Rhode & Packel, corporate governance experts working at Stanford Law and Stanford's Rock Center respectively, published a paper last month available via ECGI and SSRN entitled Diversity on Corporate Boards: How Much Difference Does Difference Make? It is a good read for any student of corporate governance as it surveys and considers the case for diversity (including gender, racial and ethnic diversity) on corporate boards and comes to some unexpected conclusions.
Rhode & Packel start by surveying academic research papers supporting a positive relationship between diversity and performance. For example, they cite the 2007 Catalyst Study which indicated firms with greater diversity outperformed those with lower levels, for a set of Fortune 500 companies. They also consider studies finding no or a negative relationship, including those which map gender diversity versus ROA, Tobin's Q score and other financial metrics. The bottom line is that the authors can not conclusively establish a strong link between boardroom diversity and financial performance after considering the various methodologies present in research domains. I am once again struck by the challenge to establish linkages between boardroom composition and performance, an issue I have considered in the context of risk governance. The fact is that observing effective corporate governance norms and linking it to performance, or going further yet and considering causality, is easier said than done. Our old friend endogenity, omitted variables and the like...
Rhode & Packel start by surveying academic research papers supporting a positive relationship between diversity and performance. For example, they cite the 2007 Catalyst Study which indicated firms with greater diversity outperformed those with lower levels, for a set of Fortune 500 companies. They also consider studies finding no or a negative relationship, including those which map gender diversity versus ROA, Tobin's Q score and other financial metrics. The bottom line is that the authors can not conclusively establish a strong link between boardroom diversity and financial performance after considering the various methodologies present in research domains. I am once again struck by the challenge to establish linkages between boardroom composition and performance, an issue I have considered in the context of risk governance. The fact is that observing effective corporate governance norms and linking it to performance, or going further yet and considering causality, is easier said than done. Our old friend endogenity, omitted variables and the like...
However, the paper does argue effectively in favour of diversity as a means of improving boardroom communication, decision making and the firm's reputation and image when diversity is encouraged in the boardrooom. The authors cite several common arguments, including: reducing tendancies to engage in groupthink, greater inclusion to encourage diverse capabilities, greater potential collaboration, the generation of cognitive conflict (or a wider set of perspectives), and the signalling effect of diversity that re-inforces the acceptance of differences of opinion and debate. A good recap is available on the Harvard Law School's Corporate Goveranance blog as well.
References
Rhode, D and Packel, A. (2014) Diversity on Corporate Boards: How Much Difference Does Difference Make? Delaware Journal of Corporate Law, 39 (2), pp. 377 - 426.
Comments
Post a Comment