Money Is Diversity, Or Diversity Is Money? (Sotomayor And The Value Of Diversity, Part III)

In my prior post on this topic, Do The Right Thing, So Long As It’s Free, I discussed fairness arguments related to corporate board diversity, but noted that serious discussion of board diversity (both academically and in the business community) tends to center on whether board diversity enhances performance.  Numerous theories have been offered in defense of diversity’s potential positive impact on either board functioning, corporate performance, or share price. These include:  

(a) Firms seeking board diversity are accessing an untapped talent pool;

(b) Female and minority board members reduce agency costs;

(c)  A more diverse board possesses more and better information;

(d) Diverse boards are more likely to engage in constructive dissent; and

(e) A diverse board conveys a credible signal to relevant observers of corporate behavior.

Skeptics, in contrast, contend that board diversity is a meaningless public relations maneuver, designed to quiet vocal critics, that generates no real benefits for shareholders. (For a more detailed discussion of the various corporate board diversity rationales, see here and here).

Unfortunately, there is no consensus on the critical question of whether board diversity improves firm performance.   Whereas some studies find evidence that the authors conclude is consistent with the theory that board diversity positively affects firm performance, others find no support or even contradictory evidence.

These divergent results may be due to a number of factors, including the thorny causation issues posed by attempts to study diversity and firm performance, and the different tools employed by researchers seeking to address that problem.  In short, although board diversity could create value for shareholders, the opposite could also be true.  More successful firms could have greater resources to dedicate to the pursuit of board diversity.  Or more successful firms could be under greater public scrutiny and pressure to diversify their boards.  Or female and minority directors could be scarce commodities who can choose to serve only on the boards of more successful firms. (See here for a literature review and discussion of reverse causation and other problems related to empirical research on board diversity).

Confusion on this point has sometimes led to unwarranted conclusions about how well we understand the effects of corporate board diversity.  For example, popular studies, such as Catalyst’s, that consistently document the superior financial performance of firms with more female directors are frequently cited in the press and by industry and advocacy groups as proving “the business case” for board diversity.  In reality, we know very little about whether, how, why, and under what conditions board diversity impacts firm performance.

In my next post on this topic, What Corporate Insiders Say About Why Diversity Matters, I’ll discuss research (conducted with Lissa Lamkin Broome and John M. Conley, both at the University of North Carolina) on what those most directly involved in the board diversity question – primarily corporate directors, but also some senior executives, executive recruiters, shareholder activists, and regulators -- say about it.

Related Posts:
I. Sotomayor, Diversity, And Group Dynamics: Why Do We Care? What Do We Know?
II. Do The Right Thing, So Long As It’s Free
IV. What Corporate Insiders Say About Why Diversity Matters
V. Wrapping It Up: The Struggle To Explain Why Difference Makes a Difference