Yes, investors care about gender diversity

These reports have Thomas lys, professor emeritus of accounting and management information at Kellogg, and his colleagues wonder: do investors who read these reports appreciate diversity?

Our goal was: Can you do a business case for diversity? said Lys. If so, reports showing relatively high diversity should boost stock prices more than reports showing low diversity.

This is exactly the model that emerged in a study on technology and financial companies, conducted by Lys and his colleagues. When companies reported a higher percentage of women, investors appeared to reward them with larger increases in stock values.

The magnitude of the effect is surprisingly large, says Lys. For example, researchers estimate that if the share of women at Google had increased by one percentage point when the company released its diversity report in 2014, the company's market capitalization would have was about $ 375 million higher at the end of the day of the announcement. .

For Lys, the message is clear. Investors appreciate the diversity of genres, that's for sure, he says. They appreciate it very highly.

A new perspective on diversity in business

Numerous academic studies have attempted to rigorously determine whether diversity improves team performance. Results to have summer mixed, in part because it is difficult to separate diversity from the multitude of other factors that determine the success of a business, even if randomized experiments, often regarded as the benchmark- but scientific evidence has tended to show this diversity is beneficial.

But little has been done to determine what investors think of diversity.

Investors in neglected riding, says professor emeritus at Stanford University Margaret Neale, who co-wrote the newspaper with his former students David Daniels, now at the Hong Kong University of Science and Technology Business School, and Jennifer Dannals, now at the Tuck School of Business in Dartmouth.

There is some studies who are examining investor responses to the increase in the number of women on boards of directors, mixed results. But little work has really focused on how investors perceive diversity among core employees, which would likely have a more direct influence on the productivity of the company.

Investors could see the advantages and disadvantages of diversity. On the one hand, they might believe that diversity stimulates creativity, or that more diverse businesses are less likely to get caught up in legal issues, such as discrimination lawsuits, which could both be beneficial. for business results. Or maybe investors believe that increasing diversity is simply the right thing to do morally.

On the other hand, investors may adhere to stereotypes that women are not as good at leading teams or performing technical tasks. Or they might fear that more diverse teams might have problems getting along.

The key question, says Neale, is whether investors think the benefits of gender diversity outweigh the costs. If so, this net positive attitude should be reflected in changes in stock prices.

Quantifying the value of gender diversity in technology

The team decided to start by studying tech companies. Research had suggested that greater diversity would foster innovation, and in technology, innovation is everything, says Lys. As such, this sector was a natural place to test whether investors are rewarding companies with more women.

The wave of disclosures among tech companies started in 2011 when Intel, Dell and Ingram Micro published its diversity data in response to a request from CNN. Then in 2014, Google changed the tone for the whole industry by publish their own diversity report. Since then, many other companies, including Yahoo!, Facebook, Twitter and Apple, have followed suit.

The team reviewed 49 gender diversity announcements by tech companies from 2014 to 2018. The percentage of women in those companies ranged from 17% at NVIDIA to 47% at Groupon. Next, the researchers calculated the abnormal performance of each company, that is, how much its stock performance exceeded what was expected based on the overall performance of the US market on the day of the announcement. If other important news about the company appeared on that day, they rejected this announcement from the dataset.

The diversity figures seem to make a difference, the team found. Each additional percentage of women on staff at the time of a company's first announcement was associated with an average increase of 0.1 percentage points in share prices. In other words, all other things being equal, if two companies published their diversity figures on the same day, the company's share price with 40% of women would increase by one percentage point more than the course of a business with 30% women.

Although this effect may seem small, it could represent tens or hundreds of millions of dollars for a large technology company.

Investors favor finance companies with more women

Then the team turned their attention to the finance companies. Although these companies are not known for their innovation, they are highly dependent on good relationships with regulators.

Pleasing the regulator goes to the very heart of this industry's existence, says Lys. His team hypothesized that, for political reasons, regulators probably looked more favorably on companies with more women. So perhaps investors would value diversity in financial firms, the researchers theorized.

They analyzed the diversity figures of 10 companies that were published in a 2017 Financial times article. When they looked at the percentage of women in each company, a similar pattern emerged: an additional percentage point of women in the company was linked to an increase of 1.65 percentage points of the share price on the day of the article's publication, about 10 times the size of the effect in the technology industry.

Finally, the team conducted an experiment to see if the results were maintained in a more controlled setting.

The researchers recruited 389 managers, about half of men and half of women, to participate in an online study. Participants learned that a tech or finance company had announced its gender diversity figures. Some participants were informed that the figures were above average for this industry, while others were informed that the figures were below average.

Participants could then choose to bet on the rise or fall of the company's share price. Each person received $ 1 and could bet some or all of it.

When participants learned that the diversity of companies was above average, 77% of them bet that the stock price would increase. Among those whose diversity has been below average, only 25% have bet on an increase in stock prices.

The researchers also asked participants about their beliefs about diversity. For example, the survey asked if they thought companies with greater gender diversity were more or less likely to have original ideas, to hire people with potential leadership, being the victim of lawsuits or experiencing personality conflicts.

Not surprisingly, these personal beliefs also influenced the betting decisions of the participants. The more a person firmly believed that diversity benefited a company, the more they were ready to bet that a positive announcement on diversity would increase the value of the shares.

What explains the gender gap in technology and finance?

Women understand about 30 percent of the technology industry and 20 percent of the financial sector. Given the findings of the study, it seems confusing that companies have not done more to increase their number of women.

Why is this the case? Researchers hypothesize that senior managers view gender diversity as a high priority, but they (or middle managers they supervise) can still make biased hiring decisions due to the strong psychological tendency to be attracted to similar people.

This could explain why many companies with below-average diversity figures (such as Dell and Intel) have nevertheless chosen to advertise them publicly: it could encourage company executives to hire more women, by increasing the public pressure and surveillance.

And while low-diversity businesses may suffer from announcing their diversity numbers, keeping those numbers secret could also backfire. Investors might interpret silence as the worst type of news, says Lys.

So how can companies improve gender diversity, given that even well-intentioned managers can tend to hire men disproportionately?

Simply telling hiring managers that diversity will increase stock prices probably won't work, says Lys, because stock values ​​should change drastically to have a direct financial impact on most employees. Instead, he suggests that leaders put in place policies that make their businesses more fair and inclusive.

For example, they can remove gender information from resumes or make sure recruitment announcements use non-sexist language (for example, avoiding gender pronouns and replacing gendered terms such as pirate or ninja by descriptive titles such as engineer). Or they could require that interview committees include a certain number of employees, in order to increase the chances that women who are offered positions accept them. (For more ideas, read what Kelloggs Nicole Stephens has to say about promoting inclusion.)

Such initiatives could take on a new urgency, given the evidence that improving gender diversity is not only a moral issue, but in fact good for business. Investors will reward or punish you based on the outcome, says Lys.