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Commentary

ESG Investment Program

Second Quarter 2020

Key Takeaways
  • There is a clear business case for diversity, and companies with recruitment, pay equity and executive compensation practices conducive to growing diversity can help build a more just society as well as achieve better financial performance.
  • Promoting informal networks within a company, in which mentorships or other internal structures increase visibility, experience and opportunity for minority groups, can help support diversity in the workforce and social equality at large.
  • Overall disclosure of racial data remains a challenge, especially in the United States, with relatively few companies in the S&P 500 reporting racial diversity data.
Promoting Social Equality Through Active Engagement

ClearBridge’s ESG mission for over 30 years has been to continually improve the integration of our ESG analysis into fundamental research and portfolio construction, as well as use engagements with companies and proxy voting to drive positive change and reduce risks. That change includes the promotion of social equality and the economic equality that supports social equality, as well as responsible environmental and governance practices.

Stay-at-home orders have not reduced our contact with portfolio companies in 2020 — in fact, we have increased our engagements. Given there is currently very little disclosure by most companies on racial diversity, to scope out innovative practices our analysts have been reaching out to companies in our coverage that we consider best-in-class in sustainability and asking them how they are thinking of diversity as a key component of a strong human capital pipeline. Our approach has focused on gathering information in the service of three main goals: 1) spurring managements to think about racial diversity; 2) motivating companies to track diversity by candidly assessing their company’s workforce profile and to be transparent about it externally; and 3) sharing insights, such as the value of informal networks within a company, in which mentorships or other internal structures increase visibility, experience and opportunity for minority groups.

 

"Despite EEO laws, voluntary detailed diversity disclosure to shareholders has been hard to come by."

 

In renewing our discussions with managements on solutions that public companies can offer to disparities of social, and in particular racial, inequality, we have been encouraged by a universal acknowledgment of the problem. And in general, leaders are aware there is more to be done: according to a recent survey by PricewaterhouseCoopers, only 16% of directors scored their companies as “excellent” in recruiting a diverse workforce, 15% believed they were excellent at developing diverse executive talent and over 80% thought their companies should be doing more to promote gender and racial diversity. Common hurdles cited for increasing diverse representation include difficulty sourcing talent up the pipeline and unconscious bias, while experts contend that more networking opportunities would help alleviate these issues. Our outreach has offered insight into a mosaic of challenges in addressing racial inequality, and it has also offered solutions we believe range from good starts to exemplary.

Lack of Diversity Data Is a Challenge

While diversity is a frequent focus of our engagements, we tend not to ask questions specifically on any one group of employees; rather, our focus is on all employees being treated fairly. We look for benefits, policies and practices that support an inclusive culture for training and advancement opportunities for all employees as a key stakeholder group. We ask about racial and gender representation in management, boards of directors and C-suite executives and about what diversity policies are in place. But overall disclosure of racial data remains a challenge, especially in the United States, with only 4.4% of companies in the S&P 500 reporting racial diversity data (Exhibit 1).

Companies with global operations may face difficulties tracking data around ethnicity in certain countries due to local rules and permissions to ask for such disclosure for privacy reasons to avoid discrimination. Ethnic statistics are often forbidden in France, for example, and are the subject of intense sociological debate. Companies that are unionized tend to be color blind on racial lines: union members get treated equally.

Nevertheless, we are happy to see many companies we engage with not only thinking about diversity in a meaningful way, but also tracking and disclosing diversity metrics. This is encouraging because while U.S. Equal Employment Opportunity laws have for decades required disclosure of diversity data, voluntary detailed disclosure to shareholders has been hard to come by.

Exhibit 1: Disclosure of Minority Employee Data Remains Low


As of June 12, 2020. Source: J.P. Morgan, Bloomberg / Europe: BBG Europe 500 firms; USA: S&P 500 firms. Courtesy J.P. Morgan Chase & Co., J.P. Morgan’s ESG Wire, Copyright 2020.

The Business Case for Diversity

There is a strong and growing business case for gender, ethnic and cultural diversity in corporate leadership as shown by a recent McKinsey analysis, "Diversity Wins: How Inclusion Matters." In terms of profitability, the most diverse companies are now more likely than ever to outperform less diverse peers. In 2019, top-quartile companies outperformed peers in the bottom quartile by 36% in profitability, up from 33% in 2017 and 35% in 2014. As McKinsey has found before, the likelihood of outperformance continues to be higher for diversity in ethnicity than for gender.

Companies with diverse management teams have almost 10% higher operating margins than those with below-average diversity, according to a Harvard Business Review study. Boston Consulting Group found that diverse management teams were more innovative than less diverse ones, judging by revenue from products and services launched within the past three years (a proxy for innovation). The study found this innovation advantage meant better overall financial performance.

Finding and Sharing Leading Recruitment and Pay Equity Practices

Recruitment and pay equity practices are key parts of human capital management and a frequent topic of discussion with our portfolio companies. We have, for example, discussed with Intel its establishment of the “Rooney Rule”: in the program, hiring managers are required to interview at least one person of color for a job as a way to get talented people in front of managers that may otherwise have been overlooked for systemic or discriminatory reasons. The company noted this was a way of bypassing more subjective (and thus discriminatory) promotions and forced accountability on managers that systematically bypass qualified minority employees.

Intel has also created a hotline that allows underrepresented minorities to call with questions or concerns about their immediate managers or just to get help with career choices/decisions. Intel had data that showed people that used the hotline had lower churn than employees that didn’t as it provided them a way to discuss more passive forms of discrimination from their immediate management and also provided a more centralized form of mentorship (as the company pointed out, one of the issues with career advancement was that underrepresented minorities tend to have fewer informal mentorship opportunities and networks than others).

 

"It can be both good business and social policy to adapt stores to minority community needs, tailoring staff to reflect the community."

 

Intel also tracks cohort data to ensure that underrepresented minorities continue to proceed through the organization. Some companies explain lack of diversity in management by pointing to efforts in their infancy and noting the time it takes for them to become effective, but that ignores the fact that while entry level hiring decisions may increase diversity/inclusion, career progression tends to be more limited. By tracking and providing cohort data, it highlights progress in real time, rather than just pointing to an indefinite point in the future for progress to be more evident to shareholders.

ClearBridge holding Microsoft’s recent $150 million investment in diversity and inclusion is a broad-based move to support African American leadership both internally and at its suppliers and partners, and to extend access to capital and related programs to the African American community generally over the next three years. This adds to the company’s already relatively strong and growing gender-focused diversity program to encourage STEM careers among females, offer access to technology skills and training at the high school level and to offer training camps for young females in less affluent areas across the U.S. Microsoft is a leader among software peers in tracking the data on gender and race role and pay differentials within the company, although it has a way to go to obtain the same level of data internationally as it has domestically.

Linking Executive Compensation to Inclusion Metrics

Linking executive compensation to inclusion metrics can go a long way to incentivizing leadership to think about and track diversity initiatives. Intel, for example, has linked a portion of executive and employee compensation to corporate responsibility factors, including operational goals such as advancing women in senior leadership and building an inclusive culture. In 2020, its operational goals were redesigned to include metrics related to diversity and inclusion, as well as employee experience, climate change and water stewardship.

Diversity Programs Can Take Many Forms

First Republic Bank (FRC), a large regional bank focused on high net worth clients and a ClearBridge holding, has some of the better disclosures regarding female and minority representation within the financials sector. In our conversations with FRC, we have also discussed diversity programs it has found valuable. In addition to establishing a Diversity Equity Inclusion Council, FRC has participated in internship programs like INROADS (places talented, underserved youth in business) and supported diversity-focused foundations such as Posse (recruiting/networking events for undergraduate students) and 10,000 Degrees, which makes scholarship funds available to students from low-income backgrounds. FRC has also created a Culture Carrier Roundtable, which is a program to reveal how diverse perspectives underpin the company’s culture and shape its growth. The program has grown to over 1,100 participants, or 25% of the company’s workforce, since its 2010 inception.

CVS Health, another portfolio company, approaches racial equality both internally, as it pertains to employees, and externally in the targeted work CVS does for communities that are underrepresented in terms of health access. CVS has, for example, developed Colleague Resource Groups, groups of employees with shared interests or affinities with goals that help the organization. Groups include the Black Colleague Resource Group, which promotes inclusion, networking, community outreach and mentorship, Juntos, a multicultural organization of members of Latin ethnicities, Pride+, focused on inclusion for LGBT employees, as well as groups focused on recognizing American Indians and Alaska Natives, environmental awareness, women’s leadership development, fitness, faith and more.

CVS illustrates the opportunity and obligation of health care companies to enhance health at a societal level. CVS has also undertaken large-scale efforts to improve the health of underserved communities. Its hallmark program, “Project Health,” offers in-store health screening to large numbers of people, largely ethnic minorities, in underserved communities, then helps connect those people with primary care providers and clinics. CVS works with local health clinics and government-sponsored community health centers to enhance local access to quality care. CVS also supports local food banks to address nutritional insecurity, which can have significant health implications. During the COVID-19 pandemic, CVS is making a concerted effort to set up testing sites in underserved communities.

In addition, in what is both good business and social policy, CVS adapts stores to minority community needs, tailoring its store assortment and staff to the ethnic makeup of local communities. The company emphasizes hiring store managers, pharmacists and pharmacist technicians to align with local demographics and languages spoken, particularly Spanish.

Biotechnology company and ClearBridge holding Biogen has created strategic committees on diversity and inclusion (D&I), as directed by the CEO. The focus areas include: building inclusive talent systems and disrupting bias in those key talent areas of deficiency; the directive that everyone owns D&I in each division; and health disparity and equality by seeking meaningful lasting change for patients.

Biogen starts by creating programs for where it wants to see a shift in representation and shifting coverage. One example is a focus on women in leadership through structured programs, since only 11% of women are represented on life science company boards. Another area of focus is racial and ethnic minority representation, by supporting diverse candidates to go through The Partnership, Inc. program, a leadership development program for multicultural talent. Roughly 80% of program alumni have stated the experience has helped strengthen their professional networks, guide them through organizational cultures and improve their managerial skills. Biogen has been driving health equity and disease treatment by trying to understand how culture impacts health care decisions and reaching out to underserved patients in terms of medical communications. And from an educational standpoint, through its Community Lab, Biogen is exposing underrepresented high school and middle school students through a biomedical sciences career program.

In terms of diversity and equality, 40% of Biogen employees are millennials, and they have indicated to the company that they are focused more on intersectionality with multiple identities, meaning they don’t want to be identified only as a person of color, but as a millennial woman of color in the LGBT community, for example. 

Conclusion

Supporting the advancement of everyone’s right to live in a safe, respectful and just society is a key element in the long-term sustainability of a business. Many high-quality companies such as those ClearBridge seeks out, for example, have diversity recruiting and inclusion practices as well as policies to allocate contracts to minority-owned businesses. Many of these companies are further focusing these efforts, while others are still in the early stages of developing them.

Engaging on company efforts that we believe promote social and economic equality, both internally and in the communities in which they operate, has always been an integral part of ClearBridge’s ESG efforts. Whether it is discussing and sharing best practices on community investment and job creation, financial inclusion and access, human capital management (including recruitment, retention, diversity and inclusion), or supply chain labor management, we will continue to factor these considerations into our analysis as we look to enhance the long-term sustainability of our portfolio companies and help build a more just society.

Deepon Nag

Senior Analyst - Technology Hardware
11 Years experience
4 Years at ClearBridge

Miguel del Gallego, CFA

Senior Analyst - Financials
20 Years experience
19 Years at ClearBridge

Marshall Gordon

Senior Analyst - Health Care
20 Years experience
12 Years at ClearBridge

Mary Jane McQuillen

ESG Head, Portfolio Manager
24 Years experience
24 Years at ClearBridge

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  • All opinions and data included in this commentary are as of the publication date and are subject to change. The opinions and views expressed herein are of the author and may differ from other portfolio managers or the firm as a whole, and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither ClearBridge Investments, LLC  nor its information providers are responsible for any damages or losses arising from any use of this information. 

  • Past performance is no guarantee of future results.