The economic case for gender targets

The economic case for gender targets

This article first appeared in the Financial Review on 3 August 2020

I am female and I am an equities portfolio manager.  Citywire counts 12,000 portfolio managers globally (across both bonds and equities) - but only 1,200 female portfolio managers.  So clearly my industry, along with many others, has more work to do when it comes to gender diversity. 

The introduction of targets has been one way to address this but is it a good thing?  When I was promoted to portfolio manager in 2007 there were no gender policies or targets in place and so I never felt that there was any question that I was hired and promoted on merit. Sadly, in today’s environment where targets are more commonplace across a range of industries, that is not always the case.  Whether real or perceived, women can battle against the view that they are seen as token hires. 

So is there a case for targets and how do I think about it in terms of the companies I invest in?  I can see three arguments.

First, there’s the diversity of capability argument.  Increasingly businesses are run via teams, and research* supports the idea that adding women to all-male teams increases group intelligence and performance.  This implies that the sum of the parts can be greater than the individual parts.  What does this imply for hiring targets?

Perhaps because I’m in the finance world the easiest analogy for this is an investment portfolio.  One of the simplest investment strategies is the “60/40 portfolio”.  This is a portfolio of 60% equities and 40% bonds and it seeks to position a portfolio on the “efficient frontier” of risk and returns.  Equities generally offer higher returns but with higher risk (ie volatility), while bonds offer lower risk but capped returns.  Put them together and you get better risk-adjusted returns than you get from either asset class on its own. 

So if you are building that portfolio, there are slots for bonds and slots for equities.  We don’t allow the 60/40 portfolio manager to tilt the portfolio to 90/10 because “there were so many great equities out there and just not a lot of bonds in the pipeline…”  Nor do we say, “that’s ok, we will achieve 40% bonds in our portfolio by taking any low quality bonds.”  No way would we accept that!  It’s the job of the 60/40 portfolio manager to go out and find a collection of great equities AND terrific bonds and put them together.  If there’s slim pickings among the pool of bonds available, we just have to work harder to find the right bonds.  If we want teams that operate on the efficient frontier across a range of attributes, we should be upfront that this requires a certain threshold of women (and other diverse thinkers) on the team.  Setting target ranges is a natural application of this insight.

The second argument is grounded in equity and equality.  Gender diversity is not about women getting access to the good jobs - it’s about opening up all roles to all qualified candidates.  I think there’s real power in the Male Champions of Change model of 40:40:20 which advocates for 40% men, 40% women and 20% open.  This approach is most impactful when it is applied across all departments.  So where are all the male HR people?  Where are all the guys in marketing communications and events?  Those teams would benefit from getting closer to the “efficient frontier” also.  Boys should feel ok if they aspire to be primary caregivers… or to work part time… or to work in the helping industries.  The 40:40:20 approach makes us examine why these ideas feel so foreign to us. It helps us to understand the extent of our embedded gender biases and provides a starting point for breaking down the unconscious bias we bring to so many roles in society.

The really compelling argument for targets is that we know they work.  Too much of the conversation around diversity is that it’s too hard and it can’t be done - and that the trade-offs (in terms of choosing the best candidate) are too onerous.  We need to stop making excuses:  the reality is that corporate change is clearly possible - just look at the “safety revolution”.  We used to think that workplace fatalities were a regrettable reality of heavy industries.  Then we decided those outcomes were unacceptable - so boards set targets and management teams went out and used their ingenuity to find ways to meet those targets - without sacrificing economic outcomes. 

Did boards say, “Please improve safety outcomes if you can, without upsetting your current ways of working?”  or, “Please change safety - and it’s ok if you have to make sacrifices to the quality of your product to do it.”  - ?  Of course not.  The challenge to management was:  go make our workplaces safe - and find a way to do it efficiently and without sacrificing other outcomes.  It will be hard and it will require creative approaches. But this is what senior managers get paid for: innovation and managing hard trade-offs, not just continuing with the easy options that were good enough in the past.


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