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Companies with a higher percentage of female directors also have higher credit quality, a new study by Moody’s Investors Service has concluded, adding more weight to arguments that gender diversity should be considered as an investment factor.

Moody’s said its review of 1,109 publicly traded companies in Canada and the United States found a correlation between gender diversity and higher credit ratings, but warned the review cannot prove gender diversity actually caused the better performance.

Moody’s senior analyst Brendan Sheehan, a co-author of the report, said it is possible that companies that are better managed, more dynamic or more forward-looking have both greater diversity and better financial results, but diversity is not the reason for the performance.

Nonetheless, he said Moody’s has added gender balance on boards as one of the factors it considers in its new methodology for assessing the quality of corporate governance at companies. Boards with less than 30-per-cent of either men or women are ranked lower in the assessment.

Mr. Sheehan said the review’s findings suggest the same factor should be considered by other investors.

“There does appear to be some relationship between levels of gender diversity and the ratings scale, so I think it would be reasonable to consider it as one of the many factors you consider when you’re looking at corporate governance,” he said.

The review included 256 Canadian companies, or about 23 per cent of the total sample.

The Moody’s report said the five companies in the review with the highest AAA debt rating also have the highest proportion of women on their boards, with an average of 28 per cent of directors.

For companies rated Baa1 or higher, women accounted for about 25 per cent of the board. Companies with a Ca rating, which is the weakest level Moody’s uses, averaged just 5 per cent women on boards.

Higher-rated companies also have more women in top executive positions, the report said. Companies with an AAA rating have almost one-quarter of their top executive roles filled by women, while companies rated Ca average 10-per-cent women in C-suite level jobs.

The findings add to a body of evidence that greater diversity is associated with stronger financial results, the review said, noting prior studies by Credit Suisse, Morgan Stanley and Catalyst have also found a correlation between diversity and better performance.

The study did not contrast Canadian and U.S. companies within the sample, but Mr. Sheehan said the authors sorted all companies by the state or province where they are headquartered. Within Canada, he said Quebec-based companies had the highest overall level of board gender diversity.

The researchers also measured how many companies in each region would comply with a California law that requires all public companies headquartered in the state to have at least three women on their boards by 2021 if they have more than six directors.

Of the 37 companies headquartered in Quebec, 22 of them – about 60 per cent – would already meet the California requirement, which is the highest proportion of any province, Mr. Sheehan said. By comparison, Moody’s said only 20 per cent of companies based in California and subject to the new rules currently comply.

Canadian companies have significantly increased their board diversity since securities regulators introduced rules in 2015 requiring them to report annually on their approach to diversity. A 2018 review of corporate governance in Canada by law firm Davies Ward Phillips & Vineberg LLP found women accounted for 21 per cent of directors on boards of companies in the TSX composite index and TSX small-cap index in 2018, up from 12 per cent in 2014.

Some Quebec-based companies have significantly higher proportions of women on their boards, including Saputo Inc., which has 50 per cent women on its 10-member board, and Laurentian Bank, which has five women on an 11-member board or 45 per cent women. Isabelle Courville was chair of Laurentian Bank’s board for 12 years until stepping down this spring, and is now chair of Canadian Pacific Railway Ltd.

Royal Bank of Canada, the country’s largest company by market value, also has five women on its 13-member board, including board chair Kathleen Taylor.

Moody’s managing director Atsi Sheth said Moody’s data could not prove diversity improved performance, but there is still a compelling link.

“There seems to be something in common – and there may be other factors and it may be idiosyncratic from company to company – but there’s something that leads to this very high correlation between higher credit profiles and gender diversity,” she said.

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