- What evidence is there that more diverse company boards perform better?
- and, doubting that anyone else would submit anything critical, sent this off. (The paper by Boivie et al, with its splendid title "Are Boards Designed to Fail? The Implausibility of Effective Board Monitoring", is especially useful as it contains a comprehensive list of all the relevant literature, noting for each paper the theoretical framework used and summarising the findings.)
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What evidence is
there that more diverse company boards perform better?
1. To date, academic research into board diversity has
focused principally on gender diversity, and on its impact on corporate performance, rather than specifically on board performance, although some may consider the two to be
effectively synonymous. Boards are
generally assumed to perform two roles - advisory and monitoring - and the
latter has received the most attention.
A recent paper by Boivie et al (2016) provides a
comprehensive review of the literature which addresses the oversight role of
the board. They focus primarily on the board’s role as information processor and
identify ten barriers to effectiveness relative to this. They address the issue
of board diversity (p338ff) and observe that the literature suggests that,
while there may be benefits from board diversity:
“….diversity increases
certain challenges for group interactions within boards…. diversity may make it
more difficult for the group to work together thereby creating barriers that
affect boards’ ability to be effective information processors.”
(p339)
2. The literature on the impact of board diversity on
corporate performance is scattered across a range of different academic disciplinary
areas: it uses varying theoretical approaches and research methodologies and
has been conducted in a variety of national contexts. The results are inconclusive: correlations
between board gender diversity and financial performance have been identified
but the direction of causality cannot easily be inferred. Authors of these
studies are careful to include this caveat although those who cite their work
often ignore it.
A comprehensive statistical meta analysis of the literature
is provided by Post and Byron (2015) who note that:
“..our results suggest
that board diversity is neither wholly detrimental nor wholly beneficial to
firm financial performance.” (p1563)
They warn readers:
“However, we
cannot—nor do we—claim causality; we can merely claim that we have taken a few
extra steps to rule out some plausible alternative explanations for our
results. “(p1562)
3. Rhode and Packel (2015) provide a narrative review of the
literature. They cite a number of empirical studies (p393ff) which indicate
correlations between gender diversity and improvements in board process,
corporate governance oversight and corporate reputation but they also point out
that:
“…correlation does not
demonstrate causation, and it could be that well-governed corporate boards are
more committed to diversity and seek greater gender parity.” (2015:401)
4. These three recent and substantial studies of the
literature on board gender diversity therefore conclude that the evidence is
mixed and that there is no clear causal relationship between board gender
diversity and corporate performance.
Are the right
questions being asked?
5. Observing
that there is little evidence to support the business case for diversity based
narrowly on board/corporate performance, Fanto et al (2011) argue for
broadening the scope of the debate to include other justifications for
diversity. While the evidence to support policy with regard to “the
business case” for board gender diversity is inconclusive, there may be sound
social/political reasons for pursuing this. These have not been well
articulated in the UK debate which has moved to focus on how to achieve gender balance rather than why this is necessary (Spira, 2013)
This lack of challenge to fundamental assumptions may lead
to unforeseen problems in the future as economic and political environments
shift. The Committee may find it helpful to consider the more fundamental
question: does mandating board
composition improve corporate governance?
The work of Boivie et al cited above also suggests that the
evidence to support such policies is not clear cut. They cite empirical studies conducted in the
US dating from the 1990s that question this approach. The UK experience of
mandating the appointment of independent non-executive directors (NEDs)
suggests that outcomes are difficult to assess and unintended consequences may
follow.
6. Although it has taken several decades since the
publication of the Cadbury Code to embed fully the idea that board oversight
will be improved by the appointment of a specified number of independent NEDs, the assumption underlying this requirement has
not been challenged.
Identifiable and measurable criteria signifying independence
stand as proxies for the independence of mind
that is being sought in board members, and the strength of this relationship
has not been tested. Similarly, the identifiable and measurable characteristics
of diversity (gender, age, race, etc) may not provide the diversity of thinking that is posited to improve
board and corporate performance.
7. Evidence has been
available for some time that independent NED appointments do not necessarily
have the expected effect. This requirement for board composition in UK quoted
companies has led to significant structural change. Boards have become smaller
and are now predominantly non-executive. When executive directors and NEDs no
longer meet around the boardroom table, contact between the two groups is in
effect mediated by the CEO. The impact of this change on corporate governance outcomes
has yet to be assessed but intuitively one might expect communication processes
at board level to have changed. Requiring further alterations in board
composition to accommodate gender and other forms of diversity may have more
complex and unanticipated effects.
How does research
influence policy?
7. In a reflective essay on the potential usefulness of
research to policy makers, Ferreira, a leading scholar in this area, observes:
“Finally, it has never been clear to me why the
board is the place to start with policies that aim to promote better female representation
in business. Most proponents of board quotas believe that, if we smash the
glass ceiling at the board level, we will also reduce discrimination at lower
levels. I am not
sure that this conclusion follows. If a group
is more likely to be promoted to the top, perhaps employers will become more
demanding when first recruiting from this group. I would like to see more
empirical and theoretical research on this issue.” (Ferreira, 2014)
8. But even where a significant body of rigorous and robust
research is available, it may not be put to the most effective use. Eagly (2016)
explores the relationship between research findings, advocacy and policy making
around gender diversity on boards. She probes critically the use of available
research by advocates and policy makers, demonstrating that simple arguments
are chosen by these groups which do not accurately reflect the complexity of
the underlying research but then become received wisdom and remain
unchallenged.
“…simplistic renditions of scientific findings
on diversity continue to find favor among diversity’s advocates and
the legions of practitioners and consultants engaged in helping organizations
meet their diversity goals. Presented as if they were evidence-based findings,
broad claims about the advantages of diversity for group and organizational
performance appear regularly in promotional materials of consultants and
advocates. Also, their scientific allies may engage in selective citations of
those studies or portions of studies that have shown the hoped-for performance
gains, without
hinting at the general pattern of findings
across studies.” (p207)
While Eagly
urges researchers to adopt a more proactive stance in relation to the ways in
which their findings are interpreted, improved policy development could also
result from more detailed consideration of the robustness of the arguments on
which policy decisions are based.
References
Boivie, S., Bednar, M.K., Aguilera, R.V. & Andrus, J.L. (2016)
Are Boards Designed to Fail? The Implausibility of Effective Board Monitoring, The
Academy of Management Annals, 10:1, 319-407 http://dx.doi.org/10.1080/19416520.2016.1120957
Eagly, A H (2016) When Passionate Advocates Meet Research on
Diversity, Does the Honest Broker Stand a Chance? Journal of Social Issues,
Vol. 72, No. 1, 2016, pp.
199--222
Fanto, J.A., Solan, L.M. and Darley, J.M. (2011) Justifying
Board Diversity
North Carolina
Law Review Vol. 89, 902-936
Ferreira, D
(2014) Board Diversity: Should we trust research to inform policy?
Corporate
Governance: an International Review 23(2): 108–111
Post, C and Byron, K (2015)
Women On
Boards And Firm Financial Performance: A Meta-Analysis
Academy
of Management Journal Vol. 58, No. 5, 1546–1571.
Rhode, D.L and Packel,
A.K (2015)
Diversity on
Corporate Boards: How Much Difference Does Difference Make
Delaware Journal Of
Corporate Law 39, 377-426
Spira, L.F (2015) If women are the solution, what is the
problem? economia, March, 66-67
