Stockholm (NordSIP) – Zooming in on gender balance and how it impacts a company’s financial performance, a recently published study by BlackRock, Improving Financial Performance by Investing in Women, concludes that workforce diversity pays off. For many of us, this statement might not count as news. Yet the current state of affairs, summarised in McKinsey’s latest Women in the Workplace report, indicates that hardly everyone is on board. True parity remains painfully out of reach. Gathering extensive and consistent supporting evidence could be a way to persuade the sceptics that a diverse workforce does indeed improve return on assets. That is why the BlackRock study is essential. Backed by the world’s largest fund manager, the analysts have reached their conclusion after perusing information from 1,250 big companies, which makes the study one of the largest ever to examine the phenomenon to date.
The best performance is found in equilibrium
The report finds an intermediate ‘sweet spot’ in gender balance that matters for performance. “A first look at the relationship between women’s representation and company performance suggests that it is diversity that counts, rather than the prevalence of women or men,” assert the authors. The analysis demonstrates that companies with a lower participation of women (16% on average) and those with a higher share (60% on average) achieve worse results than balanced ones. The results hold both across time and on a long-term average. It might be worth noting, however, that profitability is slightly higher in female-dominated companies than in male-dominated ones.
According to the report, the linkages between workforce diversity and corporate performance remain robust, even when controlling for country- and industry-specific factors. Companies with the most diverse workforces outperformed their country and industry group peers with the least diverse workforces in terms of return on assets on average by 29% annually between 2013 and 2022.
Alignment across the ranks matters
The study confirms the anecdotal evidence that women’s representation is closest to parity in entry-level jobs, and the balance tends to deteriorate with seniority. Senior and boardroom management-level diversity has so far received the most attention, which has led to board composition guidelines being implemented in many jurisdictions.
BlackRock’s analysis highlights, however, another critical aspect: the financial materiality of gender balance at the middle management level. The study shows that companies, where women’s representation in middle management best aligns with that of the overall workforce, perform better than those with the most skewed representation on a risk-adjusted basis.
The analysis demonstrates that overweighting companies that are closing the gaps in women’s representation at higher ranks is associated with higher portfolio returns. Promoting women is also associated with lower employee turnover rates, which is highly relevant for a company’s long-term performance.
‘Glass ceiling’ or ‘broken rung’?
“Companies within the MSCI World Index with women as CEOs have almost consistently outperformed companies run by men on RoA metrics over the past decade,” states the report. “Yet at the same time, men heavily dominate the drivers’ seats of the largest corporations, with only 6% of these corporations being led by women.”
According to BlackRock’s report, the problem is the persistent ‘glass ceiling’ is making it difficult for women to reach the very top ranks. Examining the same phenomenon, McKinsey’s latest report offers a slightly different explanation. According to their findings, women face their biggest hurdle at the first critical step up to manager, with only 87 women being promoted from entry-level to manager this year for every 100 men promoted. “As a result of this ‘broken rung’, women fall behind and can’t catch up,” they conclude.
Diversity beyond gender
BlackRock’s paper focuses specifically on gender diversity and its importance for corporate performance. The analysts are, however, careful to point out that this is primarily due to greater data availability on the representation of women in the workforce and that other forms of diversity, such as race, ethnicity, gender identity, sexual orientation, socio-economic or cultural background, age, national origin, personality, physical ability, or others, may be equally important in creating a diversity of thoughts, skills and perspectives, enhancing the performance of groups and organisations.
“We recognize that other aspects of workforce diversity are also important in driving corporate performance, and we believe that many of the arguments described here can translate into other features of workforce diversity.”