June 25, 2019 / In-depth

Are companies overlooking a key diversity metric?

By Joe McGrath, ESG Clarity

Companies are failing to choose the best staff for the job, negatively impacting innovation

Are companies overlooking a key diversity metric?

The emergence and integration of ESG policies at the world’s top asset managers has ensured that major listed companies are now widely expected to have comprehensive policies when it comes to diversity and inclusion.

As well as being the right thing to do, there have been numerous studies which show vast benefits of having a diverse workforce in terms of corporate innovation, financial performance, workforce stability and the creation of a positive corporate culture.

Once such study carried out in 2018 for the Harvard Business Review stands out. The research was conducted among 1,700 companies in Austria, Brazil, China, France, Germany, India, Switzerland and the United States. It concluded there was “a statistically significant relationship between diversity and innovation outcomes in all countries examined”. The research also found that the more “dimensions of diversity” that a company embraced had a direct correlation with levels of innovation in a business.

There is no doubt that the corporate world is beginning to make progress on diversity. The arrival of specific Diversity & Inclusion (D&I) reports at some companies, such as Facebook and Hewlett Packard, has been welcomed by investors.

However, the recognised need to reduce inequalities rarely includes scrutiny of the social background or social class of employees. And this, according to a UK government report, could prove very costly.

The report, entitled Elitist Britain 2019, underscored the lack of attention that businesses have paid to levels of social diversity in their workforces and, significantly, in management.

“While many top companies have started to look seriously at many aspects of diversity, such as gender or ethnic background, much less work has been done on socio-economic diversity within business,” the report concluded.

“It is important that in the world of business, talent has the opportunity to flourish regardless of family background, both from a sense of fairness, but also so the British economy can make the most of the talent available to it.

“Work from the Sutton Trust has indicated that low levels of social mobility mean that talent is wasted because of artificial barriers to success, meaning that the best talents are not matched to the best jobs.”

Given that this report has concluded that companies may inadvertently be overlooking the best candidates for their jobs, should investment companies consider this a performance issue for the long-term, and one which needs to be fixed?

Also, is there a performance threat to businesses which don’t monitor this diversity metric and could other, more forwarding-thinking companies seize market share by building a workforce who have been educated at the widest possible range of institutions or arrived at their current role from multiple different education and industrial routes? Well yes, according to the aforementioned Harvard Business Review study.

“Companies with above-average total diversity, measured as the average of six dimensions of diversity (migration, industry, career path, gender, education, age), had both 19% points higher innovation revenues and 9% points higher EBIT margins, on average,” it found.

Furthermore, the UK government report this week also highlighted the impact that the widespread absence of corporate diversity has on society around it.

“Politicians, employers and educators all need to work together to ensure that Britain’s elite becomes more diverse in gender, ethnicity and social background,” said Dame Martina Milburn, chair of the Social Mobility Commission.

“It is time to close the power gap and ensure that those at the top can relate to and represent ordinary people.”

The commercial benefits are perhaps why the UK asset management industry has become keenly invested in various initiatives to celebrate and stimulate levels of diversity within their businesses.  Within social diversity, this has been primary fostered through the Investment 20/20 programme.

At the time of writing the scheme had four traineeship schemes listed from Legal & General, Schroders, Murano and Coal Pension Trustees, plus a further two job roles, suitable for all applicants at Columbia Threadneedle Investments and L&G.

Speaking to ESG Clarity’s sister publication Portfolio Adviser, Martin Stead, chief executive of Nutmeg, recognised the issues that exist within the financial services sector.

“It is a bit of a gentleman’s club, particularly in British financial services companies,” says Stead. “You need to have been to the right school, wear the right signet ring and speak with the right accent, etc. That can feel like quite an exclusive place, which isn’t very open to diversity.”

The full UK government report is available here.