Larry Fink’s recent clarion call to capitalism that managing “environmental, social,and governance (ESG) matters demonstrates the leadership and good governance that is so essential to sustainable growth” should not fall on deaf CEO ears.
Fink is the leader of BlackRock, the largest asset manager in the world with $6 trillion under management, meaning that it has considerable proxy shareholder voting power in those companies in which it actively or passively invests. Currying BlackRock’s favor is a wise move. ESG matters to which companies should pay attention include factors such as emissions, waste and fuel management, human rights, corruption, impacts on biodiversity, fair labor standards, accident and safety controls, supply chain management, etc. Essentially, if companies don’t make palpable efforts to service their constellation of communities/stakeholders — including our planet — they could find themselves with a new board, and management team, who will.
This sentiment is not new. Socially Responsible/Impact Investing models have been around for decades (centuries, in fact) and certain prescient asset managers, such as Boston Common Asset Management (founded by a woman), have been generating market-competitive/beating returns for 15 years. What has changed is the amount of money that is being managed to these ends. CalPERS, a $350 billion pension fund of the State of California, is on the forefront of integrating ESG factors into its investments; and the NYC and NY State pension funds, also worth roughly $350 billion combined, are nipping at CalPERS’ heels. And European pension and sovereign wealth funds, some with a trillion in the bank, are considerably ahead of the U.S.
What is behind this shift in thinking? Doing the “right thing” aside, immense amounts of research from organizations such as Sustainable Accounting Standards Board reveal that proactively coming up with ways to either minimize or mitigate businesses impacts related to ESG issues can have material positive effects on financial performance, traced down to the level of income statements, balance sheets and costs of capital. And while there are a few frameworks by which companies can use to measure and report, leveraging women always factors into the mix of proscriptions companies should use to deliver these results.
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In the returns context, McKinsey estimates a $12 trillion bump in global GDP by 2025 if management gender parity were realized. A Credit Suisse study of 3,000 listed firms reports companies with 50 percent senior front office management who are female outperformed the growth of the market index from 2008 to 2016 by upwards of 60 percent. An MSCI review of 1,600+ public firms has pegged companies with three women on their boards in 2011 as outperforming those with none by 37 percent EPS and 10 percent ROE growth over the last five years.
We don’t believe any other singular ESG factor can have such a pronounced impact on company performance, again irrespective of industry. And what’s more, women are not only accretive to financial performance, they are at the core of the sustainable and ethical part of the equation.
A study by the UC Berkeley Haas School of Business of 1,500+ traded firms concludes that companies with women on their boards are more likely to address a litany of ESG factors. A research paper coming from The University of Toronto’s Rotman School of Management found that women bring six important skills that have been lacking in board composition and that are vital to decision-making: corporate governance, an eye for regulatory/compliance issues, human resources, sustainability, politics/government relations, and risk management. Of note, the last four are presently the least represented of all skills on boards. Another report from MSCI cross-referenced gender board composition with a likelihood of “fewer instances of governance-related controversies such as cases of bribery, corruption, fraud and shareholder battles” and general overall reductions in risk. Dealing with these issues, many of which only result in fines, can be distracting, expensive (in both outlays and reputation/brand), and probably wouldn’t sit so well with BlackRock. And findings published in the Journal of Financial Economics noted that female Directors have better attendance, can actually increase men’s attendance, and are more likely to be assigned to committees that monitor performance. The same study found that boards with more gender diversity are more likely to hold CEOs feet to the fire for sub-par execution.
These behaviors are not surprising in the slightest. Biochemically, estrogen — a material driver of the female gender — has been exhaustedly linked to collaboration, compromise, nurturing, relationships and “the village” perspective. The male version — testosterone — manifests itself in competition, criminality, sex drive, focus on self and aggression/violence. All genders have both in them, just in dramatically different amounts; men have 8-9 times the testosterone of women as a daily baseline and can produce 20 times more per day.
While there are many other hormonal and societal factors behind the degree and frequency of these expressions — in the U.S., testosterone levels drop once you become a father and continue to decline the more involved you become with caring for your child — a quick review of the current (and historical) state of world affairs, and the dire need for the adoption of ESG factors, would seem to underscore the intractability of these basic gender building blocks. It should also be noted that an ongoing study reveals that there has been a 1 percent drop per year in testosterone levels in U.S. men since 1987. While there is no scientific agreement as to the cause of this decline, it could explain why the vast majority of Millennial men don’t want to wear the tough, strong and respected robes of traditional masculinity and would rather be regarded as friendly, intelligent, funny and caring.
The economic, environmental and human risks of not addressing these topics have become enormous. It should be noted that 80 percent of the world’s leaders are men, and only two of the G20 nations are run by women. Good/fair and bad/less-fair treatment of others, and related ecosystems, are biologically influenced; fortunately, these tendencies, for most of us, can be cognitively altered. Biology provides the clay, norms and rules cast the initial mold, which can be modified by awareness, ongoing development, and perhaps most importantly, courage. The key words here are “can be.”
There is one other driver of performance that I’d love to underscore in Fink’s criteria, as I believe it also reflects the good leadership and governance behind sustainable, long-term growth: happiness, or paraphrasing a bit, engagement: essentially, liking what you do enough to consciously give it your focus, attention and energy, which has material impacts on productivity and innovation, talent acquisition and development expenditures, retention, and most compellingly, health care costs — mental and physical — for both employee and family. If you are miserable at work, your chances of being diagnosed with heart conditions, diabetes, cancer, depression, anxiety, etc., rise considerably; with costs directly smacking bottom lines, particularly if you are self-insured.
There are many drivers of engagement; coincidentally, women, I will argue — due to their biology — are better equipped to leverage them. Per Gallup, 70 percent of engagement comes from your manager; and female managers are 5 percent more likely to be engaged, outperform male managers in terms of team engagement by up to 10 percent, depending on the gender composition of the team; and their reports score higher on 11 of the 12 questions Gallup uses to measure engagement. Employees are more likely to follow leaders who listen to them, care for them and are active in their development, and include them in decision-making processes.
A recent Lean In/McKinsey report reveals that while 45 percent of the entry level workforce is female, only 37 percent are Manager level, 27 percent are VPs, 17 percent occupy C-level positions, and the vast majority of these roles are in Administrative functions: Human Resources, Legal, etc. Women run only 5 percent of the S&P 500 and represent 22 percent of those companies’ Board seats. To say that opportunities for advancement aren’t abundant is akin to postulating that our climate is not changing. The problem is the pipeline: The entire system, from recruiting to manager training to development and succession planning, is institutionally biased in a variety of unconscious and conscious ways. Expanding and re-weighting our definition of leadership and the skill sets required to succeed, per the afore-mentioned Board study, is a great example of a change that will have profound ripple-down effects on the entire system’s mechanics. And there are many more dials that can be turned, levers pulled, that will increase the flow of diverse talent that increases profit and valuations.
To Fink’s credit, in February, BlackRock requested all companies on the Russell 1000 in which it has positions and have less than three female board members to share their rationale (with a similar implied voting stick as his prior announcement). State Street, with $2 trillion in assets under management, made similar Board-related waves when it unveiled its Fearless Girl statue last year and a similar call to action. And organizations such as The 30 Percent Coalition and Paradigm 4 Parity are making great strides in signing up backers from both the investment and issuing communities who are taking the pledge to increase female representation in executive and director ranks. The stage is being set.
Mainstream momentum for sustainable and ethical business is growing. PE shops and hedge funds are now donning ESG garments and flaunting them to both investors and the general public. Mutual funds and ETFs with organic flavors are flooding the market; Barron’s recently had a cover article on the top 200 Sustainable Funds (though beware, there is a good deal of marketing at play here). And there are a multitude of issues — e.g., deforestation will positively bump GDP growth in the short term — that require the laws of researched investment supply and demand to kick in and influence both policy and business priorities. The key to unleashing this momentum — and impacting stock prices, the “everything change” global warming portends, discrimination, biodiversity, etc., simultaneously — is simple and achievable. We must let women lead.