Why workplace inclusion makes sense for corporations, investors and society

DURING THE PANDEMIC, MANY COMPANIES HAVE SEEN their social and governance policies undergo a sort of stress test. Those businesses that passed the test were more likely to be focused on their employees, in one way or another. They were the ones that provided desperately needed benefits such as health insurance, paid sick leave, and child care to workers who fell ill. As health and safety guidance evolved and research improved, their leaders were able to innovate quickly, offering work-from-home capabilities or social distancing guidelines and protective equipment on-the-job. Their executive suites were already diverse enough to be able to communicate a unified message clearly to a broad consumer base. And their efforts to recruit, develop and include a diverse workforce continued rather than being deprioritized.

What the data tells us

As it happens, “These measures are similar to those that sustainable investors have used for years to gauge the health of companies over the long term,” says Jackie VanderBrug, head of Sustainable & Impact Investment Strategy in the Chief Investment Office for Merrill and Bank of America Private Bank. Why might investors turn to this kind of non-financial data?

For starters, businesses that offer a range of benefits or workplace diversity are more likely to attract and keep high value employees, and the resulting culture of engagement may drive performance. A BofA Global Research study found that stocks of corporations with high employee satisfaction ratings outperformed those with low ratings by nearly five percentage points (ppt) per year over a recent six-year period.¹ What’s more, corporations that treat their workforce well may attract the business of a consumer base increasingly concerned with how companies behave toward employees.

Investors may also hold the view that a company whose policies help it respond effectively today stands to weather difficult environments — health-related or not — in the future.

Indeed, “There is a wealth of data highlighting links between long-term valuation and inclusive corporate policies, including recruitment practices, pay parity, and cultures of belonging and support,” says VanderBrug. “What’s more, these same factors may reinforce economic resilience and provide a proxy for good management.”

Gender issues

Research on the economic benefits of gender balance is becoming more widely available, VanderBrug says, and it may prompt more investors to view a high score on gender diversity as a benefit and a poor score as a risk. Research company McKinsey, for example, found that firms in the top quartile of gender diversity, based on leadership teams, were 25% more likely to experience above-average profitability than their peers in the bottom quartile.² Those in that bottom quartile, meanwhile, were 27% more likely to underperform on profitability. Why might companies with more women in upper management perform better over the long term? Says VanderBrug: “There are a number of possible reasons. They include a broader talent pool, the avoidance of group-think, and a fuller analysis of the pros and cons of risks and opportunities.” Several studies even suggest that male CEOs are less overconfident when women are on boards, leading to fewer risky choices.³

Diversity & inclusion

A corporation may benefit when it creates more workplace diversity and inclusion (D&I), by fully incorporating people of color, members of the lesbian, gay, bisexual and transgender (LGBT+) community and people with disabilities. The McKinsey study found that companies in the top quartile for ethnic/cultural diversity on executive teams, for example, were 36% more likely to financially outperform their peers. Why? It’s possible that hiring people from a variety of backgrounds gives business leaders a fresher perspective, helping them be more innovative, enter new markets or create new products. “With a more diverse workforce, companies may avoid the kind of group-think that is likely when team members come from a similar background,” says VanderBrug. “Not only that, but as societal diversity increases, companies may find it makes sense to ‘mirror’ their consumer base more closely.”

For the future

The recent unprecedented health crisis has revealed that not every company provides the kind of safety net that can help employees and their families survive. It may also have highlighted which businesses seem to value inclusivity as a path to future growth. Sustainable investors or everyday consumers may in turn choose to reward those businesses that have been “walking the walk” and avoid those that have not. And the same may be true for top-notch talent seeking employment at inclusive companies. “We anticipate that the more-inclusive companies will have better financial performance than their less committed peers,” says VanderBrug, “And we can at least hope that in time more companies will appreciate inclusivity for the critical business driver it can be.”