Stewart Investors manage investment portfolios on behalf of our clients over the long term and have held shares in some companies for over 20 years. They launched their first investment strategy in 1988.
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Exploring the glass cliff: Women CEOs and turnarounds
RQI Investors has built a powerful data set for gender diversity, based on the MSCI World universe of companies spanning over 23 Developed Markets countries, with over 1,500 constituents. It looks beyond easy-to-find board diversity data, to include leadership team composition.
The first report based on the data set was launched in 2022 and titled ‘Beyond Lip Service: tracking the impact of the gender diversity gap’. It showed that higher female executive participation improves company performance, while creating potential returns for investors.
In 2023, RQI Investors undertook further analysis of the data set. It looked at the time series covering the period 2013 to 2022, and explored the correlation between gender, CEO appointments and stock price, and ESG ratings. Analysis found that when underperforming companies appoint a female CEO, they are more likely to turn around investor returns, while male appointments are more likely to continue the underperformance. Moreover, the data showed that female CEO appointments have a neutral impact on ESG risk, while male appointments are associated with subsequent increases.
Women drive turnarounds
CEO appointments are often associated with a fall in equity performance in the run up to an appointment. The data shows that in these situations, female CEO appointments are often associated with greater underperformance (11% below the market) prior to appointment, compared to male CEOs (4% below market).
Once in the role, however, women oversee a recovery in the ensuing two years that more than doubles the company’s shareholder returns. By comparison, male CEO appointments stabilise the falling performance, however there is little improvement in the following two years (figure 1).1
Figure 1. Stock excess performance1 around CEO appointment
Source: MSCI, RQI Investors, Data from 1 January 2013 to 31 December 2022.
Male CEOs less effective in reducing ESG risk following appointment
RQI Investors then examined the change in ESG risks (controlling for the market wide and industry effects) of developed market companies following the appointment of male and female CEOs, and their cumulative change over the ensuing three years.
The data showed that over time, ESG risk relative to industry peers reduces over the three years following a new CEO appointment. However, following a female appointment, the reduction in risk is over four times larger than their male counterparts over the same period (figure 2).
Risk is assessed using Sustainalytics’ ESG Risk Rating2, which measure a company’s exposure to industry-specific material ESG risks and how well a company is managing those risks. It measures the excess risk relative to a company’s industry peers and we examine those differences over time.
Figure 2. Firm level ESG risk following CEO appointment
Source: MSCI, RQI Investors, Data from 1 January 2013 to 31 December 2022.
RQI Investors is using data sets like these to better understand how gender diversity can improve returns in its portfolios.
1 Stock excess performance is the difference between a stock’s return and a given benchmark. The benchmark used here is the MSCI World Index.
2 Data is only available from 2015 for ESG Risk rating.
Australian Small and Mid-Cap Companies
The Australian Small and Mid-Cap Companies team frequently discuss ESG issues with senior management and board members during the team’s extensive engagement with companies. The team seeks to ensure that management are aware of, and accountable for, the management of material ESG issues. These discussions contribute towards the team’s overall investment view and are an integral part of the team’s investment process.
As minority shareholders, it is pleasing to support ESG initiatives and witness improvements in the companies in which we invest. A mining company, which is a key holding in the mid-cap strategy, has steadily improved its ESG practices over several years, which the team has fully endorsed. For example, the mining company has improved its gender diversity across all levels of the organisation, resulting in the workforce now comprising almost 30% women, including more than 40% female representation in the senior executive team and the board. The company’s approach to ESG considerations has helped it become one of the leaders in the mining industry globally and it remains a core holding in the mid-cap strategy.
Challenges
While gender diversity data is widely available for company boards, it is less straightforward to find easily comparable data on management gender diversity.
There are also many more aspects of diversity than just gender, but reporting on these factors is limited. There are also the sensitivities of asking employees for such data about themselves, so there is more work to be done for investors to understand the landscape as it is today, and what appropriate targets we should set.
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