Investment Approach

Pax World believes that companies that effectively attract, hire, retain, and promote women and people of color are better equipped to capitalize on competitive opportunities and avoid missteps that might not be apparent to a more homogenous group. Pax World also believes that those companies that are successful in promoting diversity at the most senior levels of their business will tend to outperform those that fail to embrace diversity. This belief is supported by academic research. In 2007 Carter, Simkins and Simpson examined the relationship between gender and ethnic diversity on boards and financial performance for the Fortune 500 over a four-year period from 1998-2002¹ and concluded that diversity has a positive effect on financial performance (using Tobin’s Q as the measure of financial performance). Also in 2007, a study by Francoeur et al. found that “firms operating in complex environments do generate positive and significant abnormal returns when they have a high proportion of women officers.”² And finally a 2007 Catalyst study took on the topic of board diversity and financial performance³ and found that those companies with the highest proportion of women on their board of directors outperformed those with the lowest percentage of women 42% to 66% on the basis of three financial indicators. We believe that there are also several less tangible benefits associated with support for diversity which include increased workforce morale, productivity, teamwork and support for organizational goals and values.

Pax believes the importance of embracing diversity throughout the workforce is particularly important for companies that produce or sell consumer products or services, especially those in the consumer discretionary and financial sectors. It is estimated that women comprise more than 50% of the US population and are responsible for 80% of consumer purchasing decisions in US homes. ^{4, 5} The United States Department of Commerce estimates that the minority population in the United States could contribute to between 44% and 70% of the total increase in purchasing power in the US between 2000 and 2045.⁶ As women and minorities continue to increase their economic influence and control over purchasing decisions, companies that effectively market to them will have increasing competitive advantages.

There is also anecdotal evidence that suggests that failing to embrace diversity can result in reputational damage and costly litigation. In 2000, Coca Cola paid $192.5 million to settle claims that is discriminated against black employees in its compensation, evaluation, and promotion practices.⁷ In 1997, Home Depot paid $104 million to settle gender discrimination charges.⁸ In July 2004, Morgan Stanley settled a gender discrimination lawsuit brought by the EEOC on behalf of female employees for more than $54 million.⁹ While the sheer size of these settlements makes them significant, there are also intangible costs, including brand risk, loss of employee morale and productivity and loss of stakeholder confidence. All of these outcomes can distract from a company’s ability to operate efficiently and serve the best interest of shareholders.

For these reasons, Pax believes that a company’s approach to diversity is a key component of its sustainability profile. When reviewing sustainability profiles, Pax looks for companies that have strong diversity policies and programs and that disclose the performance and success of those programs. Pax may avoid investing in companies that have engaged in a pattern of discrimination or that have had other significant diversity failures. In order to do this, Pax takes into account several factors, which may include a company’s level of disclosure on diversity, its diversity training programs, as well as its supplier diversity policies.

Pax World also addresses the issue of gender diversity through its proxy voting. When voting on director elections, Pax World generally withholds votes from, or votes against where possible, slates of director nominees when there are no women on a company’s board of directors. Pax World generally registers these concerns with the company through a follow-up letter to explain the reasoning for the vote and to encourage the company to take steps to incorporate gender diversity into their board of directors.

Past performance does not guarantee future results.

The issues highlighted above are illustrative and do not necessarily reflect the full range of diversity issues Pax World may consider in analyzing a particular security for investment.

¹David A. Carter Frank D’Souza, Betty J. Simkins, and W. Gary Simpson, “The Diversity of Corporate Board Committees and Firm Financial Performance,” Department of Finance, Oklahoma State University, March 15, 2007.
²Francoeur et al. “Gender Diversity in Corporate Governance and Top Management.” Journal of Business Ethics (2008) 81:83-85.
³Catalyst, “The Bottom Line: Corporate Performance and Women’s Representation on Boards,” 2007.
⁴2006 American Community Survey, Census Bureau Population Estimates Program. http://factfinder.census.gov/servlet/STTable?_bm=y&-geo_id=01000US&-qr_name=ACS_2006_EST_G00_S0101&-ds_name=ACS_2006_EST_G00_
⁵Jennifer Barr Kruger, “Meeting a higher standard: women consumers demand more than men.” Photo Marketing, 11/1/2005.
⁶U.S. Department of Commerce Minority Business Development Agency, “Minority Purchasing Power: 2000 to 2045,” 2000.
⁷“Coca-Cola to pay $192.5 million to settle racial discrimination suit.” Insurance Journal, 11/17/2000.
8Brooke A. Masters and Amy Joyce, “Wall Street Women Take Suit to Court,” The Washington Post, July 7, 2004.
⁹ U.S. Equal Employment Opportunity Commission, “EEOC and Morgan Stanley Announce Settlement of Sex Discrimination Lawsuit,” Press Release, 7-12-04. Posted at http://www.eeoc.gov/press/7-12-04.html.