Mind the Gap: Disclosure of Diversity Matters
Image: Equal Employment Opportunities Commissioner Saunoamaali’i Dr Karanina Sumeo from the Human Rights Commission website: https://tikatangata.org.nz/about-us/our-people
In a move I applaud, the New Zealand government has announced a promise to introduce mandatory gender pay gap reporting in New Zealand in 2024. In the light of this announcement, I’ve written this blog to takes a wider look at how disclosure of diversity matters for improving diversity and inclusion. This blog follows on from my gender equity blog published on Friday 11 August, that happened to be the same day as the government announcement. I can’t claim prescience – it was a pleasant surprise to see my blog coincide with this announcement.
The pay gap reporting system will require organisations with more than 250 employees to report their gender pay gaps. This will apply to around 900 entities. Over time, the system will apply to organisations with more than 100 employees. This will then apply to almost 2,700 entities. In announcing the policy, Minister for Women Jan Tinetti said: “The reality is that women have different experiences in the workplace than men, and change is needed. Requiring companies to publish their gender pay gap will encourage them to address the drivers of those gaps and increase transparency for workers.”
The government says it will be working with companies such as Air New Zealand and Spark that already disclose their gender pay gap to learn from their experience and establish a universal model for reporting so there is consistency and guidance for employers and workers.
As research indicates investors are more willing to invest in a company that discloses gender pay equity compared to either a company disclosing a gender pay gap or one disclosing no gender pay information. It seems wise for NZ business to quickly act to remove the gender pay gap and be able to disclose this commendable achievement.
Welcomed by Business Leaders
The government’s announcement was welcomed by a number of businesses and union groups. Employers and Manufacturers Association (EMA) CEO Brett O'Riley said he and the lobby group Business NZ supported work to create “more equitable workplaces”. He said mandatory gender pay gap reporting would pose a minimal strain on companies, as businesses this size would already have the payroll systems to work this out.
With countries such as Australia, Canada and the UK already imposing pay transparency regulations, O’Riley said human resource-focused technology companies had the IT programmes in place to enable businesses to easily report on gender pay gaps. National Party women’s spokesperson Nicola Grigg also supported this move to require large companies to report on their gender pay gap.
Research and Leadership from MindTheGap
The MindTheGap campaign has previously reported that international research shows:
Pay gap reporting law reduces gender pay gaps by approximately 20 to 40 percent.
Pay gap reporting law reduces gaps by resulting in more women being hired and promoted within firms, as well as bringing growth in men’s wages into line with growth in women’s wages. Canadian law addressed this by requiring employers to reduce gaps by increasing women’s wages.
Women on lower incomes benefit most.
Pay gap reporting has wider behavioural impacts. Women will choose to apply for jobs at low pay gap employers. Increasingly, consumers, especially women, make spending decisions based on pay gap data reporting. Investor behaviour is influenced by pay gap data as well.
MindTheGap lobbied for compulsory reporting in NZ for entities with more than 50 employees. In the NZ context, MindTheGap research reported that as of June 2021: the median women’s wage was $26.37 per hour. The median man’s wage was $29.00. That is a difference of $2.63 per hour. If this difference were closed by 19 percent (as happened in the UK after pay gap reporting law was introduced), women would earn $0.50 more an hour, or $20 per week for a 40-hour week, or $1,000 per year for working 50 weeks of the year.
A Pay Gap Registry was launched by MindTheGap in March 2022. The objective is to show whether or not a business has published its pay gaps. There are many pay gaps that can and ought to be measured in order to benefit our society. MindTheGap has started by focusing on gender, Māori, and Pasifika pay gaps. They note that additional pay gaps can be added over time explaining that: “Māori pay gap and Pacific Peoples’ pay gap need to be reported as the link between our gender, ethnicity pay gaps, and our child poverty crisis needs to be addressed with urgency.” MindTheGap reference the ‘Child Poverty in NZ Report’ prepared by Bryan Perry: “Material hardship rates are much higher for Māori and Pacific children/ethnicities (23-28%) compared with that for European or Asian children/ethnicities (6-10%).”
MindTheGap maintains that: “Publishing your pay gaps has proven effective in retaining and attracting talent and is considered a trust indicator, providing the impetus to narrow and close pay gaps…Customers, investors, and employees want to know that they work for or support organisations that are committed to fixing what’s not fair. Investors and consumers increasingly look for transparency and fairness when making their decisions. It is therefore in the interests of any organisation wanting to attract and retain staff, grow markets, and find capital to be transparent and publish their pay gaps. International evidence also shows that when businesses report publicly, they are more likely to work toward closing them.”
International Disclosure of Diversity
Writing for the Harvard Law School Forum on Corporate Governance, the research firm ISS (Institutional Shareholder Services) ESG, in March 2022 noted that the topic of gender diversity has been a focus for the responsible and ethical investment sector for many years. However only 6% of companies globally disclose gender pay gap data for their entire operations, and 20% disclose a limited amount of information on the topic. Given the regulatory pressures they face, European companies feature among the top performers. There is clearly a need for ethical investment fund managers to demand more pay gap reporting.
ISS note that “One of the earliest factors that allowed investors to identify those companies taking a progressive stance on governance issues, the measurement of the percentage of women on corporate boards of directors, has been standard practice for ESG-minded investors for more than a decade.” They report that various measures also demonstrate that strong female representation at senior corporate levels is associated with better financial returns. Recent research illustrates how boards with at least two women outperform the average Russell 3000 returns over 3-, 4-, and 5-year periods, while male-dominated boards underperform the index over the same periods. Over a holding period of four years, the spread between the two groups is greater than one percent annually.
Past Time for Ethnic Pay Gap Reporting
The government’s announcement stated it is “committed to exploring” the inclusion of ethnicity in pay gap reporting as Māori, Pacific peoples and other ethnic groups often face the compounding impact of both gender and ethnic pay gaps. Stuff reported that Equal Employment Opportunities Commissioner Saunoamaali’i Dr Karanina Sumeo questioned why the Government hadn't committed to ethnic pay gap transparency as well: “We know that Māori, Pasifika and a lot of our migrant communities have faced experiences of colonisation and racism... In the workplace, those factors – intentional or not – do affect people’s pay and who gets chosen for promotions,” she said.
In response Diversity and Inclusion Minister Priyanca Radhakrishnan said there needed to be more consultation before the Government could commit to implementing ethnic pay gap reporting: “It's a bit more complex. Individuals can identify with multiple ethnicities, for example, and Stats NZ doesn’t have guidance on ethnic pay gap calculation. It’s not something that’s done much internationally,” she said.
Let’s hope that the NZ government takes up the challenge to be an international leader by also requiring ethnic pay gap reporting. In the meantime, ethical investors have an important part to play in encouraging NZ businesses to report more comprehensively than the mandatory gender pay gap, instead including measurement and reporting on ethnic pay gaps, and as discussed below, diversity and inclusion practices.
Disclosing Diversity and Inclusion Practices
Gender and ethnic pay gaps provide important insights. However, ethical investors need to know much more from businesses about the practices that individual businesses have implemented that address diversity and inclusion.
The reference index often used by global index fund managers is the MSCI All Country World Index (ACWI). Maintained by Morgan Stanley Capital International (MSCI), the index comprises the stocks of nearly 3,000 companies from 23 developed countries and 25 emerging markets. With a need to understand a vast number of companies, ethical index fund managers usually rely on third party global research firms. Given the enormous scale of their research task, these researchers tend to be relatively quantitative in their approach.
These global researchers may, for example, give each company in the index a Diversity Score made up of a ‘Performance Score’ and a ‘Practices Score’ with a higher weighting often given to the ‘Performance Score’. The ‘Performance Score’ may include pay gaps and other numbers based on diversity of percentages of staff in new hires, the total workforce, years of employment, and a percentage of directors. Usually based on gender, there is potential for scoring on ethnicity too. The ‘Diversity Practices Score’ may include factors such as ‘provides material benefits to facilitate diversity and inclusion’ and ‘provides employee training on diversity’.
There is of course much more to diversity and inclusion than these numbers. In researching this practice area as part of my PhD back in the 1990s, I worked with the leading USA ethical investment researchers who pioneered this field. These researchers measured the diversity factors noted above and added more qualitative research insights. In my PhD I also studied companies like The Body Shop that were leaders in undertaking a wider range of diversity practices (contact me if you would like to know more). Money Matters believes it is wise for all fund managers to adopt a wider and deeper approach to diversity and inclusion. This recommendation is more likely to be enacted by the higher ‘impact funds’ with, for example, about fifty companies in their fund. These fund managers are usually expected to be closer to and therefore potentially more able to understand and engage more deeply with these companies. They may also use their own research frameworks to analyse ethical performance and not rely on any third-party ratings providers.
Insights from Māori Business
In considering the ethical performance of New Zealand companies, investors can naturally expect a significant focus on how business practices take account of impact on Māori. This has been a key focus for Money Matters’ Professor Chellie Spiller – from her PhD through to her book ‘Wayfinding Leadership’. Chellie and I have advocated for more than two decades for ethical investors and businesses to take more account of this valuable cultural dimension.
Back in 2015 I co-authored with Chellie and Dr Manuka Henare a guide for the Equal Employment Opportunities (EEO) Trust focused on this subject (contact me if you would like a copy). These days Chellie’s teaching includes a Diversity and Inclusion university paper and workshops for businesses on “Next Level Inclusion…designed to give leaders tools to strengthen organisational transformation towards greater diversity, inclusion and belonging”.
Chellie is leading a transdisciplinary team of Māori economy researchers exploring Māori economies of wellbeing. This research is part of Ngā Pae o te Māramatanga, New Zealand's Māori Centre of Research Excellence (CoRE). The multi-year project that has already highlighted principles and practices that Māori businesses can offer to encourage diversity and inclusion. These and Chellie’s other diversity and inclusion research and training insights would add significant value to all New Zealand companies. NZ fund managers investing in Australian companies could ask those companies about their progress in respecting, learning from, and incorporating practices that reflect the wisdom of First Nations people. If NZ fund managers ask companies to report about their adoption of indigenous peoples’ wisdom then more progress is likely.
Further afield, I am regularly told that key players in the global funds management community are looking to NZ to lead the way in sharing how indigenous wisdom can be applied to ethical investment and business. These international industry participants see NZ as having made relatively more progress than other countries in respecting and learning from indigenous culture.
Cultural Proficiency
There is growing recognition that ‘cultural proficiency’ is essential for good business. This includes the ability of individuals and businesses to value diversity, conduct self-assessment, and learn and apply cultural knowledge. In her workshop for business Chellie explains the Cultural Proficiency Continuum which ranges from Cultural Destructiveness to Cultural Proficiency to which she has added Cultural Humility.
Cultural Destructiveness: See the difference, stomp it out.
Cultural Incapacity: See the difference, make it wrong.
Cultural Blindness: See the difference, act like you don’t.
Cultural Pre-competence: See the difference, respond inadequately.
Cultural Competence: See the difference, understand the difference that difference makes.
Cultural Proficiency: See the differences and respond positively and affirmatively.
Cultural Humility: See the differences and embrace their beauty and complexity all the while recognising competency and proficiency as process.
Noting that we might move up and down this scale depending on our experiences and views or a particular situation we find ourselves in, Chellie invites workshop participants to privately reflect where on average they would position themselves and their business on this continuum.
Make Your Vote Count
The countdown to the NZ election highlights the importance of making your economic vote as an ethical investor count. For ethical investors and the businesses they vote for by investing in, diversity and inclusion has long been considered as a way to “do well and do good”. For example, my PhD (1999) referenced a USA commentator Thomas Shaw quoted in a Time Magazine (1997) article who concluded: “While the government may be the watchdog and, in some cases, may be the impetus, by and large corporate America is adopting diversity for reasons of self-interest: for marketing and public relations and good business purposes.”
You can exercise your economic vote by encouraging your investment adviser and fund managers to report to you about diversity and inclusion practices. To help ensure your money matters you could ask how their investment research and decisions to invest in funds and companies on your behalf is taking account of and seeking to make a positive impact on diversity and inclusion. If you also ask about whether and how Māori business principles and practices are being taken into account, you can increase the growing focus on the exciting and impactful potential of this approach.
Together our economic votes, reflected in the way we invest our money, matters. We can make a difference. Hopefully, in keeping with and supporting Dr Karanina Sumeo’s challenge, we can show governments why and how ethical investors and business leaders support more government leadership on requiring wider disclosure of diversity matters.