His and HERS: Scoring the leaders and laggards on gender diversity
3 September 2019 at 4:44 pm
A new framework has been developed to help investors identify the most gender diverse companies, after it was revealed gender diverse firms tend to outperform their less diverse peers.
The Holistic Equal Representation Score (HERS), developed by international investment bank Morgan Stanley, is designed to systematically rank companies on their level of gender diversity across the company.
In a report outlining the framework, HERS: Employing Diversity Pays Off, the bank concluded that “gender diverse firms tend to outperform their less diverse peers globally”.
“Our analysis shows that globally, companies that have taken a holistic approach toward equal representation have outperformed their less diverse peers by 3.1 per cent per annum over the past eight years,” the report said.
While the finding that gender diversity pays off for companies and their shareholders may come as no surprise to many people – there is a growing body of evidence to support the case for gender diversity – the framework offers a new way of identifying those companies that are leaders or laggards.
The score is based on four metrics: the percentage of women who are (1) board members, (2) executives, (3) managers, and (4) employees.
Researchers said all four metrics had shown positive efficacy historically, across different regions, with relatively low correlation to each other.
“We find that combining them together into a composite HER Score results in a more stable signal that provides a holistic overview of gender representation across all levels of the firm,” the report said.
The analysis was created using the share price performance of 1,875 companies on the MSCI World Index between January 2010 to May 2019.
LVMH, which owns Louis Vuitton, scored highest in the ranking of European businesses, Apple was top in North America, United Overseas Bank Ltd came top in Asia ex-Japan, and Nippon Telegraph and Telephone Corporation, commonly known as NTT, was top in Japan.
The good news is that gender diversity has been increasing globally.
The report found in all developed MSCI regions, boards are more diverse now than at the end of 2010, though the rate of progress differs across regions.
With the analysis revealing a positive link between the level of gender diversity at a firm and stock performance – stocks of companies that ranked high on HER Score outperformed over the last eight years across all regions – the bank hopes investors will be able to use the metric to inform their decisions.
“With growing focus on corporate governance, we think investors looking for additional sources of uncorrelated alpha can use the Morgan Stanley HER Score to supplement their stock selection process,” the report said.