SRI/ESG/CSR Research


Four Winners and Four Losers in Corporate Diversity

This article was originally posted on the Street Insight section of 1/27/2006 10:26 AM EST

A look at the Fortune 100 yields data you can trust.

This diversity indicator helps investors separate the winners from the losers.

As an investor with long experience in social responsibility, I've learned to focus on studies that are quantitatively robust and which offer actionable advice. I recently had the chance to review a study on diversity at boards of directors from Chicago United, which examined all of the firms in the Fortune 100. Chicago United concluded that:

Companies with diverse boards of directors had an average return on equity of 25%.

Companies with non-diverse boards had an average ROE of 9%.

Four Winners and Four Losers

Now, these are interesting findings, but the real question is: How can I profit from these results? Well, Chicago United highlighted the most diverse and the least diverse companies from its study. The companies with diverse boards of directors were:

Citigroup (C), PepsiCo (PEP), Target (TGT) and United Parcel Service (UPS).

Those without diverse boards of directors were:

Costco Wholesalers (COST), Hewlett Packard (HWP), Goldman Sachs (GS) and Sprint-Nextel (S).

The Positive Impact of Diversity

My advice is simple: Buy the former. Sell the latter. Why? Companies with diverse boards are more likely to be more sensitive to current and future demographic trends. These trends have real and direct business impacts. These companies are flexible, more agile enterprises. Thus, board diversity can be a lead indicator of higher profits and stock prices.

Avoiding Lawsuits

Companies with diverse boards are probably less likely to face discrimination lawsuits. I note, however, that both Citigroup and Target have faced allegations of discrimination in their main lines of business: Citi with respect to making loans in minority neighborhoods, and Target with respect to minority hiring and promotion practices.

Possible Exceptions to the Rule: Goldman and UPS

As with any investing theory, one must be careful here. I'd think hard about selling Goldman. Goldman appears to have a printing press in the basement of their 85 Broad Street headquarters that churns out currency. And as Street Insight contributor Scott Rothbort has noted, Goldman stands to gain from continued strength in M&A and the end of rate hikes from the Fed. Thus, Goldman may be able to fight demographic trends a little longer.

I'd also point out that fourth-quarter earnings at UPS jumped 21% from year ago levels, as contributor Ben Thomas mentioned on the earnings call yesterday. UPS posted strong volume and pricing trends, and Ben is long the stock. But he did note the possibility of a pilot's strike, and troubling increases in pension and health care costs. Both of these are examples where a lack of harmony in the workplace may hurt profits.

Closing Thoughts: Diversity Is One Variable Among Many

No theory is perfect. Several factors influence corporate profits and stock price performance, and board diversity is just one variable. In the end, the only indicator that matters is stock price, and we only know this after the fact. But board diversity is a useful factor to consider when analyzing companies and when deciding whether to buy or sell a stock.

William Michael Cunningham


  • B.A. (Economics) , MBA (Finance), A.M. (Industrial Organization)