Investing in Diversity

Excerpted from Domini 2019 Semi-Annual Report

March 2019

Diversity-related metrics are an integral part of the research process for Domini.  We believe strong corporate diversity can mitigate risk to investors and an equitable workplace can enhance corporate performance. Companies with diverse management may be more likely to innovate thanks to a multiplicity of ideas and perspectives.  Leadership with a range of backgrounds may be more likely to understand customer needs, anticipate societal trends and changes, and cultivate cooperation and connections within their workforce and communities. Having diverse leadership also helps deter discriminatory practices and foster a culture of tolerance and inclusiveness throughout an organization. Diverse organizations have been shown to have more positive workplace cultures and are thus better positioned to recruit and retain talent.

Around the world and across industries, we see signs of progress on corporate diversity. But women and minorities are still underrepresented on boards of directors and at all levels of management. Businesses are missing out on the benefits of diversity.  Women also receive lower wages, leading to significant wealth gaps over the course of their careers. In the U.S., women in professional and management positions earn around $0.73 for every dollar a man makes. Women of color experience an even larger gap. Efforts to close these gaps have made only halting progress, both in the US and around the world. The impact of this lackluster improvement in workplace representation and equality has been stark in light of ongoing revelations about the scale and cover-ups of workplace sexual assault and harassment.

Higher levels of diversity could improve economic development and GDP growth around the world. Repeated research has confirmed that higher levels of diversity correlate with better long-term corporate performance. A company with low diversity may miss the most qualified candidates and have poor workplace culture. Lack of diversity can be a material risk for companies, particularly from litigation, as in recent high-profile cases of pay discrimination with large settlements and legal awards. Further, at the most basic level, support for diversity is in line with international human rights standards.

In 2018, we released our refreshed Impact Investment Standards, which serve as the backbone of our work.  Our standards highlight the importance of companies’ consideration of diversity and what we look for, particularly as it applies to their employees, suppliers, and boards. Our standards for diversity in the workplace exemplify our approach for determining which companies we invest in:

Diversity in the workforce, whether related to gender, ethnicity or race, age, sexual orientation, disability, economic or class background, religion, and political opinion, can be a hallmark of a well-managed corporation. A diverse workforce can help companies better understand the needs and desires of the full range of their current and prospective customers; anticipate new societal trends and emerging issues; foster understanding, mutual respect, and cooperation among their workforce; and improve a company’s ability to recruit from the widest possible pool of talent. Diversity, particularly among positions of authority, can indicate a corporate culture based on merit and open to new ideas and perspectives.

We look for companies that have substantial representation of women and minorities among management- level positions, particularly in senior line executives; companies that have created a notably open work environment for minority groups – for example, for LGBTQ+ employees; and companies with strong programs for training on sexual harassment and respect for diversity. Conversely, we view with concern companies that have a record of diversity-related controversies and regulatory sanctions, including those related to sexual harassment and discrimination.

We look favorably on diversity across all industries as an indicator of company culture and commitment to a just and equitable workplace.  Diversity among senior management, executive-level, and board-level employees has additional importance when it may directly impact services that a company provides and markets that it serves, for example in the financial and banking services industry and among advertising, media distribution & production companies.  In these industries we consider diversity to be a Key Performance Indicator (KPI) that demonstrates quality of management. Beyond minority and female CEOs, management teams, and boards, we also look for initiatives to promote further improvement on diversity including strong disclosure practices and internal auditing to assess pay gaps.

While diverse leadership is not a guarantee of strong performance or a diverse workforce, Key Bank is a case where it has led to both. The firm has notably diverse leadership. Women and minorities account for 36% of Key Bank’s management team and 44% of its board. Key Bank’s CEO, Beth Mooney, is the first woman to head a Top-20 bank in the U.S., and under her tenure the company has rolled out a $16.5 billion community development investment plan, including funds for affordable housing, and increased products for low-income and underserved consumers. Accenture is another example of a company that through conscious planning has nurtured a diverse workforce in order to cultivate a progressive corporate culture. Already ranked number 1 on Thomson Reuters Index of The World’s Most Diverse and Inclusive Companies, Accenture further seeks to increase diversity by pursuing the goal of having a 50-50 female-male workforce by 2025. According to Ellyn Shook, Accenture’s chief leadership and human resources officer, “we believe that diversity is a source of innovation, creativity and competitive advantage and creates a workplace where everyone feels equally accepted with a real sense of belonging.” In addition to setting goals for gender equality, they also have programs dedicated to improving the workspace for people with disabilities in order to remove barriers of entry into the workforce, as well as programs to help promote a welcoming, safe community for LGBTQ+ employees. It is through this sort of sensible, dynamic governance that we believe will help build a more equal and innovative future.

Strong Signals through Proxy Voting

Early this year Domini strengthened our proxy voting guidelines on diversity, now among the most rigorous in the industry.  We felt this move was necessary to push more strongly towards our goal of a supportive, fair, and inclusive workplace. As of 2018, only 21.2% of board seats in the S&P 500 were filled by women. In a true meritocracy, a corporate board reflects the markets it serves. Companies have made some progress in representation of women in recent years, but more is needed, and proxy voting is a strong tool to communicate the demand for change.

Our policy has several layers of thresholds related to both racial, ethnic and gender diversity. We look for a minimum of 40% or three (whichever is greater) female board members. While racial and ethnic diversity are important globally, good data only exists in the United States, Australia, the United Kingdom, and Canada, so in these countries we look for at least 40% or three (whichever is greater) non-Caucasian board nominees.  This figure is derived from research suggesting that this threshold is necessary to see significant benefits from resulting from diversity.r When board diversity is below the 40% threshold, we vote against members of the nominating committee, because they are the highest source of responsibility at the board level. When diversity is below a 30% threshold, we vote against the committee and all male nominees.  If there are no women on the board, we vote against the entire board.  In this case, we have sent letters to laggards, explaining our vote against them and the reasoning behind it.

Advocating for Diversity

Domini is a women-led and founded firm, a rarity in the mutual fund world.  Four out of five members of our executive team are women, including our chair, CEO, CFO, and General Counsel.  This leadership is reflected in the makeup of our firm, which is 54% women. Thanks to this strong performance on diversity, we have a solid platform from which to push other companies to improve.

We have a long history of engagement on diversity issues. Last year, Domini joined the Thirty Percent Coalition, an alliance of large asset owners, city and state treasurers and asset managers working to advance corporate board diversity. The name of the group refers to the minimum level of racial, ethnic, and gender diverse board members the group would like to see at public companies.  The coalition advances this goal through letter writing campaigns and direct dialogue. These engagements are often multi-year, using shareholder resolutions as a tool of last resort.  Much of the work has focused on laggards: companies with no or only one female board member. We have also focused engaging with all male boards, particularly in Japan.  Progress is still limited, given Japan’s historically low levels of management diversity. The Japanese pension fund giant GPIF’s entrance into the Thirty Percent Coalition in 2016, followed by the selection of gender-focused index in 2018, sent ripples through the corporate and investment worlds.

While there remains a dire need for advancement on representation and fair pay, investors can play a substantial part in pushing the pace of change.  There is a clear business case for the value of diversity to companies and their shareholders, but diversity may also make companies better neighbors and better able to serve diverse customers bases. Through setting standards related to diversity, having a strong proxy voting policy, and communicating our policies to companies and other investors, Domini is able to create lasting change and a better environment for our investments and our communities.