In an article yesterday headlined, “Women At Top Lift Shares, Study Shows,” the FT discussed a new report on corporate boards published by the British law firm Eversheds. Although copies of the report do not appear to be publicly available, the firm’s website reports that a free copy can be obtained by emailing [email protected]. I’d be surprised if the study actually shows that women directors improve corporate performance, as opposed to merely confirming the by now well-known correlation between board diversity and stock performance.
Says the firm’s website:
The report also reveals that those companies who had more female directors performed better during the financial crisis – this was particularly so in the UK and in the banking sector. However, when interviewed, only 55% of directors thought that diversity for its own sake was beneficial for board and company performance and only half that number was directly in favour of taking positive action to appoint more women onto boards.
As I’ve discussed at length here before, the claim that board diversity improves firm performance is a relatively common one, particularly post-crisis. This could be the case, of course, though the majority of empirical studies on point conclude that gender diversity on boards has no effect or a negative effect. (See here for a literature review of empirical studies on board diversity).
Instead, it is just as likely that more successful firms have greater resources to dedicate to the pursuit of board diversity; or are under greater public scrutiny and pressure to diversify their boards; or that female and minority directors are scarce commodities who can choose to serve only on the boards of more successful firms. Or, as mentioned by several of our respondents, modern, forward looking (and thus well-managed and successful) companies could view board diversity as simply one of many “good governance” mechanisms to be followed by companies that are (or want to be perceived as) modern, forward-looking, and well-managed. As stated by one of our (white, male) respondents:
To me, that’s why some boards go for diversity in part, they want to look like they’re the majors, I’m sure they want to look like world businesses, they want to look like businesses that understand the galaxy. Well, I’m serious. And so, yeah, I think a piece of it is symbolic speech. That used to make me ill when people would say, “Well you want to look like your community.” But in truth, you do. Or the community you want to be. Better yet than that, you want to look like the community you aspire to be.
Interestingly, though one can think of several theories to support the notion that diverse boards perform better than homogenous ones in times of crisis (for example, women’s risk aversion, the avoidance of group-think, etc.), our respondents make the opposite point. Many suggest that diversity brings benefits during good times, such as more creative thinking or a focus on employee welfare (though, as we discuss at length here, these assertions are not, on the whole, well-supported or clearly articulated). But the feeling appears to be that diversity, and its attendant “creative vibes,” is irrelevant to firms in crisis, who just need to stay alive. Said one of our (Hispanic, female) respondents:
If you could for a moment imagine yourself in a fast flowing river drowning looking for a lifeboat, you wouldn’t care what color it was and you wouldn’t care who was in the lifeboat. All you need is a lifeboat.
Some respondents attributed the lack of board diversity at start-ups to a similar need to focus on the basics. Said one (white, female) respondent:
I have been on boards of far more entrepreneurial companies, like [company names omitted], where that kind of concern [i.e. board diversity] is not raised because the concerns are so different. They’re trying to stay alive, basically. It’s businesses, so diversity is down the line someplace in terms of a value, not that anybody would be precluded, but it just doesn’t come up in the same way it does.
And for those of you who have been breathlessly waiting for the next installment of this project, it’s your lucky day. We just posted a new paper to SSRN: Does Critical Mass Matter: Views From the Board Room. Here is the abstract:
In this article, we report and analyze the results of forty-six wide-ranging interviews with corporate directors and other relevant insiders on the general topic of whether and how the racial, ethnic, and gender composition of corporate boards matters. In particular, we explore their views on the concept of “critical mass” – that is, the theory that women and racial or ethnic minorities are unlikely to have an impact in the boardroom until they grow from a few tokens into a considerable minority of the board.
In contrast to other recent qualitative research on corporate boards, we find more limited support among our respondents for critical mass theory. Though some female respondents expressed the view, consistent with critical mass theory, that having more women on the board increased their comfort level and eased some of the stresses associated with being the first and only female, this narrative is in tension with our respondents’ apparent embrace of their first and only status. Moreover, with the possible exception of employee relations, our interviews largely fail to support the theory that a critical mass of female directors will produce different, and distinctly feminine, boardroom outcomes.
I will, of course, be back with much more on this topic in the future.
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