Why diversity matters in investment

Diversity is a key consideration when evaluating the governance of a company

Responsible investment
Felicity Hall
Felicity Hall
Investment Associate*

Defined as the presence of a range of different groups, diversity can refer to gender, race, heritage, religion, social class and ways of thinking, as well as to many smaller differentiators.

Robust diversity policies encourage the balanced representation of a variety of individuals who bring experience from contrasting backgrounds.

Diversity is already established as an important component of ESG analysis. It informs ratings produced by the likes of MSCI ESG Research, which many investors, including Ruffer, use as a source of information. Gender equality, the most topical angle, is also the fifth of 17 United Nations Sustainable Development Goals (SDGs), adopted by all Member States in 2015 to promote sustainability and prosperity.

Diversity is growing in importance as investors seek to align their activities with the SDGs. It also feeds into social considerations when investing, under the guise of human capital and social opportunities.

So why exactly should diversity matter to investors?

Studies demonstrate a positive correlation between the diversity of a company’s employees and its returns. A McKinsey study in 2018 suggested that firms in the top quartile for gender diversity on their executive teams were 21% more likely to have above-average profitability and 27% more likely to have superior value creation than companies in the fourth quartile. The same report suggested that companies in the top quartile for ethnic and cultural diversity on executive teams were 33% more likely to have industry-leading profitability.1 In a similar study, Boston Consulting Group analysed management boards, focusing on factors such as gender, age, birthplace, career path, industry background and education. It found that profit margins were 9% higher for companies with diverse management teams. The same study also suggested that diverse leadership teams boost innovation, with nearly half the revenue of companies with more diverse leadership coming from products and services launched in the preceding three years.2

A McKinsey study in 2018 suggested that firms in the top quartile for gender diversity on their executive teams were 21% more likely to have above-average profitability and 27% more likely to have superior value creation than companies in the fourth quartile. 

There are many similar studies which show a positive correlation between profitability and diversity. Yet some caution that correlation should not be confused with causation in such studies. Could enhanced returns be the product of superior corporate governance and a diverse workforce the outcome of the latter rather than a profit generator in and of itself? With the limited data currently available, scepticism remains.

Nevertheless, there are intuitive reasons why diversity may boost financial returns.3 Diversity encourages collaboration between individuals who think differently and approach problems in different ways. This can reduce the risk of groupthink, thereby enhancing decision-making. Consider a business expanding to target a new region or customer base. A company whose employees come from a narrow pool of individuals may struggle to adapt. On the other hand, a diverse workforce means a company is more likely to have the knowledge and skills necessary to understand a new market.

In addition to strengthening financial performance, diversity has also been linked to higher employee retention and job satisfaction. The more diverse the workforce, the less employees feel obliged to fit a particular mould. Indeed, young people entering the workforce say a diverse environment is an important factor when choosing a place to work.4 Thus, in a diverse working environment, key talent may be retained for longer, building stability and reducing operational risks. Furthermore, diversity has been linked to lower reputational risk. This is because companies that actively include diversity in their governance policies reduce their exposure to lawsuits based on discrimination.5

Case study: Japan

In Japan, many companies have historically ignored the importance of diversity. Recent progress, however, has been helped by the introduction of the Act on Promotion of Women’s Participation and Advancement in the Workplace in 2016. This required companies with more than 300 employees to collect four gender diversity metrics and disclose at least one of them.6 The metrics include statistics such as the percentage of women in new hires and the difference between the average tenure of men and women. Most notably in 2019, the average percentage of female board members among MSCI Japan IMI Top 500 companies increased to 7.5% from 4.9% the previous year.7 Although this overall figure remains low, given the shortage of executive and director level female talent available in Japan (in the past, many women stopped work once they married or had children), this could mark the start of a positive move forward. While progress remains slow, with many measures flat and Japan continuing to languish behind other developed countries in terms of diversity, the need to disclose these metrics – and the interest from many investors in them – has made this a much more significant focus of boards.

Case study: Diverse Disney

Disney’s business is, in its words, dependent on employing people who reflect the lives and experiences of its audiences. To encourage and attract a diverse workforce, Disney has established 45 business employee resource groups representing eight dimensions of diversity. Two-thirds of Disney’s corporate board are either women or people of colour, which reflects the composition of its employees.

at Ruffer
How we think about diversity in the investment process at Ruffer

At Ruffer, diversity is considered holistically alongside other ESG considerations as part of our analysis. When considering the diversity statistics of a company we endeavour to take into account the availability of diverse talent in the industry and the country in which the business is based. Where we believe diversity policies fall short, Ruffer looks to engage actively with the company to improve performance. For example, we have engaged with Dai-ichi Life to improve the diversity of non-executive directors. Likewise, Ruffer has engaged with Kao, which still maintains a traditional Japanese board structure, but has been considering how to increase diversity. Beyond gender, Ruffer considers other aspects that are likely to negatively affect diversity of thought. For example, when considering board composition we take into account diversity of skills.

Our discussions on diversity are continuing, with further engagement on these issues expected in future.


Better financial returns and business decisions; more innovation; a happier and more adaptable workforce: there is now a compelling body of evidence for why businesses should embrace diversity within their governance policies. In addition, companies must endeavour to guard against groupthink and ensure, as Disney does, that their employees represent the demographics of their customers.

Strong diversity policies are a sign of good corporate health. As investors, this is something we should be looking for and be actively engaging with companies to improve where necessary.

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  1. McKinsey & Company (2018), Delivering through Diversity
  2. Boston Consulting Group (2018), How Diverse Leadership Teams Boost Innovation
  3. Morgan Stanley (2016), A Framework for Gender Diversity in the Workplace
  4. Bright Network (2018), What do graduates want?
  5. Morgan Stanley (2016), The Gender Advantage: Integrating Gender Diversity into Investment Decisions
  6. MSCI ESG Research (2018), Gender Diversity in Japan: Progress Report
  7. MSCI ESG Research (2019), Gender Diversity in Japan Report

The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. This document does not take account of any potential investor’s investment objectives, particular needs or financial situation. This document reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. Read the full disclaimer.

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