Recently
in the FT (HT: Lisa
Fairfax),
Alison Maitland and Sarah Halls rank the top 50 women in
world business and discuss the evidence surrounding gender diversity and firm
performance:
This inaugural ranking comes as the global crisis has turned
a spotlight on male domination of the corporate world: would we be better off
if more women were in charge? Some prominent people think so. Helen Alexander,
first female president of the CBI, the UK employers’ body, says diversity is needed to
prevent “groupthink” by white male boards. And 17 leading businessmen,
including the chairmen of Anglo American, BP and Tesco, recently called for
faster progress in appointing women to senior positions, saying the economy
needed the best talent more than ever. They equated the urgency of the
issue to that of climate change and poverty. . . .
Across Europe, only 10 per cent of board directors of the
largest companies are female (quotas have made Norway the exception, with more
than 40 per cent) and the numbers are even lower in Asia. [For the US numbers,
see chart above right, courtesy of Catalyst -- KDK] This is all the more surprising given the substantial
evidence that better gender balance has a positive impact on performance.
Studies by Catalyst and McKinsey in the US and Europe have found a correlation
between the number of women in a company’s leadership and the company’s
profitability. Financial outperformance is most significant when there is a
“critical mass” of women – 30 per cent or more. And Nick Wilson of Leeds
University Business School has found that having women on the board can reduce
a company’s risk of bankruptcy by 20 per cent. (emphasis mine)
The claim that there “is substantial evidence that better
gender balance has a positive impact on performance” is a relatively common
one, particularly post-crisis. One
has to wonder then, if gender diversity is so obviously and overwhelmingly
positive for the bottom line, why aren’t corporations pursuing female directors
with a vengeance? Is the old boy
network so entrenched that corporations are unwilling to gender diversify their
boards, even at the expense of higher profits and at a time when competition
for scarce profits has never been more heated?
Although that’s possible, of course, the story is likely far
more complicated. Unfortunately, there
is no consensus on the critical question of whether board diversity improves
firm performance. Whereas some studies find evidence consistent
with the theory that board diversity positively affects firm performance,
others find no support or even contradictory evidence. A recent study concluded, for example,
that the increased monitoring associated with more women on boards can have a negative effect on well-governed
businesses, and some other studies find similar negative effects or no effect
at all. (See here for a literature review of
these empirical studies)
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 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 (discussed in
the FT article quoted above), 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.
This lack of clear support for the business case for board diversity
is consistent with our preliminary findings in Narratives of
Diversity in the Corporate Boardroom: What Corporate Insiders Say About Why
Diversity Matters, undertaken with Lissa Lamkin Broome and John Michael
Conley. Our research suggests that corporate insiders appear not to have
arrived at a master narrative to explain the pursuit of diversity on boards of
directors. Instead, their accounts stress a variety of factors and feature few
concrete examples. Elements of each of the diversity rationales discussed
in my prior post, Money Is Diversity or Diversity Is Money?,
appear, but it is largely a theoretical narrative without concrete detail -- a
story without substance. When invited to elaborate, subjects have
digressed into instances that had little to do with race or gender, and in fact
have often distanced themselves from demographic variables. And none
expressed anything more than a hope that diversity would correlate with
business performance. Despite their focus on the business case for
diversity, overall our subjects do not tell that story concretely or
consistently, instead falling back on a story that is more similar to “it seems
like a good thing to do.”
Rather than “substantial evidence that better gender balance
has a positive impact on performance,” we have substantial uncertainly
regarding whether gender balance has a positive impact on performance. More research needs to be done before
we can say anything with certainty.
For more on board diversity, read my prior series of posts
on this topic, starting with: Sotomayor, Diversity, And Group Dynamics: Why
Do We Care? What Do We Know?
Also read our two articles on board diversity: Signaling Through Board Diversity: Is Anyone
Listening and Narratives of Diversity in the Corporate
Boardroom: What Corporate Insiders Say about Why Diversity Matters
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