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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