Board Diversity: How Much Difference Does “Difference” Make?

Board Diversity: How Much Difference Does “Difference” Make?

In a recent post on the Harvard Law School Forum on Corporate Governance and Financial Regulations, Deborah L. Rhode and Amanda K. Packel take a closer look at the actual impact of diversity on corporate boards, both in terms of the financial performance of firms with more diverse boards and more broadly.

The authors begin their post by highlighting the increased global attention on more diverse BoDs. They note “More than a dozen countries now require some form of quotas to increase women’s representation on boards, and many more have voluntary quotas in corporate governance codes. In the United States, support for diversity has grown in principle, but progress has lagged in practice…”

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Corporate boards: Increasing diversity can help improve financial performance

Some studies have shown that more diverse corporate boards do tend to produce better financial performance, but others have shown little correlation. After reviewing the research on the subject, Rhode and Packel conclude: “An overview of recent studies reveals that the relationship between diversity and financial performance has not been convincingly established.”

They continue, however, to say there is “some theoretical and empirical basis for believing that when diversity is well managed, it can improve decision-making and enhance a corporation’s public image by conveying commitments to equal opportunity and inclusion.”

Rhode and Packel also note they believe “increasing diversity should be a social priority, but not for the reasons often assumed.” They say the “business case for diversity” is not as important other reasons “rooted in social justice, equal opportunity, and corporate reputation.”

Progress toward corporate boards’ diversity stalled last few years

However, the blog also notes that the move forward to greater diversity on corporate boards “seems to have stalled.” The authors point to data from Spencer Stuart that shows the share of S&P 500 company board seats held by women has only grown from 16% in 2004 to 19% in 2014. Moreover, the proportion of board seats held by minorities in the biggest 200 S&P 500 companies has stalled at 15% for the last several years. Recent data do show progress in some areas, as in 2014, a record 30% of newly appointed independent directors in S&P 500 firms were women.

Rhode and Packel also assert there is a “growing consensus within the corporate community is that diversity is an important goal.” They go on to argue that the case for diversity has two central grounds: “First, diversity provides equal opportunity to groups historically excluded from positions of power and enables full use of the pool of available talent.” The second claim is that diversity will improve organizational processes and performance.

The authors also point out that the business case for diversity tends to dominate debates in part because it appeals to the long-held key corporate metric of shareholder value, but they say there’s more to improved business performance than just share price.

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