This interesting article was first published by Grant Thornton in September 2015. It gives some context to the potential financial advantage of board diversity.
Increased diversity of perspectives on executive boards leads to them outperforming their all-male run peers, according to new research from Grant Thornton International Ltd. The study, which covers listed companies in the UK, India and US, estimates the opportunity cost for companies with male-only executive boards (in terms of lower returns on assets) at a staggering £430 billion (US$655 bn) in 2014.
The report, Women in business: the value of diversity, scrutinises the financial performance of companies listed on the FTSE 350, CNX 500 and S&P 500. Although acknowledging the progress made by women at a non-executive level, the report focuses on whether diverse executive teams - the people involved in day-to-day business operations - outperform male-only peers. Analysis of the return on assets ratio1 (also known as return on investment) showed that, on average, companies with at least one female executive board member outperformed those with male-only boards in each of the three markets analysed.
Francesca Lagerberg, global leader for tax services at Grant Thornton, commented: “I liken the debate around board diversity to that of renewable energy. We know it’s the right thing to do - both in terms of fairness and for sustainable future growth - but collectively society is dragging its heels. The response to both issues seems to be 'Yes, we need to take action, but it will be expensive to implement in the short-term,' so we kick the can down the road.
“But the message from our research is clear: there is a large opportunity cost for companies associated with male-only executive boards. Those businesses stuck in the past are not fully unlocking their growth potential. Like a world still addicted to fossil fuels, these companies are suffering now. A lack of action now will make it all the more difficult to respond in the future when both problems are likely to be more acute.”
In the US, S&P 500 companies with diverse boards outperformed rivals by 1.91%. In the UK FTSE 350 the gap was 0.53% and for the Indian CNX 200, 0.85%. This translates into an opportunity cost of around £372.5bn (US$567bn), £48.5bn (US$74bn) and £9bn (US$14bn) in each of the three markets respectively - or around 3% of GDP in the UK and US.
Sacha Romanovitch, CEO of Grant Thornton UK LLP, added: “The research clearly shows what we have been talking about for a while: that diversity leads to better decision-making. Whilst an important element, this goes beyond solely the issue of gender. If we consider diversity in the round, including areas of socio-demographic and racial diversity, amongst others, the opportunity to develop a wider perspective on the world is huge. In a business context, this diversity of thoughts and experiences leads to more innovative and unique solutions.
"So we have the evidence that businesses with more diverse teams give better business performance. These progressive firms are delivering a competitive advantage for their stakeholders, finding it easier to attract talent and building better business relationships. It matters that we get this right – and more and more we are seeing that it requires intentional action by leadership teams to effect a change. It’s about creating a business environment that is attractive to people from all walks of life, removing real – and perceived - barriers to progression and genuinely valuing diverse perspectives."
1. Return on assets measures how efficient a management team is at using its assets to generate earnings