The social aspect of corporate culture reflects how a firm treats its employees and can also add value and enhance a company.

“State Street Global Advisors believes that the single most important driver of long-term value is a strong, independent and effective board exercising high-quality oversight. In turn, we have long appreciated the positive correlation among diversity at the workforce and board levels, effective boards and oversight and sustainable long-term financial performance. As such, whether through our long-standing stewardship focus on gender diversity and board effectiveness, amplified by our Fearless Girl campaign, or the integration of Sustainability Accounting Standards Board diversity metrics into our Environmental, Social and Governance (ESG) scoring system, R-Factor, we have called on companies to disclose more details regarding the diversity of their boards and workforces,” Rick Lacaille, Executive Vice President, Global Chief Investment Officer, State Street Global Advisor, said in a research note.

Lacaille noted that as long-term investors, State Street is convinced that the lack of racial and ethnic diversity and inclusion poses risks to companies that senior managements and boards should better understand and manage.

Research has shown that groups composed of people from similar backgrounds refrain from challenging prevailing views, along with the positive impacts that diverse groups can have on improved decision making, risk oversight and innovation. Other studies have revealed that management teams with a critical mass of racial, ethnic and gender diversity are more likely to generate above-average profitability. Those that promote workforce diversity and inclusion through transparent hiring, promotion and wage practices have seen improved productivity, revenues and market share.

On the other hand, companies with limited diversity are more likely to underperform peers and face reputational risks.

While companies in the United States are required by to track racial diversity data, only 4% of Russell 1000 companies publicly share detailed data on their employees’ gender and ethnicity.

“We encourage companies to take steps that ensure that diverse talent pools are sourced, supported and developed. At the board level, the talent pipeline is often narrowed by focusing on job experiences, such as being a former CEO, at the expense of the core competencies that strong directors possess. Companies that intentionally expand their search criteria often cite that there is already a broad pool of racial and ethnically diverse talent available,” Lacaille added.

For more news and information, visit the ESG Channel.