No longer pale, male and stale
Diversity is improving performance, explains David Prosser.
That investment trusts are overseen by independent boards of directors – a unique structure in the collective fund sector – is often cited as a distinctive quality. And in theory, that makes sense. The board is there to hold the investment management team accountable and has demanding legal responsibilities to serve the interests of the trust’s shareholders. Still, whether theory translates into practice depends on the quality of the board.
In that context, new analysis of the diversity of investment trust boards, just published by the investment trust analyst team at Investec, makes interesting reading. There was a time when investment trust boards were dominated by white, middle-aged men, but that’s no longer the case.
When all your directors are cut from the same cloth, there’s more risk of dangerous groupthink.
David Prosser
In fact, more than four in ten (44%) investment trust directorships are now held by women, compared to just 8% in 2010. Over the same period, the number of all-male boards has fallen from 159 to just 12. In addition, almost two-thirds (64%) of investment trusts now have at least one individual from a minority ethnic background, up from 29% as recently as 2023.
This is undisputably good news. From a societal or ethical perspective, you may or may not have strong feelings about the importance of addressing under-representation of particular demographic groups in positions of authority. But what you can’t argue about is the substantial body of evidence suggesting clear links between board diversity and stronger company performance.
The list of academic studies demonstrating this link is a long one. McKinsey & Company, for example, found that diverse boards were 43% more likely to deliver above-average profits. BCG research showed that six dimensions of diversity demonstrated a correlation with innovation. A Goldman Sachs paper concluded that firms with “at least one diverse board member saw a 44% jump in their average share price within a year of going public, versus 13% of companies with no diverse board members”.
There’s also good reason to think that board diversity can protect shareholders from downside risk too. Research published in the International Business and Finance journal suggested that more diverse boards – particularly those with a mix of genders and ages – were less likely to preside over companies that suffered a share price crash.
What explains such results? The answer is almost certainly that these boards are benefitting from diversity of thought. A group of people with differing life experiences, skills and perspectives inevitably bring different views, challenges and thought processes to the boardroom. By contrast, when all your directors are cut from the same cloth, there’s more risk of dangerous “groupthink”.
Indeed, when the boardroom discussion is little more than an echo chamber, risks are much more easily overlooked. The fact that so many bank boards were dominated by white men is widely seen as a significant factor in the global financial crisis of 2008 – none of them brought any kind of new perspective to the discussion about risk.
The same point can be made about opportunity. When companies are run by the same type of people they have always been run by, it’s not difficult to understand why they struggle to pursue new ideas or to change direction. Heterogeneous boards are much more likely to benefit from collective imagination.
All of which is to say that the increasing diversity of investment trust boards is something investors should be really pleased about. The fact that there’s a board to keep the fund honest is genuinely valuable in its own right – but if that board’s diversity leads to it functioning more effectively, so much the better.
David Prosser
David is former Business Editor of The Independent, Personal Finance Editor of the Daily Express, and Deputy Editor of Money Observer magazine. He writes regularly for the AIC.
