Corporate America looks a little more equal than it did a year ago, but it still has a long way to go before it reaches parity in terms of gender representation, according to the investment bank that has made this issue a priority for the companies it invests in.
According to State Street Global Advisors, 152 companies have added at least one woman to their board of directors over the past year, while another 34 have “committed to adding at least one woman to their board in the near term.” The asset-managing giant credited this trend to its own stewardship on gender diversity issues.
State Street has made board diversity a key focus of its corporate governance policies, to the point of voting against 511 companies that had no women on their boards and failed “to demonstrate progress on board diversity,” it said in a statement. As part of this initiative, it launched the SPDR SSGA Gender Diversity Index ETF SHE, +0.10% an exchange-traded fund that only holds companies where women serve in positions of power. It also installed the popular “Fearless Girl” statue in the financial district of Manhattan, where it stares down the iconic Wall Street bronze bull.
The asset-managing giant has been accused of some hypocrisy on this issue; in October, State Street Corp. STT, -0.10% agreed to pay $5 million to settle allegations it discriminated against hundreds of female employees. Of the 10 current members of State Street’s board, three are women.
According to the statement, State Street Global Advisors reached out to nearly 800 companies in the U.S., the United Kingdom, and Australia with all-male boards over the past year, urging them to increase the diversity of the boards and threatening to vote against the boards if they didn’t.
The initiative has shown some signs of progress. Per FactSet, 20% of companies in the Russell 2000 RUT, +0.79% have no women on their board, compared with 23% last year, prior to State Street’s mandate. Half of companies have boards that are overwhelmingly dominated by men, meaning the percentage of female directors is 15% or less. Last year, however, that was true of 58% of Russell 2000 components. (Only 10 companies in the Russell have boards that are majority female.)
According to BofA Merrill Lynch Global Research, just 22% of board members for components of the S&P 500 are women.
“We are proud of the fact that 152 companies have placed women on their boards in just the last year. However, there is still important work to be done. The 152 leaves more than 600 companies in our original target universe that have still taken no action,” said Rakhi Kumar, head of ESG investments and asset stewardship for State Street Global Advisors. “We will continue our engagement and voting efforts in 2018 as we look to make additional progress on this important issue.”
ESG stands for environmental, social, and corporate governance. While there are funds with an ESG slant, by tilting their portfolio holdings toward companies that score high on those metrics, large passive-investing firms like State Street have recently become more aggressive in advocating for such measures.
Related: ‘Sustainable’ funds outperformed the broad market in the recent correction
Passive funds mimic the performance of underlying indexes like the S&P 500 by holding the same securities they do, and in the same proportion. This is in contrast to actively managed products, where the components are selected at the discretion of a manager. Because passive firms essentially have no choice about what they choose to invest in, they can use their increasingly sizable weight as shareholders to push for changes, something they have been increasingly active in doing.
In addition to State Street’s push for diversity, Vanguard last year called for both better disclosures about climate risk and more diverse boards. Recently, in the face of high-profile mass shootings, passive firms like BlackRock Inc. BLK, -0.22% have said they would speak to the weapon retailers in their portfolios about how they monitor firearm sales.
Corporate diversity is widely expected to remain a primary theme for asset managers and other investors. “We think the #MeToo campaign will lead investors to reprioritize gender issues in their engagements with portfolio companies,” wrote Sustainalytics, a research firm focused on impact investing themes.
“We expect the groundswell of discussion on gender issues to have three main effects for investors. First, we anticipate more analysis about the downside portfolio impacts of discrimination and harassment incidents. Second, we foresee a renewed prioritization of gender issues in corporate engagements. Third, we expect an uptick in gender-based investment strategies.”
In addition to seeing gender diversity as a social good, asset managers also see it as a way to boost their returns. Vanguard, in its open letter calling for more diversity, cited “compelling evidence that boards with a critical mass of women have outperformed those that are less diverse.”
In a note to clients published on Wednesday, BofA Merrill Lynch Global Research wrote that companies with high scores on board diversity and the number of women in management roles “generally saw lower subsequent price and [earnings] volatility and higher subsequent [returns on equity] than those with low scores.”
Don’t miss: A quick path to 3% U.S. growth: Economists say get more women into workforce
Investing with gender issues in mind has been a hot area on Wall Street, with assets dedicated to such strategies growing at an annualized rate of 81% over the past three years, per BofA Merrill Lynch data, which calculated that there was $600 million in assets in such funds. “With a growing focus on ESG and impact investing, these assets should continue to grow, in our view,” it wrote.
Despite that growth, it hasn’t been a winning strategy of late. Over the past 12 months, State Street’s Gender Diversity ETF is up 8.8%. The S&P 500 SPX, -0.05% is up 15% over the same period.
Part of this underperformance could be related to the technology sector, which has been the biggest gainer over the past year and has among the lowest percentages of women in key roles of any primary S&P 500 sector, according to Morgan Stanley, which advocated for looking at gender issues when evaluating companies for their investment prospects.