Many workers would like to believe the profit motive can be a strong incentive for corporate kindness
By John Foley
LONDON (Reuters Breakingviews) — Companies that put an emphasis on equality for gay and lesbian employees perform better in the market. This finding, revealed by Credit Suisse in a report on April 15, is heartening. Many workers, regardless of their sexual orientation, would like to believe the profit motive can be a strong incentive for corporate kindness. It's just not that simple.
The Swiss bank discovered that its basket of 270 companies, selected for their lesbian, gay, bisexual and transgender representation and engagement, outperformed the wider market by 3 percent a year over six years. They also generated cash returns on investment that were as much as 21 percent higher. By that measure, inclusive policies are a no-brainer. The activism of companies speaking up against anti-LGBT legislation, like PayPal in North Carolina or Salesforce in Missouri, would be justifiable as a straightforward financial decision.
The big problem with the research is one that haunts most arguments for workplace diversity: establishing cause and effect. To take an absurd example, companies in the FTSE 100 whose names include the letter K have performed 31 per cent worse over the past decade than the broad index. Presumably, that's coincidence. Sometimes numbers can lead in bad directions. Credit Suisse also found its 270 LGBT-friendly companies traded at a 10 per cent price-to-earnings discount to the others.
It's nice to think that happy employees, even if they cost more at first, will deliver more value in the future. Maybe they don't always, though. British sportswear retailer Sports Direct and U.S. online retail titan Amazon, both criticised publicly for tough working practices, have given investors one-and-a-half times better annual returns than Google over the past five years.
Being a good corporate citizen thus requires something more than a free market and selfish investors. One thing that works is a leader prepared to stick her neck out. Take Google's decision to pull out of China in 2010 rather than censor its search results, driven by the strong free speech beliefs of its founders Sergey Brin and Larry Page. Investors had previously resisted motions to stop self-censorship. The sexuality of openly gay Apple boss Tim Cook, or HSBC U.K. chief Antonio Simoes, are entirely incidental to their jobs, but their decision to be visible sends an encouraging message.
Elsewhere, there are examples of how companies need a push from the outside. Auto emissions are a clear case of companies being forced to do good. Volkswagen got into trouble for faking emissions data from U.S. environmental regulators, but there was an economic incentive to cheat: consumers don't pay more for cleaner cars. Low-emissions vehicles are becoming the norm because regulators insist on it — not because it's more profitable.
Tax avoidance is similar. It's perfectly rational for companies to move profit into lower-tax jurisdictions. Shareholders would be disgruntled if they didn't, which is why the Tax Justice Network reckons a quarter of all U.S. multinationals' gross profit is funneled to companies with no or low tax. A push to make multinationals show their tax breakdown is sensible. While it doesn't outlaw aggressive tax planning, it may invoke the profit motive in another way, by creating the fear of being shamed.
Society's views on LGBT equality have been changing dramatically, and with any luck will continue to do so. Rather than wait for investors to make it so, regulators could help by asking for better disclosure, so that companies feel more pressure to keep up with rivals. A start would be to make them publish in their annual reports how many of their staff anonymously identify as LGBT, at least in countries where asking is permitted. They could say how many of their board identifies as LGBT too.
No one number can tell the full story, and perhaps the free market really will one day reward companies for being virtuous. Until then, a shove would help.
CONTEXT NEWS
• Companies that emphasise equality for gay, lesbian, bisexual or transgender employees have outperformed the MSCI All Country World Index by three per cent a year over the past six years, according to a study by Credit Suisse published on April 15.
• The Swiss bank's analysts constructed a basket of 270 companies with LGBT leaders, high rankings in diversity-related indices or employees with high-profile membership of LGBT business networks, and found that the basket's performance beat the broader index, and a separate sub-index of North American, European and Australian companies.
• The study also found that the 270 companies generated a higher rate of cash return on investment, beating other companies by 10 per cent to 21 per cent. Their stock market valuations, however, were lower. The companies traded at a 10 per cent discount on forward price-to-earnings multiples, and were neck-and-neck in price-to-book multiples, despite having higher returns and profitability.
