Want Outperforming Stocks? Look for Diversity in Executive Leadership

When McKinsey talks, people listen -- right? Well, at least sometimes they do. McKinsey generally ranks at or near the top of lists of the most prestigious, biggest, or most well-regarded consulting firms. It mostly delivers guidance for companies, but it offers some insights for investors, too.

Its "Delivering through Diversity" report from 2018, for example, addressed diversity in management. The consulting firm found correlations between diversity and performance.

Image source: Getty Images.

McKinsey says...

Here are some key findings from the report:

• Having more female leadership at high levels is tied to outperformance: "Companies in the top-quartile for gender diversity on executive teams were 21% more likely to outperform on profitability and 27% more likely to have superior value creation. The highest-performing companies on both profitability and diversity had more women in line (i.e., typically revenue-generating) roles than in staff roles on their executive teams."
• Having more minorities and people with different ethnic and cultural backgrounds in executive ranks is tied to outperformance: "Companies in the top-quartile for ethnic/cultural diversity on executive teams were 33% more likely to have industry-leading profitability."
• The least diverse executive teams fare the worst: "Overall, companies in the bottom quartile for both gender and ethnic/cultural diversity were 29% less likely to achieve above-average profitability than were all other companies in our data set. In short, not only were they not leading, they were lagging."

What it means for investors

It's clear what companies should consider doing in order to be more profitable: Hire or promote more women and minorities into top positions. We investors, though, can aim to identify promising investments for our long-term portfolios by checking how diverse companies' boards of directors and executive teams are. This is often easily accomplished by checking out the "About Us" nook on a company's website and perhaps clicking on a link labeled "Leadership."

Corporate leadership has been getting more diverse, but it has been happening slowly. Among S&P 500 companies, there was recently an average of 3.2 women directors on boards (out of an average 11.2 people on boards), per a recent Bloomberg.com article. That's 29%.

There's movement afoot to push companies to get more diverse more quickly. A new law in California, for example, requires publicly traded companies based in it to have at least one director from an "underrepresented community" by the end of 2021. In 2022, boards featuring between four and eight people must have at least two such directors, and boards with nine or more people must have three. California already required public companies to have at least one female director by the end of 2019 -- and by the end of 2021, depending on the size of the board, there must be two or three.

Biggest still, late last year, the Nasdaq proposed a new rule that would require companies to have at least "one [director] who self-identifies as female and one who self-identifies as either an underrepresented minority [such as, for example, Black, Hispanic, Native American] or LGBTQ+." Some are pushing the Nasdaq to include disabled people, as well.

Companies doing the right thing

So which companies are being more inclusive in their boards? Here are some of the best from the S&P 500, per Bloomberg:

Data source: Bloomberg.com. 

And here are the laggards:

Data source: Bloomberg.com. 

And since many investors are particularly interested in tech companies, here are the standouts among that group:

Data source: TheOrg.com. 

While the tables above are focused on gender diversity, the #BoardForward Diversity Drivers ranking (from 2018), below, uses broader criteria:

Data source: Medium.com. 

It's likely that many of these companies sport even more diverse boards now.

So when you're looking for promising candidates for berths in your portfolio, don't just look for businesses with growing revenue and profit margins -- look at how diverse the board of directors and/or management is.