Greater diversity on corporate boards may benefit financial performance

UK fund manager Newton Investment Management has called for greater diversity on corporate boards, but is against the use of affirmative action such as mandatory quotas to make this happen.

In a report, ESG Focus: the dynamics of diversity, Newton said that in a global business world, diversity at board-level is instrumental to wellrun, sustainable companies: “As longterm investors, we believe it is vital that companies’ boards evolve to reflect their operations and client bases if they are to maintain their competitive strength”.

Although diversity has become associated with greater representation of women on corporate boards, Newton said it should be seen as widening the search for talent as widely as possible. The fund manager agreed that is impossible to prove a causal link between diversity and positive performance, but says there is growing evidence of a positive correlation between diverse board membership and financial returns. As an example of the benefits of diversity, it questioned if RBS would have following such aggressive policies before the crisis, which led to the loss of £4 billion on the disastrous acquisition of ABN Amro in 2007, if there had been more than a single female member on the 18-strong allwhite board at the time.

In evidence of positive benefits of diversity on corporate boards it said that companies listed on the Australian stock exchange which have women on the board have produced a higher return on equities than companies with no female board members. Newton chief executive Helena Morrissey is a founder of the 30% Club, which aims to increase female board representation of UK companies through voluntary action to 30% by 2015, and she said: “Active debate and robust challenge are crucial to effective decision-making and diverse groups are more likely to identify creative solutions and offer a broader range of perspectives”.

However, the report comes out against mandatory quotas, saying this does not necessarily lead to better returns. Quotas for a minimum female representation on boards have been introduced in Norway, where 35.9% of boards are now female, far ahead of the rest of Europe. Spain, France and the Netherlands are planning to introduce quotas and a resolution has been passed in the European Parliament calling for legislation to implement quotas for women on listed company boards.