Now in its fifth edition, the report continues its tracking of diversity across the boardroom and executives, this year examining the relationship between board diversity and company performance.
It was just ﬁve years ago (2017) when the ﬁrst call to action on board diversity took place, with State Street Global Advisors installing the Fearless Girl Statue on Wall Street, one day ahead of International Women’s Day. Fast forward to 2022, in which investor policies have evolved from a requirement of what was originally having a single female board member to those ranging from at least 30% of the board being gender diverse to others having not just a female board member as the measurement but also diversity from an underrepresented group (inclusive of race, ethnicity, sexual orientation, etc.). Investor pressure certainly remains, and based on our ﬁndings the real estate investment trust (“REIT”) industry has responded.
Ferguson Partners has been actively tracking the evolution and progress of board diversity across the U.S. public REIT marketplace since the initial investor guidelines were enacted. This year marks our 5th edition and our very ﬁrst to examine whether there exists a relationship between the degree of board diversity and company performance.
REIT Board Diversity and Performance: Dedicating Real Estate on the Board to Diverse Directors Correlates to Increased Performance
A number of studies, such as McKinsey’s Delivering Through Diversity (2018), Boston Consulting Group’s Diversity and Innovation Survey (2017), etc., have found that more diverse boards and management teams produce better financial outcomes. In March 2018, Wells Fargo Equity Research published an analysis, Real Estate: It’s a Man’s World on REIT Boards But it Pays to Include Women, which examined the relationship of diversity and performance in the REIT industry from 2006 to 2017. The conclusion at that time was that there is a correlation between diverse boards (then defined only as gender diversity) and REIT returns. As the degree of board diversity has significantly increased since 2017, and now with five full years of data, we performed an extensive analysis across 134 publicly traded, internally-managed equity REITs to ascertain whether there is a relationship or correlation amongst REIT boards deemed to have a higher degree of diversity and the level of total shareholder returns over various time periods.
Our methodology involved first classifying each REIT board’s percentage of diversity across gender, race, and ethnicity. We then evenly bifurcated the group of REITs into those found to have a higher degree of board diversity (the top 67 REITs) – which we observed as those with 32% or more, on average, board diversity across at least three years to those that had a lower degree of board diversity (the bottom 67 REITs). Therefore, we analyzed the total shareholder returns across these two groups over a trailing 1-, 3-, and 5-year timeframe as of June 30, 2022 - to be included in the analysis, each REIT had to be publicly traded for the entire timeframe.
As the report shares, REIT boards that are in the top 50% by diversity have outperformed those REIT boards in the bottom 50% by diversity, across each timeframe examined (1-, 3-, and 5-years). We have provided the total shareholder return data, which is deﬁned as change in stock price plus dividends paid, on both a compounded, annual return basis and a cumulative return basis.
Correlation is not causation, and as such, we cannot say that more diverse boards lead to higher returns than those observed by less diverse boards. Many variables exist, though it should also be noted that there was a very close divide in terms of the number of companies within each asset class/property sector having top 50% and bottom 50% board diversity.
However, we are able to conclude that more diverse boards have produced higher returns than those with less diverse boards.
Continue reading the 2022 REIT Diversity Across Boards and Executives or download a PDF of the full report.
For questions or further information, please contact Jeremy Banoff.