Tuesday, February 18, 2014

Diversity and the Boardroom 2014: Part II

Notwithstanding the empirical benefits of diversity, America's boardrooms continue to be the last bastion of white male supremacy. As demonstrated above any progress in this area can only be termed glacial. As I noted in Diversity and the Boardroom 2012, it has been 50 years since discrimination was outlawed, yet there really is no sound explanation for continued under-representation on this front other than the reality of crony capitalism. The apex of the American economy is still dominated by an old boys club.

Since that posting, more empirical evidence has emerged that well-managed diversity in the boardroom enhances corporate performance. Thus, one recent study found performance reflected the benefits of diversity when a critical mass of women were present in the boardroom:
Based on critical mass theory and with the help of a hand-collected panel dataset of 151 listed German firms for the years 2000–2005, we explore whether the link between gender diversity and firm performance follows a U-shape. Controlling for reversed causality, we find evidence for gender diversity to at first negatively affect firm performance and—only after a “critical mass” of about 30 % women has been reached—to be associated with higher firm performance than completely male boards. Given our sample firms, the critical mass of 30 % women translates into an absolute number of about three women on the board and hence supports recent studies on a corresponding “magic number” of women in the boardroom.
This critical mass of women on the board is also associated with greater innovation according to another recent study:
Academic debate on the strategic importance of women corporate directors is widely recognized and still open. However, most corporate boards have only one woman director or a small minority of women directors. Therefore they can still be considered as tokens. This article addresses the following question: does an increased number of women corporate boards result in a build up of critical mass that substantially contributes to firm innovation? The aim is to test if ‘at least three women’ could constitute the desired critical mass by identifying different minorities of women directors (one woman, two women and at least three women). Tests are conducted on a sample of 317 Norwegian firms. The results suggest that attaining critical mass – going from one or two women (a few tokens) to at least three women (consistent minority) – makes it possible to enhance the level of firm innovation. Moreover, the results show that the relationship between the critical mass of women directors and the level of firm innovation is mediated by board strategic tasks.
And, finally, in the perhaps the most comprehensive study of diversity in the boardroom to date Credit Suisse looked at the performance of 2400 firms worldwide over a six year period. Credit Suisse found that:
in a like-for-like comparison, companies with at least one woman on the board would have outperformed stocks with no women on the board by 26 percent over the course of the last 6 years. However, there is a clear split between relative performance over 2005 to 2007 and the post 2008 performance. In the middle of the decade when economic growth was relatively robust, there was little difference in share price performance between companies with or without women on the board. Almost all of the outperformance in the back-test has been delivered post 2008, since the macro environment deteriorated and volatility increased.
Clearly, more work is needed to understand the underlying mechanisms of diversity benefits and the best means of unlocking the benefits of diversity. In particular, it is difficult understand the critical mass needed for the full optimal level of diversity benefits in terms of gender diversity versus ethnic diversity. Learning to manage diversity in the boardroom may take years to fully understand. After all virtually no firms have a critical mass of African Americans (or other ethnic minorities) on the board. Nevertheless, I no longer think it tenable to maintain that the business case has not been established.

Further, those on the wrong side of this issue will ultimately be proven even more wrong in coming years. The OCC, the FDIC, the Fed, the NCUA, the SEC and the CFPB jointly released proposed standards for assessing the diversity policies of regulated entities under section 342 of the Dodd-Frank Act. The standards are available in full here. Among the items the joint standards address are board and senior management diversity. This means that many regulated entities will be assessing their diversity practices under the scrutiny of federal regulators across the entire business enterprise, including the boardroom. As such diversity is sure to increase beyond its current crony capitalism constraints in the boardroom. This in turn will create a more robust foundation for diversity research.  

In my opinion, this will simply illustrate more powerfully the truth behind the fundamental logic of diversity as a key driver of innovative and critical thinking.

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