The Wall Street Journal - 28.10.2019

THE WALL STREET JOURNAL. Monday, October 28, 2019 |R11

BRIAN STAUFFER

JOURNAL REPORTS | DIVERSITY & INCLUSION

D

IVERSE AND INCLUSIVEcultures

are providing companies with

a competitive edge over their

peers.

So concluded The Wall

Street Journal’s research ana-

lysts in their first ranking of corporate sec-

tors, as well as the individual companies in

the S&P 500 index, based on how diverse and

inclusive they are.

The financial industry overall was the

best-performing sector in the study, with

banks and insurers dominating the list of the

20 most diverse companies. The communica-

tions-services and consumer-staples indus-

tries came in a close second and third, while

the energy and materials sectors brought up

the rear.

Turns out the 20 most diverse companies

in the research not only have better operat-

ing results on average than the lowest-scor-

ing firms, but their shares generally outper-

form those of the least-diverse firms, the

research shows.

Many of the high-scoring companies in the

study say that having a well-rounded work-

force has helped them create better products

and be more innovative, leading to growth in

sales and profit. Analysts agree that diversity

can help fuel innova-

tion, which is critical

to success in a fast-

changing world where

technological disrup-

tion has become the

norm.

“Diversity helps cre-

ate long-term share-

holder value,” says

Lottie Meggitt, respon-

sible-investment ana-

lyst at Newton Investment Management, a

unit of Bank of New York Mellon. “Too often

we have seen companies fail or make poor

decisions where teams are populated with in-

dividuals who all think the same, or who are

unwilling or unable to challenge the status

quo.”

To create the ranking, The Wall Street

Journal’s environment, social and governance

research analysts gave each company in the

S&P 500 a diversity and inclusion score from

0 to 100. The scores were based on 10 met-

rics, including the age and ethnicity of the

company’s workforce, the percentage of

women in leadership roles, whether the firm

has diversity and inclusion programs in place

for employees, and the makeup of the board.

(See the full methodology at wsj.com/leader-

shipreport.)

Among the findings:

ProgressiveCorp. andJPMorgan Chase&

Co. took the top two spots in the ranking,

with scores of 85 and 80, respectively. The fi-

nancial industry overall had an average score

of 50.4 followed closely by the communica-

tions-services industry at 49.5 and the con-

sumer-staples sector at 48.8.Companies in

the energy and materials sectors earned av-

eragescoresof40.

Following a string of gender- and racial-

discrimination lawsuits over the past few de-

cades, banking firms in recent years have

worked to narrow pay disparities and recruit

a more diverse workforce. Other companies

in the financial sector have had to make

changes to attract and retain millennial

workers and to reach an increasingly diverse

U.S. customer base.

“Consumers have many different options

and higher expectations for products and ser-

vices that reflect and meet their unique

needs,” says Lori Niederst, chief human-re-

sources officer at Progressive. “This makes

constant and concerted attention to diversity

and inclusion a business imperative.”

Larger companies tended to score better

than smaller companies in the research,

probably because bigger firms have

more resources to devote to D&I pro-

grams, the study found. (The average

market cap of the top 20 performers is

$127 billion, compared with $17 billion

for the bottom performers). But some

say it could be that smaller companies

haven’t faced the same kind of pressure

larger companies have to create more

diverse and inclusive workplaces.

“Small-cap companies have been slow

to embrace the message that gender, ra-

cial and ethnic diversity make for better

board discussions and decision-making,”

says Peter Reali, senior director for re-

sponsible investing at U.S. money man-

ager Nuveen Investments Inc., which

last year started to press about 470

midcap and small-cap companies to add

more women to their boards or adopt

hiring policies that emphasize diversity

in the nomination process.

Female representation on boards

overall remains fairly low across the

S&P 500, the research found. Less than

2% of S&P 500 companies have boards

consisting of 50% or more women, while

77% have boards where more than two-

thirds of directors are male.

Probably the biggest takeaway from

the study is that diversity and inclusion

appear to be good for business.

The research showed that the 20

most diverse firms in the ranking have

an average operating profit margin (the

profit a company generates from its core

business before interest and tax, as a

percentage of sales) of 12%, compared

with 8% for the lowest-ranking compa-

nies. Their shares, meanwhile, had an

average annual total return of 10% in the

five years through June 28 and 14% over

the 10 years through June 28, versus

4.2% and 12% for the 20 least-diverse

companies. The S&P 500 index posted

annual gains of 8.9% and 14%, respec-

tively, over the same periods.

“The bottom line is that companies

that are able to attract and retain talent

are going to be more successful finan-

cially over the long term,” says Valeria

Piani, sustainable-investing strategic en-

gagement lead at UBS Asset Manage-

ment.

Among the top-ranked companies,

Procter & GambleCo. says it has drawn

on the diversity of its workforce to create

new hair-care brands for people of color. This

year, P&G launched the Head & Shoulders

Royal Oils Collection, developed by a team of

the company’s black scientists. In 2017, it in-

troduced the Pantene Gold Series of hair

products also designed for black consumers.

David Taylor, the CEO, president and

chairman of P&G, believes that his company’s

diverse teams are one reason it has delivered

strong financial results recently. P&G had 5%

growth in organic sales (those not attributed

to acquisitions) in fiscal 2019.

“A diverse team supported by an inclusive

environment that values each individual will

outperform a homogenous team every time,”

Mr. Taylor said in an email.

At television-ratings

firmNielsen HoldingsPLC,

which also made the top 20,

CEO David Kenny holds the

additional title of chief di-

versity officer, signaling the

company’s commitment to

diversity and inclusion from

the top.

“Diversity and inclusion

are essential to everything

we do at Nielsen, not just

our financial performance,”

Mr. Kenny said in an email,

adding that Nielsen’s prod-

ucts need to be diverse and

inclusive to ensure the

company produces unbiased

data.

Not all of the top-ranked

companies have products

aimed specifically at di-

verse customers, but most

say that cultivating workers

from different backgrounds

and having diversity at the

highest levels helps with

product development.

“A diverse workforce

promotes fresh, innovative

thinking that translates into

a competitive advantage,

which in turn translates

into winning products for

our customers,” said Mary

Barra, chairwoman and

chief executive at General

Motors Co. In June GM be-

came one of the first major

U.S. companies with a ma-

jority-female board of di-

rectors.

As companies seek to attract and retain

younger workers in a competitive hiring

landscape, more of them are seeking advice

on diversity programs, consulting firms say.

“Our clients are increasingly looking to us

for best practices and strategic advice on how

to improve their diversity and inclusion ef-

forts,” says Michele Parmelee, global chief

people and purpose officer at Deloitte. This

year, a Deloitte survey estimated that 63% of

millennials would consider quitting if their em-

ployer didn’t prioritize diversity and inclusion.

Mr. Holgeris a reporter for The Wall

Street Journal in Barcelona. Email him at

[email protected] Sardon

contributed to this article.

BY

Female board

representation

remains fairly

low across the

S&P 500.

The Business

Case for More

Diversity

Wall Street

Journal research

analysts rank

industries and

companies in

terms of diversity

and inclusion—

and find a link to

performance

Diversity and the Market

The stocks of companies that score well in diversity have outperformed low scorers.

5-yearaverage compounded

annual total stock returns

Diversity and

inclusion performance

10-yearaverage compounded

annual total stock returns

Top 20 performers

Mid performers

Bottom 20 performers

Note: Stock return data is for the five and 10 years ended June 28.

Source: WSJ environment, social and governance research analysts

11.9

14.4%

14.1

4.2

8.9

10.2%

BYDIETERHOLGER

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