As part of its shakeup this summer, American Apparel (AMEX: APP) appointed two women to its previously all-male board of directors. The new regime at the money-losing retailer, backed by a hedge fund, may have had more in mind than just changing the optics around a brand best known for its sexually provocative—some would say sleazy—advertising. Gender diversity in corporate leadership, a growing body of research suggests, can produce a tangible financial return.
Earlier this year, for example, Judy Zaichkowsky of Simon Fraser University’s Beedie School of Business published a study indicating that the presence of just one woman on a company’s board resulted in significantly higher standards of corporate governance (which has an established correlation to better financial performance). Studies have also shown a gender difference in approaches to risk management, a particularly topical subject in recent years.
“In the financial industry, there’s been a lot of debate, post–financial crisis, around different approaches to risk and gender difference,” says Brenda Trenowden, global head of funds at ANZ Banking Group in London and a member of the steering committee of the 30% Club, which works to get more women on corporate boards. “Would we have had the same depth of crisis if there had been more balanced governance structures?”
Women’s under-representation on boards and in top management positions has long been the subject of academic study and, more recently, public policy. Norway and France have mandated quotas for female board representation. The governments of Canada and Ontario are mulling similar rules. But the motivation for such intervention has been largely social. Now investors are taking a more flinty-eyed look at diversity—for reasons related to the bottom line.
“The 30% Club is really taking a business-based approach to this, and enlisting the business community itself to perform better in terms of getting women onto boards and in positions of leadership, really for its own self-interest,” Trenowden explains.
And the investment industry is beginning to respond with diversity-themed products. American mutual fund company Pax Ellevate Management offers a Global Women’s Index Fund that invests in companies where women collectively make up 24% of management. British bank Barclays recently started issuing exchange-traded notes on the NYSE Arca exchange (similar to ETFs, only they are derivatives guaranteed by the bank rather than invested in the underlying securities) that track a Women in Leadership index of U.S. companies whose CEOs are women or whose boards are at least one-quarter female. Back-tested, the index outperformed the S&P 500 by 1.3% annualized over the past five years.
The case for using diversity as an investing theme is far from proven, though. Eve Ellis, a financial adviser and portfolio manager at Morgan Stanley’s Matterhorn Group, notes that no causal link has yet been drawn between female leadership and improved performance. “The story everyone would love to hear is that a company added more women, and then their financials became stronger and their stock price became stronger, and I don’t really have that kind of story,” she says.
Ellis and partner Nikolay Djibankov use a strategy called Gender Lens Investment, which targets companies with at least three women on their boards of directors, in the creation of a so-called “parity portfolio” for clients. “The results of the portfolio have been strong, but remember that many components go into a stock price,” Ellis cautions. “At the end of the day, my partner and I need to be good at stock selection.”
Since women make up just 15.9% of the board seats of Canada’s 500 largest companies by revenue according to advocacy group Catalyst, investors looking to apply a gender-lens strategy may find better pickings south of the border. Here, at least, there are noteworthy stories. Meg Whitman’s Hewlett-Packard (NYSE: HPQ) provided a one-year total return of 69.8% against the computer systems sector performance of 52.8%. Since Gracia C. Martore became its CEO three years ago, Gannett Co. (NYSE: GCI) has rallied 294%, against a 90% gain for the S&P 500 as a whole.
Interest in gender-based investing, however, is being driven at least in part by a growing pool of women investors with progressive ideals. “You see more and more women starting to be more active on the wealth management piece,” says Trenowden. “When women have money, they want to do something meaningful with it, and often they want to invest in funds that have this gender-lens approach.”
Ellis has seen a similar motive in some of her clients. “Anecdotally, we have an investor (who’s a man) who said to me, ‘Eve, this is the first time I’m not being a passive investor,’ and he added another $1 million to his investment,” she recounts. “I think that there is a real sense of satisfaction on the part of investors that they’re part of an important conversation.”
The next step, predicts Catalyst Canada executive director Alex Johnston, will be the use of a diversity-based approach by institutional investors. “I think that the investors’ groups like CPPIB, like OMERS, are starting to talk about this, certainly behind closed doors, much more significantly and will probably be more public about this going forward,” she suggests.
“What I like about the investment fund discussion now is that it really is where the rubber hits the road—it’s putting the business case to the test in the right way,” Johnston adds. While she believes that case to be solid, she cautions that, as a pure-play investing idea, it’s still new and unproven. “We’re going to need a critical mass of funds and a little bit of time to see how, over the course of time [and] through different market cycles, these funds perform.”