Inside and out

November 2021

Key points

Companies that draw on a wide variety of voices from within their own workforces to advance diversity and inclusion are often better aligned with their customers’ needs.

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

In our research and engagement, we place most emphasis on those issues which could have a material impact on the long-term sustainability of a business. Diversity and inclusion (D&I) is often one of the major considerations. Many of our portfolio companies well understand its importance, while others are waking up to the potential risks of ignoring it.

As with most things, the assessment of diversity and inclusion needs to go beyond the optics – the headline statistics and ESG scores – to a fuller exploration of the motivation and actions behind them. At Netflix there has been a very conscious decision both to structure the workforce to reflect the global population and to be deliberately inclusive. Netflix added inclusion as a cultural value in 2017, believing it to unlock its “ability to innovate, to be creative, to solve problems” and thus better entertain existing and future subscribers. This is part of a broader strategy to tell stories that others aren’t, and represents a deliberate inversion of the traditional Hollywood-centric approach.

Netflix published its first inclusion report earlier this year. It shows good progress, but the firm continues its drive to have this reflected on screen. This starts with the writers and involves the internal Netflix community. To this end, the company has established the Netflix Fund for Creative Equity. It will invest $100m over the coming five years in organisations that help members of under-represented communities get training and find employment in TV and film.

Why is this important to LTGG and what is its impact on the investment case and the potential upside for the business? This approach to content moves Netflix away from a one-to-many model and towards a
many-to-many dynamic. Not only is that a disruptive hook that encourages deeper engagement, but it is also more effective because content for one audience can find new audiences in unpredictable ways. Although content will be created for smaller audiences, the company can track when shows and movies break through to other unexpected demographics. This feedback loop should allow Netflix to continue to improve and build a larger loyal subscriber base.

Diversity is important to the home fitness brand Peloton’s growth for similar reasons. In order for it to be truly mass market, its on-demand exercise classes must appeal to a diverse range of people. For this reason, both the firm’s instructor base and its senior leadership team have become more diverse in terms of gender, race and nationality over the period of our ownership of the stock. 

One of the company’s priorities is to further increase the diversity of its instructors, so that its content library caters to as many different people as possible. A positive step in this direction has been its addition of German and Spanish speakers. Their classes serve not only its international markets but also Spanish speakers in the US. 

Beyond these initiatives, which promote the company’s long-term growth, the management team announced the Peloton Pledge last year. This is a commitment to pay hourly employees better rates, at a cost of $80m over the next four years. As a result these workers, who are disproportionately non-white, will get $19 per hour. That compares to Amazon’s equivalent wage of $15 and the $7.25 federal minimum. In addition, the firm pledged to ensure these staff get access to learning and development opportunities. Peloton has also set aside a further $20m to help its non-profit partners fight racial injustice.

Adyen, which operates a global payments platform, believes diversity is a key driver for innovation and its ability to service and grow a multinational merchant customer base.

The ‘Adyen formula’ – key principles that support the company’s culture – calls on staff to include other people’s perspectives to sharpen their ideas.

The aim is that each of its teams encompasses a broad set of philosophies, with emphasis placed on ‘intellectual diversity’. This doesn’t necessarily correlate with diversity of race or gender, but the company recognises that these factors can nonetheless play an important role.

In 2020, the company formed a diversity, equity and inclusion working group. It prioritised areas for improvement in the spirit of its formula. They include a more balanced representation of genders. Today female staff are 34 per cent of the total, 29 per cent of team leads, and 16 per cent of management. The firm is also making efforts to recruit new workers from historically under-represented groups and giving all staff regular unconscious bias training.

Much like Adyen, Shopify views diversity and inclusion as a driver of innovation. The company’s goal is to create more entrepreneurs and to align itself with their success. Shopify sees these entrepreneurs as a source of energy, and wants to enable them rather than put obstacles in their way. It sees this as a democratisation project with which its own fate is bound. It’s not just that Shopify is being inclusive. Its business won’t succeed over the long term unless it can encourage people from all communities to become entrepreneurs. To that end, Shopify practises outreach on an industrial scale. Last year it ran more than 1,000 classes, workshops and meet-ups for local communities, and has further initiatives under way.

The case of Moderna and the development of its Covid-19 vaccine provides a different perspective on D&I. Inequality in medicine is nothing new, but it’s our understanding that ‘equitable design’ is not just an ESG issue; it’s also good science. Unrepresentative clinical trials could miss side effects suffered by some groups. And researchers could fail to recommend therapies for certain people because they were under-represented in trials. These are both commercial and societal failures. 

Ensuring racial and ethnic diversity in clinical trials was especially important for the development of Covid-19 vaccines given the disease’s disproportionate toll on people of colour. Studies indicate that people of colour and particularly Black adults have historically had lower vaccination rates and been more likely to express concerns about vaccines. Diversity within clinical trials helps to ensure safety and effectiveness across populations and may also increase confidence. Given this, we were encouraged by Moderna acting to slow enrolment into its Covid-19 trial to ensure there was minority representation. It took the decision despite the risk of its programme falling behind that of its closest competitor, Pfizer.

While Moderna is trying to ensure equitable representation, more recent conversations with Dexcom, the manufacturer of continuous glucose monitoring systems, have been a little disappointing. With approximately half a billion individuals living with diabetes globally, the market for its devices is considerable. We recently spoke to Dexcom’s management about international expansion and specifically its plans for India and Brazil. Together the two nations account for roughly 20 per cent of the diabetic population. We detected reluctance to expand into certain geographies based on deflationary economics. While this is rational and capital preserving, it’s not indicative of a patient-
driven culture.

While there is always more to be done, we can conclude that it is increasingly important for companies and organisations to represent society as a whole. Nowhere are we more conscious of this than in our own organisation – we know it’s important to clients. If you would like to hear more about Baillie Gifford’s approach to diversity and inclusion please visit our website or speak to your client contact.

Risk factors

The views expressed in this article are those of the LTGG Team and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions. 

This communication was produced and approved in October 2021 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

Potential for Profit and Loss 

All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns. 

Stock Examples 

Any stock examples and images used in this article are not intended to represent recommendations to buy or sell, neither is it implied that they will prove profitable in the future. It is not known whether they will feature in any future portfolio produced by us. Any individual examples will represent only a small part of the overall portfolio and are inserted purely to help illustrate our investment style. 

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All information is sourced from Baillie Gifford & Co and is current unless otherwise stated. 

The images used in this article are for illustrative purposes only.

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