Why diversity doesn’t mean share price equality

Diversity issues have exploded into the global zeitgeist over the past few months as Black Lives Matter protests have rocked cities around the world. From an investment perspective, diversity is an interesting concept. There have been a lot of studies into the diversity of gender and race on company performance with, well, diverse results.

The arguments against

On the negative side, more diversity can lead to less communication, increases group conflict, lower satisfaction and increased staff turnover.  

There are theories of tokenism that suggest that when minorities first enter an occupation that increased visibility creates expectations that are difficult to perform. Or that stereotypes increase the pressure on minorities leading to underperformance.

The stock price arguments focus on time-series analysis, showing that adding women to a board does not, on average, influence stock performance positively. In some studies, the share price is actually negatively affected, even while profitability is unaffected.  

The arguments for

On the positive side, group diversity increases network connectionsresourcescreativity, and innovation.

Creativity and innovation are particularly important from an investment perspective because they contribute to a company’s ability to create and maintain a competitive advantage. Which in turn is fundamental to the sustainability of a company’s returns.

Evidence for this case comes from cross-sectional (rather than time-series) investment studies. These show that companies with more diversity have share prices that perform better.

Context first

First, I need to give you some background on how we treat ESG (Environmental, Social and Governance) investing. 


From a quantitative perspective, corporate governance is a factor that outperforms. i.e. companies with good corporate governance tend to perform better than those with weak corporate governance.

But, as with all quantitative measures, it comes with some significant caveats.

  • Buying companies with good corporate governance tends to work more than it doesn’t. Still, there are plenty of counter-examples.
  • Price matters. If I can buy two similar companies at a comparable price, then the one with good corporate governance is more likely to outperform. If, however, I can buy the one with poor corporate governance for considerably cheaper, the advantage disappears.
  • Finally, corporate governance is a subjective measure. There are many shades of grey and weighting assumptions. For example, share structures that give the founders more votes than other shareholders is usually bad corporate governance. Having a large, diverse board with a majority of non-executive directors is good corporate governance. Google (Alphabet) has both – which is more important?  

For governance scores, I prefer to use them as a negative screen rather than a positive one. i.e. bad governance can make a quality score worse and therefore the company needs to be cheaper before I buy it. But I’m not choosing to buy a company with 42% gender diversity over the one with 39% on that measure alone. Many of the governance scores are like that – there is a definite “bad” option, but there is little sense trying to rate the difference between two good options. 


We don’t use social measures much. I find them too arbitrary. Reading about how a company rates on social impact can sometimes have the same intellectual rigour I expect to see in my horoscope.


We treat ethical as an opportunity set problem. There are 1,600 stocks in the MSCI World Index – a common investing benchmark containing only very large companies. If you:

  1. give fund manager A the ability to invest in any stock
  2. give fund manager B the ability only to invest in 800 of the better ethical stocks

You are asking fund manager B to beat fund manager A with one hand tied behind their back.

The good news? Reducing the opportunity set that a fund manager has doesn’t affect performance too much – especially if you are only cutting out a few sectors. There are plenty of periods where fund manager B will outperform.

The bad news? If fund manager A and B have the same skill, you have to expect the ethical one, in the long run, to have worse performance.

Many ethical funds have an all in or out strategy. i.e. you either get all the ethical exclusions or none. Some people think tobacco is horribly addictive and unethical, but gambling is each person’s own choice. Others have exactly the opposite view. For most ethical funds you can either have both sectors or neither, regardless of your view.

Our goal is to give every investor the broadest possible opportunity set.  So we run every investor and superannuation client through a separately managed account where they can make these choices for themselves from over 30 different options:

We find about 2/3rds of our investors choose to exclude at least one sector. But the benefit of individual exclusions is that our Tobacco-less investor still has 99% of stocks in our portfolio and our Gamble-free investor has (a different) 99% of stocks. Each has the broadest opportunity set available.

Don’t congratulate yourself too much

Positive investing is difficult – finding stocks that are good quality and cheap is hard enough. If you find a stock with very positive ethical characteristics that is only average quality and the stock is very expensive should you buy it anyway, expecting a poor return?

There are better arguments made to exclude stocks that don’t align with your values. However, don’t congratulate yourself too much.

If there is a cause you are genuinely passionate about and you want to support companies in that area, there are four monetary ways you can support that cause, in order of most helpful to least helpful:

  1. Make a donation. Are you trying to help or are you trying to make money? If it is the first then by donating you can feel good straight away, you get a tax deduction up front (rather than waiting to book a capital loss when you sell shares!).  Donating directly to companies is not generally tax deductible – but I’m guessing if your cause is ethical then there will be industry bodies that are tax deductible.
  2. Buy the product yourself. Most companies want more customers rather than more shareholders – and the ones that don’t you shouldn’t be investing in.
  3. Buy shares from the company in a capital raising. That way your money will actually go to funding the company expand or its research and development.
  4. Buy shares on the market. This is the least helpful way of helping the company. All you have done is transferred money to another investor.

How we use diversity in our investment process

For me, more innovation and creativity trump any negative effects of increased diversity.

I also find the tokenism and stereotype arguments disingenuous. These may be issues in the initial years but are not reasons to avoid diversity forever.

I find the difference in the share price performance studies understandable. If companies with more diversity are more innovative, then companies with more diversity will tend to perform better. Which the cross-sectional studies show.

I don’t think this is incompatible with the time-series findings. i.e. that adding a woman to a board doesn’t improve share price performance. I suspect those studies are over-estimating the power of a single director in a 10+ person board. And there are a lot of companies where the entire board has little control over the direction of the company, let alone a single director. To put it another way, a diverse board and management is a sign of an innovative and creative company. Adding more women to a board will not immediately (or maybe ever) make a company more innovative.

I am also keeping in mind that all the focus on diversity might also create false signals going forward. It may be harder to see genuinely diverse and innovative companies vs the ones with token appointments and a politically correct front.

Diversity as an ethical choice

In the past, we have treated diversity as a measure of governance. A relatively minor warning signal in our overall assessment of the quality of a company.

Nucleus Ethics

And we are not looking to change that. Diversity still appears to be a good (but far from infallible) indicator of more innovative companies.

However, increasingly we are finding for some clients a lack of diversity in companies is more important than that.

So, we have also added diversity as an ethical exclusion, giving investors the option to strike companies from their portfolio that don’t have enough gender diversity in their board and management team.


We won’t congratulate ourselves too much

My goal as a fund manager is to invest in companies that I think have an appropriate mix of quality and value. An important part of that is considering the potential impact on share prices of companies in ethically dubious industries, which I try to do without too much moral judgement.

In a world of cancel culture, I don’t think fund managers should be making non-investment “cancel” decisions on behalf of clients. I do however think people should be empowered to make the ethical decisions for themselves both in superannuation and in ordinary investments.

If you do “tick the box” to exclude stocks with diversity issues from our portfolios, keep in mind that this is only a small step.

In fitting with our philosophy, if diversity is something you feel strongly about then you should also be asking yourself whether there is a better way to help:

  1. Can you make a donation?  Of see here or here for some options. Or donate your time to lobby boards and legislators.
  2. Can you boycott the product? Companies care more about people not buying their products than they do about you not buying their shares. It makes no sense to refuse to buy a company’s shares if you use their shampoo every day.
  3. Are you buying the diversity product? As a manager yourself, or in your personal life.

Don’t get me wrong, I want you to avoid buying shares in companies where you don’t agree with the ethics.

But if you truly want to make an impact, don’t stop there.


Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

Follow @DamienKlassen on Twitter or Linked In

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796.

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  1. Rowan McKenzie

    Why is diversity always about European or North American companies getting foreigners, never about African or Asian companies accepting Caucasians? Do we ever measure Chinese companies based on ‘diversity’ or do we understand that it is a completely made up and irrelevant measurement?

    • Stewie GriffinMEMBER

      Diversity is simply code for fewer white people – it produces both a tower of babble and conflicting ethical approaches.

      The ‘innovation’ is a complete furphy – virtually EVERY single advancement that we enjoy today has come from the culture and people that our corporations and business and academic ‘elite’ are working their hardest to diversify away from. All the literature in support of ‘diversity’ comes from Globalist ‘Think Tanks’ that work hand in glove with other actors pushing for mass migration and multicult.

      If you want innovation, check out the list of Nobel prize winners – that will fully indicate who is responsible for advancing our understanding and generating productivity enhancing technology.


      Diversity is one filter I would only be interested in, so as to take the opposite position in.

  2. More diversity within Board and management does not mean more innovation. It’s more likely to mean more virtue signalling.
    Diversity in essence means division. Unity can be more important. Diversity is a sacred cow which no one these days dare challenge.

    • Often ‘diversity’ is rather shallow. It will be multi-ethnic across both sexes, but all from a similar background (wealthy, top schools, same networks) with similar views (looking out for themselves).

  3. Diversity becomes entertained when a company has more money than sense. The diversity crowd enter often via HR. They then hire a diverse group that look strangely identical to themselves. Only successful companies have the resources to entertain this crowd. That’s the correlation between share performance and diversity statements. It’s temporary. Incidentally, that is why the universities flush with cash attracted them. Universities are now broken.

  4. ‘Diversity’ has a very specific meaning in some fields, but has become a meaningless buzz word as it is used to imply a nebulous and largely unmeasurable virtue – that some seem hell bent on measuring anyway.

    You can have a diversity of: crime, violence, morality, intelligence, adaptability, honesty, virtue, greed and dress sense etc etc. That attributes may be ‘diverse’ says nothing about whether they are desirable.

    Instead, ‘diversity’ is used as a code for being inclusive of tribes, groups and self defined identities who ride the ‘diversity bandwagon’ because they missed the competency train (largely). Overall, the notion of “diversity” as a good is deeply flawed in a spectacular way. Should the Nigerian parliament be looking about to balance up its membership with white, yellow and brown faces in order to be diverse? Are coal mines being besieged with women wanting to form a diverse 50% quota of miners? If your industry is high tech manufacturing will you benefit from a diversity of poets, gender studies, dance and mime performers? Will Chinese industry benefit if all of a sudden they became diverse and imported people from Lapland?

    Very largely, ‘diversity’ has become about power and an alternative career path to ‘meritocracy’ that should use measures of competence that are blind to race, religion, sex and skin colour. This is a far better goal.

    When I read business or investment analysis that discusses ‘innovation’ I am struck by how poorly understood it is that breakthrough ideas do not come from diverse groups or boards. The history of science and technology shows us that life changing ideas come from individuals – oddballs, eccentrics and loners. Despite this, to further the corrosive ends of managerialism, we have invented entire systems of thought that attempts to create the image of the board room genius and innovation as a collective enterprise, now dependent upon “diversity”. Breakthrough thinking and invention has always been the stuff of a very small fraction of people in any field. It is well known that 10% of people in any organisation do 50% of the heavy lifting that is productive, but much much less than 1% have the ideas that may change the world. These people tend to have a thoroughly crap time working in any ideologically based and centrally controlled system because they tend to be hated for the crime of opposing the status quo.

    In order to actively harvest such people, increasing diversity will do little unless you have an active selection mechanism that seeks competence – which is almost impossible as genius emerges almost at random and ideas cannot be easily tested for their merit per se. In general, such people are not from a pool predicted by the school dux or academic performers at uni. The only way to capture them is to vastly increase the number (n) of people employed…OR, foster their assent by creating a culture that tolerates a diversity of thought and ideas! This is the very opposite of where we are heading when we enforce faux ideas of “diversity” so that identity-based interest groups can attain “power” without competence and merit.

    Ask the question, would NASA have got to the moon if it had to fill diversity quotas?

    Putting ‘diversity’ before measures of competence and a fair and transparent process of meritocracy will never advance a goal orientated enterprise – unless that goal is to conform to the current political definition of “diversity”. If that’s what people want to do – fine. But don’t pretend that we can revise the history of science and technology to suit the oppression narrative and then blow smoke up everyone’s rear end by pretending this will advance innovation – it won’t.

    Don’t believe me? Well here is something to consider:

    “Out of more than 720 (Nobel) prizes awarded since 1901, more than 130, or about 18 percent, have gone to Jewish laureates. Jews have won almost three times the number of awards won by either Germany or France (including their Jewish winners), and 10 times those won by Japan. Jews comprise only 0.3 to 0.5 percent of the world’s population.”


    The reason for their success has nothing to do with “diversity” – quite the opposite. If anything it is a reaction to exclusion, tribalism and the generation of the quintessential outlier. In other words, the current “diversity” politics seeks to break down the nasty, bitter, repugnant and immoral forces that have given rise to genius and cultures that support it. And that’s not something that the average PC warrior wants to deal with.

    Overall, this is an area that needs an honest conversation should we actually want to get anywhere rather than tugging away at rhetoric that uses hollow euphemisms disguised under layers of dishonestly to appease subjective concepts of modern day virtue.

    • 1 “….because they missed the competency train”.
      Innovation is found by individuals, not groups of minorities.
      And plenty of other good comments.

    • Damien KlassenMEMBER

      I’m trying to find innovative and creative companies.
      These companies are likely to have diverse thinkers and diverse hiring processes so that they don’t end up with all the people that think the same. When I say diversity, I mean diversity of thought rather than racial or gender quotas.
      There is no way of knowing this from outside.
      However, on average (but definitely not exclusively), these companies also tend to have diversity of gender.
      So having diversity of gender is a marker that indicates the company is more likely to have diversity of thought and so also be innovative – but it is certainly no guarantee and only a weak signal. That is as far as the investment side allows.
      Adding more women to a company as lip service to PC issues will not make a company outperform. However, if a company has genuinely changed to try to introduce more diverse thought, one outcome of the process might well be a more gender diverse board.

      I also acknowledge that there are investors who don’t want to invest in companies that don’t have gender diversity for their own reasons not related to investment outcomes. We offer these investors the ability to screen these companies from their own portfolios, the same way we let people screen out alcohol or tobacco or weapons. Not as an investment choice, but as a personal ethical choice.

      • Hi Damien – the intent of what you are doing is perfectly fine, so long as ‘diversity’ as you measure it is indeed linked to ‘innovation’. Much of the merit of this proposition relates to how you define diversity and innovation as distinct from ‘competence’ and ‘insight’. Does competence, inventiveness and insight scale with diversity? Not in my experience – as diversity can also generate much white noise. Competence, inventiveness and insight is rare, patchy in distribution and predicted better by prior success and runs on the board (e.g. prior patents, discovery and invention) and culture (see my prior example of Jewish Nobel prize winners). Even if you look at places such as Oxford University and swoon over how ‘innovative’ this institution is and diverse, few bother to look at the fact that Oxford targets and brings in past performers in a highly strategic, and some might say ‘cynical’ manner. It bares no comparison to recruitment practices in companies if they seek ‘diversity’ sans proven competence. What Oxford ships in by the ton is competence and proven performance based upon merit – then dresses it up as ‘diversity’ to make the Left feel happy with what is in fact elitism of the highest order.

        Diversity and innovation are each much abused terms very often not directly linked to the creation of key enabling or foundational IP or breakthrough thinking that may well have enabled a new industry. Increasingly they are used as part of management babble that is divorced from the generation of ideas and vision. This connection breaks down further when the manner in which corporations acquire IP is understood. Most corporations tend to buy up IP imagined and crafted by others, not produced from within. Most boards would not have the first inkling of where scientific and technical breakthrough thinking comes from, yet seek to trap it like a firefly in a corporate bottle and feed it bread and water. There is a cultural disconnect between the raw grey matter enabling innovation and the business that tries to generate value for a shareholder by purchasing and exploiting it. You need to decide what companies just buy in IP and what companies generate it. i.e which ones are art auction houses and which ones pay artists to paint? In Oz most pay BS artists and auctioneers top dollar.

        The most valuable people in any truly innovative company are the rare types with insight, competence and a scientific and technical knowledge that moves on the cutting edge. Virtually none of these people will be found on a board (because they are not interested and hate this culture and have nothing in common with someone who’s done an MBA or legal degree). And good luck capturing them in a diversity drive that does not filter for competence. The horrible truth is that many of the truly innovative people and inventors would not be welcome in companies that water their diversity gardens and stock them with diversity butterflies. Many such people speak their minds, are eccentric, wear socks with sandals, could not care less about money and are politically incorrect. Some (a great deal) are truly horrible people made more horrible by their obsessions. Go read up on the history of science and technology; Tesla, Edison, Newton, Erwin Schrodinger, Linus Pauling, Alexander Graham Bell, James Watson etc etc would never have been selected to work for an ASX company – creepy middle aged white men, sexists and/or racist.

        And here’s the rub – history shows us that great ideas often come from bad, elitist and insane people. What happens when we ship them out for the nice, tepid and diverse?

  5. However, increasingly we are finding for some clients a lack of diversity in companies is more important than that.

    Not sure what this means. Are you saying that clients are looking for companies with LESS diversity?

    Back to the larger theme, diversity works well for new companies as they find their way and in theory are trying to establish a culture and trying to find the best people. Forced diversity (or diversity for the sake of it) works terribly for established companies (particularly successful ones) where innovation is less important, because of the sense of tokenism and being able to show existing staff what’s in it for them.

  6. turvilleMEMBER

    I think the business world has gone mad. To suggest (as some do) that companies should adopt (not contemplate anymore) 50:50 gender split in senior management regardless of actual capability is ridiculous. The other issue (never discussed) and maybe much more important in context of wealth gap compression is issuance of shares in a company (whether listed or unlisted) to all complying staff (there must be qualifying criteria) – currently that simply isn’t happening and is a very specific critique of the distribution of equity capital

  7. Boards need to be more diverse to reflect their customer base. Time to cast of a few of the rich old boys and replace them with poor people.