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