Wall Street Journal research analysts rank industries and
companies in terms of diversity and inclusion -- and find a link to
performance
By Dieter Holger
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (October 28, 2019).
Diverse and inclusive cultures are providing companies with a
competitive edge over their peers.
So concluded The Wall Street Journal's research analysts in
their first ranking of corporate sectors, as well as the individual
companies in the S&P 500 index, based on how diverse and
inclusive they are.
The financial industry overall was the best-performing sector in
the study, with banks and insurers dominating the list of the 20
most diverse companies. The communications-services and
consumer-staples industries came in a close second and third, while
the energy and materials sectors brought up the rear.
Turns out the 20 most diverse companies in the research not only
have better operating results on average than the lowest-scoring
firms, but their shares generally outperform those of the
least-diverse firms, the research shows.
Many of the high-scoring companies in the study say that having
a well-rounded workforce has helped them create better products and
be more innovative, leading to growth in sales and profit. Analysts
agree that diversity can help fuel innovation, which is critical to
success in a fast-changing world where technological disruption has
become the norm.
"Diversity helps create long-term shareholder value," says
Lottie Meggitt, responsible-investment analyst at Newton Investment
Management, a unit of Bank of New York Mellon. "Too often we have
seen companies fail or make poor decisions where teams are
populated with individuals who all think the same, or who are
unwilling or unable to challenge the status quo."
To create the ranking, The Wall Street Journal's environment,
social and governance research analysts gave each company in the
S&P 500 a diversity and inclusion score from 0 to 100. The
scores were based on 10 metrics, including the age and ethnicity of
the company's workforce, the percentage of women in leadership
roles, whether the firm has diversity and inclusion programs in
place for employees, and the makeup of the board. (See the full
methodology.)
Among the findings:
Progressive Corp. and JPMorgan Chase & Co. took the top two
spots in the ranking, with scores of 85 and 80, respectively. The
financial industry overall had an average score of 50.4 followed
closely by the communications-services industry at 49.5 and the
consumer-staples sector at 48.8. Companies in the energy and
materials sectors earned average scores of 40.
Following a string of gender- and racial-discrimination lawsuits
over the past few decades, banking firms in recent years have
worked to narrow pay disparities and recruit a more diverse
workforce. Other companies in the financial sector have had to make
changes to attract and retain millennial workers and to reach an
increasingly diverse U.S. customer base.
"Consumers have many different options and higher expectations
for products and services that reflect and meet their unique
needs," says Lori Niederst, chief human-resources officer at
Progressive. "This makes constant and concerted attention to
diversity and inclusion a business imperative."
Larger companies tended to score better than smaller companies
in the research, probably because bigger firms have more resources
to devote to D&I programs, the study found. (The average market
cap of the top 20 performers is $127 billion, compared with $17
billion for the bottom performers). But some say it could be that
smaller companies haven't faced the same kind of pressure larger
companies have to create more diverse and inclusive workplaces.
"Small-cap companies have been slow to embrace the message that
gender, racial and ethnic diversity make for better board
discussions and decision-making," says Peter Reali, senior director
for responsible investing at U.S. money manager Nuveen Investments
Inc., which last year started to press about 470 midcap and
small-cap companies to add more women to their boards or adopt
hiring policies that emphasize diversity in the nomination
process.
Female representation on boards overall remains fairly low
across the S&P 500, the research found. Less than 2% of S&P
500 companies have boards consisting of 50% or more women, while
77% have boards where more than two-thirds of directors are
male.
Meanwhile, 28 companies in the S&P 500, or less than 1%,
fully disclose ethnic diversity in senior management, and only 17
companies fully report ethnic diversity at the board level.
Millennials also are largely absent from top positions at S&P
500 companies, with only 22 firms having at least one board member
under the age of 40.
Looking at other data, board independence is high among S&P
500 companies -- at 85% of the firms, at least two-thirds of
directors have no link to day-to-day operations. The result,
analysts say, is that the companies are getting diverse points of
view due to different professional backgrounds.
Probably the biggest takeaway from the study is that diversity
and inclusion appear to be good for business.
The research showed that the 20 most diverse firms in the
ranking have an average operating profit margin (the profit a
company generates from its core business before interest and tax,
as a percentage of sales) of 12%, compared with 8% for the
lowest-ranking companies. Their shares, meanwhile, had an average
annual total return of 10% in the five years through June 28 and
14% over the 10 years through June 28, versus 4.2% and 12% for the
20 least-diverse companies. The S&P 500 index posted annual
gains of 8.9% and 14%, respectively, over the same periods.
"The bottom line is that companies that are able to attract and
retain talent are going to be more successful financially over the
long term," says Valeria Piani, sustainable-investing strategic
engagement lead at UBS Asset Management.
Among the top-ranked companies, Procter & Gamble Co. says it
has drawn on the diversity of its workforce to create new hair-care
brands for people of color. This year, P&G launched the Head
& Shoulders Royal Oils Collection, developed by a team of the
company's black scientists. In 2017, it introduced the Pantene Gold
Series of hair products also designed for black consumers.
David Taylor, the CEO, president and chairman of P&G,
believes that his company's diverse teams are one reason it has
delivered strong financial results recently. P&G had 5% growth
in organic sales (those not attributed to acquisitions) in fiscal
2019.
"A diverse team supported by an inclusive environment that
values each individual will outperform a homogenous team every
time," Mr. Taylor said in an email.
P&G took top marks for having an ethnically diverse
workforce and employee groups that support various types of
workers, including people of color, women and the LGBT community,
according to the WSJ study.
At television-ratings firm Nielsen Holdings PLC, which also made
the top 20, CEO David Kenny holds the additional title of chief
diversity officer, signaling the company's commitment to diversity
and inclusion from the top.
"Diversity and inclusion are essential to everything we do at
Nielsen, not just our financial performance," Mr. Kenny said in an
email, adding that Nielsen's products need to be diverse and
inclusive to ensure the company produces unbiased data.
Nielsen earned top scores for the number of women it has in
senior management roles, as well as the number of groups it has for
diverse employees.
Not all of the top-ranked companies have products aimed
specifically at diverse customers, but most say that cultivating
workers from different backgrounds and having diversity at the
highest levels helps with product development.
"A diverse workforce promotes fresh, innovative thinking that
translates into a competitive advantage, which in turn translates
into winning products for our customers," said Mary Barra,
chairwoman and chief executive at General Motors Co. In June GM
became one of the first major U.S. companies with a majority-female
board of directors.
At Marriott International Inc., which also ranked in the top 20,
women now hold 40% of positions at vice president and above, and
half of the company's directors are either women or racially
diverse, the Bethesda, Md.-based hotel company says. Marriott says
it aims to reach gender parity in all leadership roles by 2025.
As a franchiser, 1,300 of its 7,000 hotels are owned by women or
nonwhite men, and the company estimates 1,500 will have diverse
owners by next year.
"If we are to thrive as a global company, everyone who walks
through our doors must feel welcome," Arne Sorenson, Marriott's
president and CEO, said via email.
As companies seek to attract and retain younger workers in a
competitive hiring landscape, more of them are seeking advice on
diversity programs, consulting firms say.
"Our clients are increasingly looking to us for best practices
and strategic advice on how to improve their diversity and
inclusion efforts, " says Michele Parmelee, global chief people and
purpose officer at Deloitte. This year, a Deloitte survey estimated
that 63% of millennials would consider quitting if their employer
didn't prioritize diversity and inclusion.
Ernst & Young says it also has seen a "measurable change in
the market" from clients seeking D&I advice, says Susan
Robinson, principal for people advisory services at the accounting
and professional-services firm. "Leaders are coming to us for
tangible advice on what they need to do to dip into the advantages
a diverse and inclusive work environment brings," she says.
Mr. Holger is a reporter for The Wall Street Journal in
Barcelona. Email him at dieter.holger@wsj.com. Maitane Sardon
contributed to this article.
(END) Dow Jones Newswires
October 28, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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