When the European Union made a fresh push for diversity quotas on corporate boards last year, many market watchers dismissed the move as political correctness run amok. The U.S. financial sector would never go along, they predicted, as Wall Street has never been a place for social experiments.
It is turning out that the business case for diversity is proving too powerful to dismiss. A series of recent studies examining diversity and financial performance have fueled growing insistence among big-name private equity firms, pension funds, and money managers that their investees hire and promote more diverse talent up the ranks — or risk losing their clients’ capital.
No, Wall Street didn’t suddenly get #woke. This is business.
Last March, State Street Global Advisors, with $2.7 trillion in assets under management, erected an instantly iconic statue of a fearless girl staring down Wall Street’s rampaging bull. As the statue went up, the firm called on its 3,500 portfolio companies to increase the representation of women at the board level. State Street cited an MSCI study showing that companies with strong female leadership generate a return on equity of 10 percent compared to 7 percent for those without strong female leadership.
A McKinsey study released in January reached a similar conclusion: Companies in the top quartile for C-suite gender diversity were 21 percent more likely to outperform on profitability and 27 percent more likely to have superior value creation than those in the fourth quartile. Companies in the top quartile for ethnic and cultural diversity on executive teams were 33 percent more likely to have industry-leading profitability.
Meanwhile, CalPERS — the nation’s largest public pension fund — is threatening to withhold votes from directors at hundreds of companies in the Russell 3000 if efforts aren’t undertaken to diversify their leadership ranks. And BlackRock — the world’s largest money manager — changed its proxy voting guidelines in February to reflect the expectation that its portfolio companies have at least two women on the board.
Two isn’t a magic number, but BlackRock is explicitly rejecting the tokenism that says putting a lone woman in the boardroom is evidence of a more attuned corporate culture. Box-checking misses the broader importance of building leadership structures that value diversity of thought, background, and perspective. Diversity helps companies win the war for talent. Companies that hire and promote leaders rooted in the multifaceted life experiences of their customers are practicing smarter, better business.
In the biotechnology industry, only 10 percent of board of director slots and 7 to 9 percent of CEO positions were filled by women, according to a 2014 national survey by Liftstream, and half of all biotech boards don’t have a single woman. Two years ago, I was shocked to discover that I was the only female CEO of the 44 publicly traded biotechs in San Diego. When I go to networking events, I’m often the only woman in the room.
Most CEOs and board chairs prefer to make big hires from within their trusted professional networks, networks that are disproportionately white and male. Some companies will only appoint new directors with a direct connection to a current member of the board. As a result, there are ocean-sized pools of diverse, untapped talent — women, minorities, and LGBT executives — who have the skills to lead but lack the cozy relationships required to get their shot.
Diversity is not the enemy of the best person getting the job; it can be an enabler instead. Championing inclusion is not about embracing mindless quotas or a covert liberal political agenda. It’s about broadening hiring searches and then broadening the perspectives of those at the table.
The Biotechnology Innovation Organization has launched a diversity initiative, which I have the honor of chairing. Its goal is to convince CEOs and board chairs working in the pressure cooker of high-risk drug development to make time to study the evidence linking diversity to better financial performance.
To this end, the BIO board of directors recently approved funding for initiatives to help advance biotech leadership diversity at the board, C-suite, and functional leader level. These will include a communication campaign to promote the business case for diversity along with the creation of a virtual network of diverse, board-ready candidates accessible to CEOs and board leaders who are interested in diversifying their leadership perspective.
Investors make their living by rigorously evaluating complex data sets and acting accordingly. They aren’t coming around on diversity to make a political point. They’re acting on evidence that suggests homogenous corporate leadership structures stifle innovative thinking, demoralize staff, and hinder the acquisition of talent. And this comes at a discernable cost to the bottom line.
Every CEO who wishes to continue receiving investments from some of the largest players in the financial services sector should hear and heed this message. In 2018, diversity makes both dollars and sense.
Helen Torley is CEO of San Diego-based Halozyme Therapeutics and chair of BIO’s Workforce Development, Diversity, and Inclusion Committee.