When it comes to investing, the research is clear: diverse groups make better decisions. That’s why for many years, the New York City Pension Funds have been leaders in advocating for increased representation of women and people of color, and of diverse skills and experience, in the all-too-often homogeneous board rooms of corporate America. Last week, a new milestone was reached, as the City’s Funds became one of the first major U.S. institutional investors to approve an LGBT-inclusive director standard for the companies in which they invest billions of dollars.
This announcement is the latest step that the pension funds have taken to encourage greater diversity throughout their portfolio companies, from the board room to the workplace and throughout the supply chain. But the ability to spur real change will require similar steps from other investors and from companies themselves.
Too many U.S. companies overlook valuable potential in the LGBT community when selecting corporate directors. Investors pay a price for this lack of inclusion, because placing LGBT people at the most senior levels of leadership can markedly boost bottom lines. Data compiled by Credit Suisse show that investment returns are 10 percent higher at LGBT-friendly companies – Out Leadership aptly calls this the “Return on Equality.”
Unfortunately, Out Leadership counts fewer than 10 openly LGBT directors on the boards of Fortune 500 companies, and only two Fortune 500 boards include sexual orientation and gender identity in their definition of board diversity. Change cannot come quickly enough to these companies, because their composition does not reflect the diverse world in which we live.
But diversity isn’t just important in the boardroom. Visible LGBT leadership from the top down helps build inclusive work environments, and Out Leadership’s research has shown that LGBT employees are 85 percent more likely to come out at firms where senior executives do the same. Sadly, we’re a long way from meeting these goals.
Thirty-seven percent of LGBT employees in the U.S. have experienced workplace harassment in the last five years, and more than half of LGBT employees who believe there are homophobic people in their workplace remain closeted at work. Closeted employees are more likely to leave their companies, and they’re less productive. Fostering workplace cultures where LGBT employees don’t feel comfortable is more than just bad management; it’s bad business.
Conversely, inclusion is great for business: 83 percent of millennials are actively engaged when they believe their organization fosters an inclusive culture – just 60 percent of millennials are actively engaged in environments that are less welcoming of all people. Inclusion is also positively correlated with a company’s ability to innovate.
Many Americans erroneously believe that national nondiscrimination legislation protects LGBT people, but it is still legal in 29 states for employers to fire someone based on sexual orientation, and in 30 states for employers to fire workers based on their gender identity. Our expectation is that U.S. companies will take vigorous steps on their own to promote inclusion, a commitment that has already produced impressive results. Indeed, during the past 25 years, hundreds of companies have voluntarily enacted Equal Employment Opportunity policies to prohibit workplace discrimination based on sexual orientation and gender identity, as part of a campaign led largely by the New York City Pension Funds.
The City Funds’ new LGBT-inclusive guidelines continue this proud tradition. It is vital that companies re-examine their policies and practices, and use new resources to identify prospective LGBT board members. One example is Out Leadership’s initiative Quorum, which has created a database of prospective LGBT directors and offers board training and candidate networking events.
Shareowners expect boards to recruit the best and the brightest, and to avoid the paralysis of groupthink. But this can only happen if shareowners and companies alike understand – and adopt policies to seek out – the important perspective those LGBT directors can bring to the boardroom. Such policies will strengthen the Funds’ investment portfolios, and ensure that New York City employees and retirees receive healthy returns on pension investments for years to come.
Scott Stringer is the comptroller for New York City. Todd Sears is the founder and principal of Out Leadership.