Inclusion-driven policy and corporate culture are key to post-COVID economic recovery.
Most people understand why diversity is nice to have. Yet many remain sceptical that diversity is a “must have” or an imperative for growth. This is despite the existence of numerous empirical studies demonstrating the link between greater diversity and improved corporate and economic performance.
A report published by Credit Suisse last year said companies with at least one woman director received a better return on their investments compared with companies with all-male boardrooms.
Catalyst in 2011 demonstrated that Fortune 500 companies with three or more women board directors generated 50% higher average returns on equity than those with no female directors.
Meanwhile, Goldman Sachs research showed that among 297 companies listed on the Tokyo Stock Exchange which disclosed figures about their female managers in 2018-19, those with the highest percentage of women in management boasted the highest average sales growth and returns on equity.
The notion behind “womenomics” — a phrase I coined in 1999 while working for Goldman Sachs in Tokyo — was that well-educated yet underemployed Japanese women could solve the nation’s twin problems of economic stagnation and demographic decline.
We estimated that Japan could grow its economy by as much as 10% if the female employment ratio, then at just 56%, rose to match the male rate of 80%.
First, former Prime Minister Shinzo Abe’s administration required companies with over 300 employees to publicly disclose gender statistics on their workforce and produce action plans to further women’s participation and advancement. This mandate was later expanded to include companies with over 100 employees. Such transparency was a critical first step to pushing workplace diversity because a company cannot manage what it does not measure.
Second, Japan created one of the developed world’s most generous parental leave systems: 12 months paid time off for new mothers and new fathers. For the first six months, pay is set at about two-thirds of the worker’s pre-leave level, falling to half pay for the remainder.
The country also expanded childcare capacity by 27% in the years through 2019, reducing waitlists for daycare centres and improving the ability of women to return to work after giving birth.
Following these changes, the percentage of women who returned to the workforce after their first child increased to 53% in 2019 from 38% in 2010.
Third, Japan’s Government Pension Investment Fund, the world’s largest public pension fund, in 2017 began to make investments tied to environmental, social and governance (ESG) criteria. As part of this effort, it began referencing an index that evaluates companies based on their creation of an environment to promote the success of women. This prompted other Japanese institutional investors to start incorporating ESG factors, including diversity, into their investment criteria.
A record number of women entered the Japanese workforce before the COVID-19 pandemic as local leaders finally began to embrace much-needed reforms to help narrow the nation’s gender employment gap.
By 2019, the country’s female labour participation rate had climbed to 71%, surpassing those of both the U.S. (66%) and Europe (62%).
In the early days of the pandemic, nearly twice as many women left the Japanese workforce as men. In Southeast Asia, women also bore the brunt of job losses, with their share in Thailand estimated by the Asian Development Bank at 60%.
Many women who have since reentered the labour market took up lower quality and lower-paying part-time jobs than they held before the crisis.
Now more than ever, governments and companies must realize that helping women thrive will be key to the post-COVID economic recovery.
Thanks to greater transparency from the private sector and progressive policies from the government, Japanese women have gained much-needed ground in recent decades. But there is still a long way to go.
Japan still faces a dearth of women in leadership positions. Fewer than 24% of the Diet, Japan’s parliament, are women; a quota system could help ensure that the nation’s highest policymaking body represents the views of all citizens.
At 22.5%, Japan’s gender pay gap remains one of the widest among Organization for Economic Cooperation and Development members. Moreover, the country’s tax code incentivizes many married women to work only part-time as longer hours reduce tax write-offs.
Across Asia, countries should offer more flexible labour contracts, enforce parliamentary gender quotas, require gender pay gap disclosures and mandate the presence of at least one woman on every corporate board. Immigration policies should be reformed to allow foreign caregivers to provide support for both child- and elder care as is the case in Singapore and Hong Kong.
Corporations should proactively manage women’s careers, promote more flexible work environments, shift away from seniority-based evaluations to performance-based systems, set gender diversity targets and engage male diversity champions.
Countries should also encourage corporations to inform their male employees about parental leave and encourage uptake. More than 85% of women in Japan take childcare leave, most for at least 10 months.
Only about 14% of Japanese men take any parental leave; many take fewer than five days. The government wants to get that up to 30% by 2025.
While strong positive linkages have been identified between diversity and large corporations, what about diversity and startups?
MPower Partners analyzed 231 initial public offerings held in Japan in 2020-21.
Of this group of companies, only eight, or 3%, had female founders. These companies had on average raised 403 million yen ($3.1 million) since their founding, 44% below the average for their male-founded counterparts.
Despite this funding gap, relative to their pre-IPO fundraising, female-founded companies had a market capitalization 32% higher than their male-founded peers at the time of listing while revenues during their IPO year were 20% higher.
Diversity supports innovation, recruitment, and risk management.
How exactly does diversity drive better corporate performance?
First, diverse perspectives help drive innovation by introducing new ideas and market opportunities to mainstream thought. While diverse opinions might initially result in friction, it is precisely this friction that fuels innovations which challenge the status quo.
Second, if an organization does not embrace gender diversity, it is forgoing half of its community’s potential talent pool, a shrinking one in Japan’s case.
Importantly, startups will need to pay attention to board diversity since it can impact their ability to raise capital. For instance, the Nasdaq Stock Market has mandated that by 2023, companies must have at least one diverse board director. By 2025, this threshold will increase to at least two diverse directors.
Goldman Sachs, meanwhile, has said since 2020 that it will underwrite IPOs in the U.S. and Europe only for private companies with at least one diverse board member. In 2021, this target rose to two diverse directors.
This movement to increase board diversity is rooted in empirical evidence showing that companies with diverse leadership perform better. Since 2016, the shares of U.S. companies that went public with at least one female board director have outperformed those that did not in their first year after listing.
Japanese public companies are already being scrutinized by foreign and local institutional investors due to insufficient board diversity.
Some governments are making gender equality a priority as we move forward from the COVID pandemic. Research has shown that prioritizing women’s participation and advancement in the workplace can have revolutionary effects on economies battered by COVID-19, and arguably are more effective than any other economic plan.
According to calculations by S&P Global economists in 2019, if the U.S. female labour participation rate matched that of Norway, the world’s leader in this area, this would create $511 billion in additional economic output over a decade.
Data must be shared widely. Empirical evidence is the only way to convince the sceptics.
Representation is also impactful. It is important to showcase women in professions long associated with men and to provide role models in those industries. Venture capital, for example, is still a mostly-male industry, but studies show that greater diversity in venture capital firms can enhance investment performance.
In sum, promoting gender diversity should be regarded as a growth strategy and investment rather than an obligation or cost. Diversity is imperative not only to accelerate innovation but to create a brighter outlook for the economy overall. There is ample evidence to prove this globally and specifically in Asia, so the time for action is now.
Kathy Matsui is General Partner at Japan’s first ESG-focused global venture capital fund, MPower Partners. She is the former Vice Chair and Chief Japan Equity Strategist of Goldman Sachs Japan
