Brent Williams, CFA, Senior Research Analyst
The rapid growth of environmental, social and governance (ESG) investing over the past decade has been a galvanizing force in making companies consider the interests of all “stakeholders” in their business decisions, rather than only shareholder interests. In addition to shareholders, stakeholders include any person or entity that has a vested interest with or is directly impacted by a particular company. Primary examples of stakeholders are local communities, the environment, suppliers, customers and employees.
Among factors of interest to these many stakeholders is the fair and equitable treatment of employees, which impacts the social component of ESG. While such fundamental human rights are comprised of multiple factors, diversity and inclusion represent a major component. A massive civil rights movement has brought this topic even further into the forefront in 2020, following the documentation of several incidences of excessive use of force by police. Although there has been steady progress on company diversity and inclusion over time, recent events could result in more rapid improvement in the coming years. Many companies have taken steps to hold themselves more accountable on this topic, and are evaluating and improving internal processes to better fight against systemic racism and gender bias.
With ESG analysis, diversity and inclusion are considered at each level of a company, from the entry level to the executive and board level. Strong diversity at the leadership level is beneficial, as a well-rounded team can understand and relate to an increasingly diverse workforce, navigate sensitive issues related to race and gender bias, and contribute to better company decision-making due to a wider range of perspectives and expertise.
ESG investors are able to track trends in the diversity of company leadership, as this information is disclosed by public companies. According to Fortune, presently there are less than 40 female chief executive officers (CEOs) and just four African American CEOs (all males) within Fortune 500 companies. In other words, these two groups combined lead less than 10% of all large U.S. companies. Although these numbers remain low, they have consistently trended higher over time.
While diversity at the CEO level is likely to continue to grow and potentially accelerate, diversity at the board level may see a faster improvement in the near-term. Historically, the mix of people at the board of directors level has been more diverse. According to an extensive 2019 Fortune study, about one-third of Fortune 500 company board members were females and/or minorities. In many cases, companies are required by government regulation to include minority groups on the board; additional legislative action in the future could expand this. Further, given that board members are directly voted on and approved by shareholders, and on average only serve three-year terms, investors are able to more quickly demand accountability and change. This contrasts with the CEO role, which has a much less standardized process for appointment, and the average large company CEO serves his term for about 10 years, according to recent data from the Conference Board.
In general, companies that rate highly on ESG criteria seem to be well-attuned to issues of systemic racism and gender bias, and take additional action to improve inclusion within their companies.
For more information about D.A. Davidson’s unique and proprietary ESG investment strategies, please contact a D.A. Davidson financial professional.
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