Numerous studies of gender diversity on boards have shown that diverse boards are associated with higher financial returns, higher firm value, higher profitability, increased investment in research and development, and lower volatility.11 As background, the average board in the S&P 500 has increased female representation from 14% in 2008 to 25% in 2019.12 Gender diversity is also an important goal addressed in several of the UN Sustainable Development Goals (for example, SDG #5: Gender Equality, SDG #8: Decent Work and Economic Growth, and SDG #10: Reduced Inequalities).
While most of the boards of companies in which we invest are still far from gender parity, the level of gender diversity is increasing. Holdings in the Sustainable Leaders Fund had a weighted average of 31% female representation, and holdings in the Sustainable Future Fund had a weighted average of 29% as of December 2019. As shown below, both measures have steadily risen over the past two years, and both are higher than the board composition of their respective benchmarks. The averages for the Russell Midcap Growth Index are significantly lower than those of the S&P 500, indicating a general trend of better gender parity on the boards of larger companies.
Our portfolios also have a higher-than-market representation of companies where women comprise 30% or more of total board membership. This level is important because, around the 30% mark, the inputs a woman might give shift from being perceived as “a woman’s point of view” to “a different point of view.”13 In short, this level of participation allows women’s inputs to be more fully incorporated into corporate governance. As shown in the charts below, this measure improved for both of our portfolios in the past year, with nearly half of corporate boards passing this crucial 30% threshold. Perhaps more important, there was also meaningful progress on this measure for S&P 500 companies over the past year.
Despite the improvement in the metrics above, S&P 500 boards in total are composed of almost 5,500 male board members versus just 1,500 female board members. The progress thus far is notable, yet there is clearly still more work to be done to achieve gender parity on corporate boards.
Weighted average percentage; 50% represents parity (chart)
Source: Data from MSCI ESG Research LLC, as of December 31, 2019. Calculations by Putnam.
Source: Data from MSCI ESG Research LLC, as of December 31, 2019. Calculations by Putnam.
Our research process extends beyond this specific metric of women on boards to focus on understanding how companies prioritize diversity in all forms and at all levels of the organization. Teams with diversity of perspective and experiences have stronger decision-making ability, particularly when facing dynamic and complex problems, and so this is a relevant set of issues for all types of companies and all investors.14
Analysis of women on boards in combination with broader considerations of board health — including diversity of perspectives and skills, accountability to stakeholders, and transparency — has meaningful implications for understanding long-term governance. The association between diverse boards and strong financial outcomes highlights the potential benefits of investing in diversity, and serves as a starting point for incorporating a more complete assessment of the composition of all company teams, beyond the boardroom.
