Goldman Sachs – one of the world’s largest and most influential investment banks – has long been an overwhelmingly male-dominated company operating in the overwhelmingly male-dominated finance industry.
Ironically it is this reputation that makes its January announcement at the World Economic Forum Davos, Switzerland even more interesting. Goldman Sachs CEO David Solomon said the investment bank would no longer help a company raise money and list its shares on a stock exchange unless it had at least one “diverse” board member. Diversity did not only mean more women, although that was the initial focus.
It is easy to be cynical. The initiative doesn’t apply to businesses in Asia, Latin America, or the Middle East, where all-male boards are more prevalent. Also, many would argue one female board member doesn’t set a particularly high bar.
But let’s set the record straight. Goldman Sachs’ acknowledgment of board diversity strongly supports the idea that diversity makes financial sense. The thinking has made it into the mainstream.
The evidence is compelling. In 2015 management consulting firm McKinsey released research covering 366 companies across a range of industries. It found that companies in the top quartile for gender or racial and ethnic diversity are more likely to have financial returns above their national industry medians. Companies in the bottom quartile are statistically less likely to achieve above-average returns. And diversity is probably a competitive differentiator that shifts market share toward more diverse companies over time.
Correlation of diversity and better returns does not necessarily mean that one actually causes the other. However, such causation could exist. A more diverse company is, we believe, more likely to win and retain top talent, to better understand its customers, to have higher employee satisfaction, and to have more robust decision making. These should lead to higher productivity, a stronger brand, and increasing returns.
This, in turn, suggests that other kinds of diversity – for example, across age, culture and life experience – are also likely to bring some level of competitive advantage for companies to attract and retain talent.
So, is this tokenism? It is a criticism that is especially relevant in New Zealand. Even though as a country we generally regard ourselves as fair and inclusive, when it comes to public company boardrooms we haven’t been. According to the advocacy group Global Women, in 2019 nearly 20 percent of New Zealand listed companies had no women on their board. New Zealand was an outlier compared to the US (2.6 percent), Australia (4.4 percent), and countries where every listed company has at least one female board member (UK, France, Finland, and Italy).
Ironically, Goldman Sachs’ position closely reflects our own. When we launched our ethical KiwiSaver scheme CareSaver in the middle of last year we said we would only invest in New Zealand companies that had at least one female director on their board. We faced some criticism for not setting the bar high enough.
We thought through the issue to balance competing views – the need to maximise investment returns, the desire to act ethically, and the counter view that quotas are never appropriate. If a quota for women is justified why not for youth or people with a minority ethnic background or perhaps even sexual orientation? Insisting on at least one woman per board, in our view is not a perfect solution but firmly puts the issue on the agenda in New Zealand.
We believe that board members of listed companies should be appointed on merit, and board diversity is important for better decision-making. That comes from a wider range of perspectives helping navigate future risks and opportunities for a business. We’d argue that this in turn means taking the ethical approach should deliver better financial returns.
Goldman Sachs agrees that setting the (admittedly low) bar of one female board member on a public company board is both fair and good financial sense for shareholders.
The question isn’t ‘should we do this in New Zealand’ – the question is, in a country where we value fairness and being forward-thinking, why haven’t we done this already?