Market Extra
Morgan Stanley wants analysts to look at gender diversity in evaluating companies
Published: Feb. 16, 2017 at 1:01 p.m. ET
Ryan Vlastelica
Data shows companies with more women tend to do better
Sony Pictures/Everett Collection / Everett Collection
Being an old boy's club may be bad for business.
Companies are coming under increased fire for having few women employees—particularly in the executive suite, where the tech sector is a prime offender. And coming up short on this issue may hurt more than simply getting dinged on social media. Having few women, or treating them with unfair compensation, could start to negatively impact the way Wall Street analyzes company performance.
Morgan Stanley, in a report led by equity strategist Eva Zlotnicka, on Thursday advocated for looking at gender issues when evaluating companies for their investment prospects, noting the data that shows firms with more diversity tend to outperform.
"We suggest incorporating our gender diversity scores with the fundamental sector analyst and quant team views in order to help investors capture potential value associated with gender diversity," the firm wrote in a note to clients.
While Morgan Stanley didn't detail what it meant by "potential value associated with gender diversity," studies have shown that there is a pronounced impact in having more women in senior positions.
Sallie Krawcheck:It's time to shut down your company's diversity council
According to a study from the Peterson Institute for International Economics, a profitable company where 30% of its top management positions are held by women could see a boost of 15% to its earnings compared with a company with no women in executive roles.
MSCI Research, meanwhile, has data showing that companies with strong female leadership generate a return on equity of 10.1% a year, compared with 7.4% returns for those without, though it added that "we couldn't establish causality." MSCI defines strong female leadership as a company with at least three female board members, or both a female chief executive and a female board member, or a board where the percentage of women is above average. While 73.5% of U.S. companies have at least one female director, according to MSCI, just 20.1% have three or more.
"Three women may constitute a critical mass to allow women to contribute more equally to group decision making," MSCI wrote in a November 2015 research report. "We also found that companies lacking board diversity suffered more governance-related controversies than average."
Read:This ETF bets that companies with female leadership will outperform
See also:The double payoff of gender-based investing
Morgan Stanley's note suggests that the financial sector has the greatest amount of gender diversity, with an equal 50-50 breakdown between men and women. "No other sector quite achieves this equal balance, with the most traditional of sectors (e.g. materials and utilities) having less than half the female representation in financials," it wrote, pegging those industries as having between 20% and 25% women.
However, it added that the sector falls flat when scored by other metrics, including "the composition of higher ranks,empowerment and equality in pay."
Read:Financial services industry is at risk to get even whiter
This could amount to a missed opportunity, the report read. "Whether a higher quality company attracts more senior women or if boosting the recruitment and retention of such women in turn boosts quality metrics, we can't be sure (we suspect it's a little bit of both). Either way, it appears that the financial sector is not capitalizing on this resource and the potential benefits it might bring."
Can Wall Street close this gender gap?
Hedgeye CEO Keith McCullough expects the S&P 500, junk bonds and previous darlings like Tesla to slide further. He's long gold, silver and defensive ETFs.
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Ryan Vlastelica is a markets reporter for MarketWatch and is based in New York. Follow him on Twitter @RyanVlastelica.