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Why investors should care about diversity

Ed Monk, Fidelity Personal Investing, 11 August 2017

The issue of diversity in the higher reaches of public life and top businesses, is getting more and more attention.

Whether at the BBC or Google, attention is focused on the obstacles facing women and people of minority ethnicities, genders and sexualities to gain fair status. The news can sometimes be discouraging - there’s still so much progress to be made - but the elevation of these issues is at least a sign that the need for change is being more widely recognised.

Improving fairness in these areas is an end in itself, but there is reason to think that greater diversity also goes hand in hand with creating more responsive, more talented and more effective organisations - including more profitable companies.

Oft-cited work from 2015 by McKinsey, the consultancy firm, charted the relationship between the diversity of businesses and their success. It examined the senior management of large companies from the UK, US, Canada and Latin America.

The results are stark - or “statistically significant”, in the words of the report.

It found that companies in the top quartile for gender diversity were 15% more likely to have financial returns that were above their national industry average. Companies in the top quartile of racial and ethnic diversity were 35% more likely to have financial returns above their national industry median. Conversely, companies that scored poorly by these measures were less likely to achieve above average returns.

The research goes as far as placing a figure on the boost to performance that diversity signifies. It reports that: “Companies with 10% higher gender and ethnic/racial diversity on management teams and boards in the US, for instance, had EBIT (earnings before interest and tax) that was 1.1% higher; in the UK, companies with the same diversity level had EBIT that was 5.8% higher.”

The research makes clear that this relationship between diversity and better performance is a correlation, and not necessarily a causal link. It puts forward, however, various explanations for it.

“It stands to reason - and has been demonstrated in other studies, as we indicate— that more diverse companies are better able to win top talent, and improve their customer orientation, employee satisfaction, and decision making, leading to a virtuous cycle of increasing returns,” the report states.

In other words, a company that recruits and promotes from the widest possible pool of talent, without any limits on who can contribute, improves its chances of success. The wider the base of the pyramid, the higher it can rise.

In turn, that business is then able draw on a wider spectrum of personal experience, enabling it to better understand different customers and address their needs.

Moreover, a company that is willing and able to bring about greater diversity in its own management may also be a sign that it is open new thinking and effective in implementing change generally, be it in this or other areas.

Diversity has a particular relevance in investing, where decisions are taken all the time that require the evaluation of competing variables. Being able to draw on a wide range of opinion, within a properly managed team, means being able to test these variables more thoroughly and reduce the risk of blind spots.

These different opinions do not have to come from people of different social groups - two people who look different can think the same - but, again, the academic work suggests a team that is more diverse in social make-up is more likely to provide these different points of view.

Fidelity is working hard to build an inclusive and diverse workforce. Look out next week for the MoneyTalk podcast which will include a conversation with Kathryn Reeves, Global Diversity and Inclusion Lead and Talent Partner, on these issues.

Important information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.

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