Tension in Directors’ Views of Corporate Board Diversity

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday July 9, 2013 at 9:14 am
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Editor’s Note: The following post comes to us from Lissa L. Broome and John M. Conley, Wells Fargo Professor of Banking Law and William Rand Kenan Jr. Professor of Law, respectively, at University of North Carolina School of Law, and Kimberly D. Krawiec, Kathrine Robinson Everett Professor of Law at Duke Law School.

Corporate boards lack significant race and gender diversity. The numbers have improved over the years, but have moved relatively little in the last ten years. The percentage of board seats held by women in Fortune 100 companies increased from 14.9% in 2004 to 15.5% in 2010, while the percentage of board seats held by minorities (including female minorities) increased from 16.9% in 2004 to 18% in 2010. There is a great deal of discussion in the popular press about the lack of board diversity and the need for more diverse boards, with some European countries having mandated board gender diversity quotas. We began this project with these numbers as a backdrop and an interest in two related questions: Why do corporate boards pursue diversity (defined in terms of gender, race, and ethnicity)—even to the limited extent that they do—and what difference might diversity make to how boards work? There has been substantial quantitative research on the second of these questions, and the results can fairly be described as mixed.

Our research has employed a qualitative interview strategy to pursue both questions. We have interviewed fifty-seven people with direct experience with corporate boards, as directors, executives, consultants, regulators, or proxy advisors. Fifty of these serve or have served as directors of publicly traded corporations. Using a method rooted in anthropology and discourse analysis, we have worked from a general topic outline and conducted open-ended interviews in which we encouraged respondents to raise and develop issues of interest to them.

Two overarching themes have been pervasive in our interviews: First, there is near-unanimous agreement that board diversity is a valuable outcome that is worth striving for. But second, it is very difficult for our respondents to provide examples from their experience of when board diversity has made a tangible difference. We have heard abundant stories about when other kinds of diversity—what might be called functional diversity: different business backgrounds and skills, for example—have made a difference in how effectively boards work. But pressing respondents for comparable stories about demographic diversity has yielded very little beyond awkward silences. Respondents have sometimes commented on that very awkwardness, noting how difficult—and perhaps dangerous—it is to talk about gender and—especially—race making a difference without engaging in essentializing or stereotyping.

But even if they have found it difficult to give concrete examples, our respondents have provided well-developed (and perhaps well-rehearsed) theories about why board diversity is valuable. They include:

  • Perhaps the most pervasive justification we have heard is that diverse boards engage in richer and ultimately more effective discussion and debate. People of diverse backgrounds bring different perspectives, experiences, concerns, and sensibilities to the boardroom; people of diverse backgrounds are more willing to question and dissent from the status quo; and diversity in the boardroom minimizes what one respondent called “the danger of groupthink.”
  • Directors of diverse backgrounds insure that the perspectives and concerns of often-ignored constituencies are represented in board discussions. These can include female and minority customers; rank-and-file employees (to whose needs female and minority directors are said to be better attuned than white males); female and minority prospects for executive positions and future board seats; and communities that a company’s business may affect.
  • The presence of female and minority directors sends signals to various constituencies about a company’s values. Those constituencies include employees at all levels, customers, communities, regulators and other government actors, and the public.
  • Female and minority directors can help in unique and tangible ways with marketing, customer relations, and employee relations.
  • A company that does not have a diverse board is failing to tap into a significant part of the relevant talent pool, and is therefore likely to be less effective.
  • Very rarely, our respondents have said that pursuing diversity is simply the right thing to do, as a matter of fundamental fairness or making up for the historical record of discrimination and exclusion at the highest levels of corporate management.

As we emphasize repeatedly in the complete paper (2013 University of Illinois Law Review 919-58), concrete examples that validate these various theories have been very hard to find. We have also been struck by the similarities between these arguments and those advanced by Justice Powell in his famous opinion in Bakke (which appeared to have injected “diversity” in its present sense into the public discourse). Like Justice Powell, our respondents suggest that demographic diversity is a proxy for different experiences, sensibilities, and points of view. Just as he argued that, as a consequence, the discourse in a diverse classroom would be broader and deeper, our respondents contend that diverse boards will engage in richer and more productive debate and examine business problems in more comprehensive ways. For legal reasons, Justice Powell did not argue for diversity on remedial or compensatory grounds. In an interesting convergence, only a few of our respondents made arguments for board diversity that were grounded in social justice and fundamental fairness.

While pursuit of diversity may be fraught with ambiguity, the outcome of that pursuit is not. The numbers are inescapable: boards are not diverse along gender or racial grounds. During the course of our interviews we heard many concrete ideas for improving those numbers, including;

  • Define qualifications more broadly.
  • Do not require prior public company board experience.
  • Limit some searches to women or minority candidates.
  • Identify the skill sets needed for new board members and then look specifically for women or minorities who have that skill set, rather using diversity as a “plus” factor.
  • Value different perspectives that could be provided by someone with different industry experience, or from a younger person with experience with social media or other emerging technologies that older directors may not be familiar with.

It remains to be seen, of course, whether those ideas will be implemented to any significant extent and, if so, whether they will lead to greater diversity. If that does happen, the next—and ultimately most interesting—question will be whether and how increased diversity changes boardroom dynamics. Based on the evidence of this study, it could go either way. Perhaps diversity really will produce different perspectives that lead to richer discussion, less groupthink, and better-informed decisions. But it is also possible that the pressure to fit in and reach consensus, and the concomitant fear of contentious debate and divisive votes, will overwhelm the potential value of difference. If that happens, tomorrow’s boards could look different while continuing to reproduce yesterday’s status quo.

The full paper is available for download here.

  1. Of course there is tension. Affirmative action was always about social engineering, and thus by definition emphasizes the public, over the individual (or individual institution’s), good. But overtly supporting social engineering is seriously out of style, even with the left, not to mention potentially invalid Constitutionally, and so we now try to figure out how to come up with ways in which favoring minorities benefits the individual institutions themselves. Thus the touting of the benefits of “diversity”. It’s always been a cynical way to have the end justify the means.

    Comment by Roddy — July 9, 2013 @ 12:14 pm

  2. The comment seems to highlight the fundamental issue. Why would diversity been seen as a way to favor minorities, as opposed to broadening the talent pool and stepping outside of traditional pathways to identify and select qualified candidates? To say appointing minorities is a favor or requires some form of affirmative action or social engineering, implies that appointing minority (whatever definition you choose for that term) candidates requires taking some sort of talent risk and automatically means accepting a less qualified candidate. It’s not surprising that social justice doesn’t really drive the issue, because at the core “doing the right thing” isn’t the point, structuring effective Boards is. Surely no one group has a monopoly on the type of intellect, skills, experience and qualifications required for Board service, yet the current composition of most Boards remains very homogeneous. Given the available talent pool this seems to clearly be a voluntary choice.

    Comment by Dale — August 5, 2013 @ 5:00 pm

 

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