In a rapidly changing world, companies that are able to anticipate and adapt to new conditions and environments are likely to be more resilient and better positioned to navigate the emerging challenges these new conditions create.
Companies’ adaptability is rooted in their innovation, but innovation is a difficult quality to assess. Yet there are proxies that can indicate a companies’ ability to foster innovation.
MSCI ESG Research looked at the role that talent management practices might play in promoting innovation and setting companies apart. We found that global companies recognized as innovators were leaders in specific areas of talent management practices, including diversity. The recognized innovators had more gender diverse boards of directors on average than their industry peers and were almost twice as likely to have had a persistent critical mass of at least three female directors for three years running. According to the report “diversity may reflect a culture that is open minded and comfortable with differences, focused on accessing and retaining the best talent available, and eager to cultivate creativity and diversity of ideas.”
The problem is not enough companies seem to be taking advantage of the existing, diverse talent pools in their regions. MSCI ESG Research examined ZIP-code-level demographic data to better assess the talent pool available in US companies’ commutable zones for a report called Racial Diversity & Talent Utilization. The report compared US companies’ voluntary employee racial data against their region’s demographic data. And found that often, companies employed lower rates of minorities than were available to them: only 55% employed Blacks and Latinos at rates proportional to their representation in the communities the companies operated. The percentage of companies that proportionally promoted Blacks and Latinos to management positions was even lower: only 14.3%. This underutilization of talent could prevent companies from unlocking innovation capabilities and increasing the overall qualification of their workforce, senior managers and board of directors.
While our research on racial diversity was limited by companies’ disclosures, we have conducted extensive research on gender diversity and its benefits. For instance, in the Women on Boards 2019 Progress Report we observed that “in emerging markets, female directors and executives were actually more likely than their male counterparts to have financial expertise.”
In Canada, while there have been board gender rebalancing advancements, companies have failed to reach gender parity and still fall short with respect to other forms of diversity. Despite Canada’s multiracial and multiethnic population, only 34% of Canadian companies in the MSCI ACWI Index (as of Sep. 22, 2020) who are required to disclose diversity statistics and policies under the Canada Business Corporation Act reported having at least one visible minority director. Only 8% of companies disclosed that they had at least one Indigenous director and 8% reported having at least one director with a disability. While 61% reported having at least one visible minority among their senior management, the ratios for Indigenous people and people with a disability in senior management were lower: 8% and 5%, respectively.
As companies face complex and unfamiliar challenges ahead – whether caused by a global pandemic or climate change – they will require all the tools at their disposal, including their ability to leverage people’s diversity of expertise, background, experience and perspective to innovate and find new solutions and opportunities. Investors may want to engage with companies to broaden management capabilities and board oversight effectiveness by increasing diversity.
 Solomon, Brian. May 12, 2015. You’re doing innovation wrong. Forbes; De Jong, Marc, N. Marston, and E. Roth, April 2015. The eight essentials of innovation. McKinsey Quarterly; Hamel, Gary and N. Tennant. April 27, 2015. The 5 requirements of a truly innovative company. Harvard Business Review; Yu, Larry. July 2007. Measuring the culture of innovation. MIT Sloan Management Review.
 Eastman, Meggin. T. 2018. The Right Stuff: Talent Management and Innovation Capacity. MSCI ESG Research
 By Fast Company, Forbes, the Boston Consulting Group, and/or the MIT Technology Review
,  Eastman, Meggin. T. 2018. The Right Stuff: Talent Management and Innovation Capacity. MSCI ESG Research
, , ,  Frazer, David and Mollod, Gillian. 2019. Racial Diversity & Talent Utilization. MSCI ESG Research
 Emelianova, Olga. and Milhomem, Christina. 2019. Women on boards 2019 Progress Report.
 Ibid. Between 2016 and 2019 there was an increase in the percentage of total director seats held by women among the Canadian constituents of the MSCI ACWI Index (moving from 22.8% in 2016 to 29.1% in 2019).
 Canada 2016 Census
 In accordance with information available at the companies’ 2020 management proxy form. It includes two REITs, which are not subject to the Canada Business Corporation Act (CBCA) but have reported trustees’ diversity statistics mirroring the CBCA requirements.
 An Act to amend the Canada Business Corporations Act, the Canada Cooperatives Act, the Canada Not-for-profit Corporations Act and the Competition Act (S.C. 2018, c. 8)
, , , ,  In accordance with information available at the companies’ 2020 management proxy form. It includes two REITs, which are not subject to the CBCA but have reported trustees’ diversity statistics mirroring the CBCA requirements.
The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the view or position of the Responsible Investment Association (RIA). The RIA does not endorse, recommend, or guarantee any of the claims made by the authors. This article is intended as general information and not investment advice. We recommend consulting with a qualified advisor or investment professional prior to making any investment or investment-related decision.