more than half of leaders do not value ideas that do not resonate on a personal level. Given that most leaders are White men and existing workplace dynamics have enabled their success,  they are less likely to see the need for the significant time, resources, and personal commitment required to effectively improve equality. It is relatively easy to update human resources policies and hire consultants to implement diversity programs. It is far more challenging to try to change corporate culture, especially if executive management is not fully committed. A recent study by McKinsey has shown that while companies have made progress in improving diversity through hiring practices, efforts to build a more inclusive culture are lagging. Survey results from a global sample of companies show that employees give a 52% positive rating to diversity efforts, with 31% expressing negative sentiment. But for inclusion efforts, including indicators such as equality, openness and belonging, only 29% were positive and 61% negative.5 This new data supports past empirical studies which have shown that employees value a supportive culture and leadership team more than a non-discrimination policy.

The business case for equality

While the societal implications of the lack of workplace equality are extensive, there is also increasing evidence of tangible economic consequences. New research reinforces that companies with strong cultures of equality, emphasized and modeled by top management, may have a competitive advantage over their peers. McKinsey conducted an analysis of companies, broken down by diversity quartile, to investigate the financial performance of more diverse companies vs. their industry peers. While more gender diverse companies were more likely to outperform peers, the difference was even more pronounced for ethnically diverse companies (Exhibit 2).

Exhibit 2: The Business Case for Diversity in Executive Teams Has Remained Strong

Exhibit 2: The Business Case for Diversity in Executive Teams Has Remained Strong

1 Likelihood of financial outperformance for companies vs the national industry median; p-value < 0.05, except 2014 data where p-value < 0.1.

2 n = 383; Latin America, UK, and US; earnings before interest and taxes (EBIT) margin 2010 –13.

3 n = 991; Australia, Brazil, France, Germany, India, Japan, Mexico, Nigeria, Singapore, South Africa, UK, and US; EBIT margin 2011–15.

4 n = 1,039; 2017 companies for which gender data available in 2019, plus Denmark, Norway, and Sweden; EBIT margin 2014–18.

5 n = 364; Latin America, UK, and US; EBIT margin 2010 –2013.

6 n = 589; Brazil, Mexico, Singapore, South Africa, UK, and US; EBIT margin 2011 –15

7 n = 533; Brazil, Mexico, Nigeria, Singapore, South Africa, UK, and US, where ethnicity data available in 2019; EBIT margin 2014 –18.

Source: McKinsey, “Diversity wins: How inclusion matters,” May 2020.

Why does research show more diverse companies deliver better financial performance? The advantage is manifested in several ways…

One significant drawback of a homogenous talent pool is groupthink. When executives promote new managers who look like them, went to the same schools, share the same experiences, and grew up in similar socio-economic situations, the result can be a commonality of ideas and lack of creativity. Indeed, recent academic research has found that homogeneity stifles innovation and leads to less effective decisions, while ethnically diverse leadership teams offer companies more problem-solving tools, broader thinking, and better solutions (Exhibit 3a and b). Given the U.S. economy’s transformation into the information age, companies that struggle to innovate and/or make the right strategic decisions will be at a disadvantage relative to more diverse competitors.

Exhibit 3a and 3b: Companies with More Diverse Leadership Teams Report Higher Innovation Revenue

Exhibit 3a and 3b: Companies with More Diverse Leadership Teams Report Higher Innovation Revenue

Source: BCG diversity and innovation survey, 2017 (number=1,681). Note: Average diversity score calculated using the Blau index, a statistical means of combining individual indices into an overall aggregate index.

Exhibit 3a and 3b: Companies with More Diverse Leadership Teams Report Higher Innovation Revenue

Source: BCG diversity and innovation survey, 2017 (number=1,681). Note: Average diversity score calculated using the Blau index, a statistical means of combining individual indices into an overall aggregate index.

“Diversity is a competitive differentiator that shifts market share toward more diverse companies”

McKinsey & Company

It has been well documented that employees are more engaged at companies they feel proud to work for, and workplace equality can be a key ingredient to productivity. This is true not just for the disadvantaged populations, but for the majority as well, as a culture of meritocracy helps bring out the best in all employees. A series of studies conducted  by McKinsey over the past 10 years has found the following benefits attributable to equality of opportunity in the workplace:

  • Higher employee engagement and satisfaction
  • Less turnover
  • Higher employee productivity
  • Recruiting advantage
  • Improved customer orientation

The final point regarding customer orientation is likely to become increasingly relevant given the changing nature of demographics in the U.S. As shown in Exhibit 4 below, the spending power of the four largest underrepresented groups has grown as a percentage of U.S. consumer spending, projected to reach nearly 20% of total by 2023. Given that half of all children born since 2010 are now members of an ethnic minority group, this trend is expected to continue for the foreseeable future.

Exhibit 4: Minority Buying Power

Exhibit 4: Minority Buying Power

E=estimate. Source: Selig Center for Economic Growth, Terry College of Business, The University of Georgia. Data as of June 2018.

Social Equality Outside the Workplace

Of course, U.S. workers do not live in a vacuum where a more equal workplace  unilaterally evens the playing field for society at large. There are still systemic challenges involving equal access to transportation, clean air/water, healthcare, education, housing, financial services, and legal justice that continue to hinder disadvantaged populations. At the macro level, the International Monetary Fund has found that increasing income inequality can inflict harm on a country’s long-term economic prospects, particularly its capacity for sustainable growth. The key reasons cited include the potential for financial market imbalances and political instability, both of which are said to discourage business investment. Another important factor is the limited ability of lower income families to invest in education, which can stunt economic mobility.6

Forward-thinking corporations are making investments in their communities with the goal of raising the economic bar and standard of living, while providing a meaningful outlet for employees to “give back” as well. Employees, particularly millennials, are increasingly attracted to companies that are making a positive impact on society. The indirect benefits of healthier local economies include a more prosperous workforce, greater local demand, more stable local institutions, increased worker mobility, higher tax base to provide services, and overall higher quality of life. For some companies, there are also direct economic benefits to fulfilling unmet needs around access to health care, rebuilding inner cities, and providing childcare services, to name just a few.

CIO’s Social Equality & Inclusion (SEI) Strategy

The Chief Investment Office (CIO) of Bank of America has designed its Social Equality & Inclusion strategy to identify leading companies that are actively building a culture of equality and have demonstrated success at promoting disadvantaged populations into leadership positions. The CIO conducts a comprehensive assessment of human resource policies, employee benefits, disclosure practices, and objective performance data to determine which companies are achieving these successes along the following factors:

  • Workforce Diversity & Leadership
  • Employee Development
  • Community Support
  • Climate Impact
  • Access to Finance & Healthcare
  • Controversies, Fines & Lawsuits

Companies are held accountable for performance across their supply chain, as well as how they impact their local communities (both positive and negative). Our goal is to look beyond simple head count numbers, to determine which companies have built a sustainable culture of social equality that will likely translate into tangible economic results. We then conduct a traditional fundamental review to make sure we are buying what we believe to be attractive stocks, not just social “do-gooders” on behalf of our clients. Finally, we conduct a portfolio construction exercise to enact appropriate diversification and risk control. The end result, we believe, is a portfolio of companies well positioned to compete for talent, manage operational risks, invest in innovation, and help serve unmet needs in the marketplace.

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