Group Of Business People Having Board Meeting Around Glass Table.
In the last decade, diversity has become the buzzword for large corporations, especially when it comes to forming a board of directors. Regulators and private investors are joining the rally, with shareholders pressuring firms to appoint female and racial minorities in their most senior positions.
As directors form a sizable part of the business ecosystem's top echelon, their diverse makeup contributes to social (in)equality. Not only that, a lack of diversity among board members can impede firms from sourcing a wide range of views and voices, which is integral for firms to make strategic changes, innovate and improve their performance.
Yet, according to a 2020 analysis of the 3,000 largest publicly traded US companies, only 21% of board seats were held by female directors. It gets even bleaker: only 12.5% of board directors were from underrepresented ethnic and racial groups, 4% of which were Black. The diversity within the boards of these firms is not proportionate to the overall population in the United States. When compared to the general public, such as consumers of these companies' products and services – 50.5% of Americans are female, just under 40% are non-white, and around 12% are Black.
Sacrificing diversity during turbulent times
And from research I conducted with my colleagues, we found the situation to be even more depressing. We found that many firms pause or cut back on the amount of gender and racial diversity they have in the boardroom, as opposed to increasing it. Alongside Dr Y.G. Lee (Hong Kong University of Science and Technology) and Dr S. Park (Seoul National University), I collected the data of 733 US listed firms in the manufacturing industries over 15 years – resulting in a total of 6,672 firm observations. We analysed the changes made to the levels of expertise, gender, and race in the boardroom by the firms, when these firms were shown to be underperforming.
We found that underperforming firms were more likely to sacrifice gender and racial diversity on their boards when they were underperforming compared to their competitors or compared to times of greater productivity. To mend their performance problem, these firms were motivated to broaden their perspectives and to put their efforts into having directors with different expertise from their existing ones. But they were doing so not by inviting more female or racial minority directors whose expertise is often different from the majority boards. Instead, the board increased the level of expertise within the white male director pools.
Why does this happen? The urgent need to build consensus prompts the board to value ease of communication, trust and solidarity and to avoid potential conflict among directors. People often perceive those with similar gender and racial backgrounds as trustworthy which can build an efficient decision-making group. The data shows that the boards of these struggling firms choose someone similar to themselves as a ‘safe’ option – which translates to white male directors, whilst female or racial minority directors are dropped from boards and not replaced with those from a similar demographic.
Challenging boardroom culture
There is no obvious evidence that homogeneity within a board during moments of crisis is the solution. Firms and their boards are under pressure from shareholders to choose the same and familiar option in forming their leadership. If the board has a female or racial minority Chair in their committees, they are less likely to reduce the gender or racial diversity of a board in response to their performance problem. This finding tells us that firms should not only care about overall board diversity but also about where, historically, underrepresented people sit in the boardroom.
Businesses need to make greater efforts to make the boardroom culture more inclusive of underrepresented directors. They can do this by increasing their awareness of the value that directors from underrepresented groups can bring to the boardroom. Without these efforts, the path to achieving more gender and racial diversity on company boards will not happen, especially during periods of underperformance.
This article was authored by Dr HeeJung Jung, Assistant Professor at Imperial College Business School.
