- Business and Employment
Gender and Ethnic Inequality on Board - Benefits and Implications
Old Boys Club
Gender & Ethnic Inequality
There have been many reports published throughout the years regarding the impact of board diversification and financial performance of the firm. The results thus far are inconclusive. In 2003 a study was published that highlighted the positive impact that women and ethnic minorities (EM) have on board performance. This study exhibited that diverse boards lead to a better return on assets and return on investment. A 2012 report published by Credit Suisse Research Institute reaffirms the above study by showing that of the 2360 companies analysed in the study evidence would suggest that those with women on their boards financially perform better. This statement was true for increases in share prices; especially in the post-crash years, and also a higher return on equity, lower gearing, and an overall better average growth. On the contrasting side Hussein and Kiwia in their 2009 report state that there is no relationship between female board membership and firm performance in terms of return on assets or Tobin’s Q ratio.
The evidence that female representation on board does increase financial performance is stronger. However, there are too many mitigating factors to enable a conclusive answer to the question. Although board diversity may not conclusively benefit the financial performance of the firm it does give rise to other arguments displaying the benefits of more diverse boards and the implications that may arise by not having a diverse board.
Benefits of Diverse Board
1. Decision Making
It has been recognised that a board of Old White Men (OWM) that originate from similar a societal class with a similar background can lead to a lack of innovation and creativity in assessing the continuously changing needs of a company. A diverse board allows the top tier of a firm to approach problems that may arise from a number of different perspectives. Male and females, in general, have inherently differing approaches to coping in uncertain environments. The variety on a board will allow the firm to be better organised in terms of managing risk during the unpredictable climates. It has been argued that homogeneous boards are faster to react and make decisions than heterogeneous boards. However, the evidence merely suggests that boards are quicker to react and make decisions. It fails to indicate the success rate of their actions or the opportunity costs suffered because of their hasty decisions.
2. Customer Appeal
The recent increased focus on corporate governance of large publically traded companies has been widely reported across news outlets. This has afforded people that ordinarily would not have an insight into the board composition of these companies the opportunity to alter their perspective on these companies.
This is significant as it may relate to where consumers decide to spend their money. In 2013 white people accounted for 84% of the US buying power while this figure was just 9% for African-Americans (AfA), 6% for Asian-Americans (AsA), and 1% for Native Americans (NA). However, the percentage increasing in buying power from 2000-2013 has increased 78% for AfA, 160% for AsA, and 139% for NA while the smallest increase has been attributed to white people with 63%.
While the above statistics are focused on the astronomical growth figures presented by EM over the last number of years and what is expected to continue in the future, a figure that is understated by large companies is the purchasing power that women have. Women account for 76% of all US purchasing power. The missed opportunity to increase women’s roles and significance on the boards as a result of this is inconceivable.
In a changing economy it is important that companies recognise the importance to society of having a diverse board. This diversity impacts on public perception and thus where consumers shop. The greater buying power that is being achieved by EM and women is also an incentive to create a more diverse board as EM and women on boards can exert knowledge that is relative to these groups of consumers. This will address the aforementioned issue of OWM boards lacking innovation.
S&P 1500 Female Board Inclusion
Implications for not having a diverse Board
Implications of a Non-Diverse Board
1. Discourage Corporate Career
Currently there are a number of factors that may cause a women or EM not to pursue a corporate career. The main factor that this paper will discuss is the lack of corporate leader role models for these two groups. This lack of role model has a trickling down effect throughout the layers within companies and indeed students that may ordinarily seek to pursue a corporate career.
The introduction of this paper mentioned that of the Fortune 500 companies women accounted for just 4.8% of CEOs in 2014. Meanwhile the overall percentage of seats held by women of the same companies is 20%. This lack of natural progression can be emphasised even further when the fact that women account for 51.5% of jobs in management, professional services and related operations in the US is considered. The same statistic shows that EM have a 26% representation. Similarly this is not indicative of their holding of seats on the Fortune 500 companies.
This ‘glass ceiling’ that is evident by analysing the above statistics has been said to shrink the leadership talent pool, downscale ambition, lower achievements, and lead to a complete exit from corporate life. In 1999 the US peaked in terms of women participating in the workforce. At that time women accounted for 60% of the labour force. This figure has dropped over the following years and in 2013 57.2% of women were considered part of the workforce.
The evidence that women are leaving the workforce may show a marginal decline in participation it is still a regressive movement that could indicate a decline in the ambition of corporate women. This is an issue that could be addressed by creating a clear system of progression through companies and appointing a higher number of directors to the boards. However, in order for the system of progression to work it is essential that the appointments to the board are based entirely on merit and that no aspect of tokenism comes into play.
2. Supplier status
The implications for not having a diverse board may not only affect the relationship with customers and staff but it may also impact on the success of gaining contracts that are being tendered our by large private companies or the public sector. In more recent times these contracts have had an element of assessment with regarded to how a company is managing gender and ethnic diversity.
In 2010 the US government introduced the Dodd-Frank Wall Street Reform and Consumer Protection Act. Contained in this act are the expected standard that are to be met by companies in the US. There is a specific provision for increased interaction to take place towards the awarding of contracts to “minority-owned and women-owned vendors”. The provisions of this act have been adhered to by companies and the evidence suggested that there has been an active effort by companies to sub-contract the aforementioned companies. In 2012, two years after the introduction of the act, 9.6% of all contract dollars went to minority or women owned businesses. This figure had increased by 6.3% to 15.9% just two years later.
The significant increase in percentage over two years should be a worrying sign for companies that have boards mainly consisting of OWM. The trend that is being set in motion will inevitably have an impact on the operation of their companies if they fail to act. It is indispensible that large publically traded companies aim to appoint adequately qualified and justifiable ethnic minorities and women to their boards to be in with a chance of competing for these contracts in the future.
3. Talent Pool
Large publically traded companies are always trying to be innovative in order to remain market leaders in their respective fields. The process of remaining at, or ascending to, the top requires the recruitment of top talent. It has been argued that companies that engage in recruiting large numbers of women into managerial positions perform better as they have a more diverse and vaster talent pool to choose from. This is something that should be considered when selecting board of directors.
The ideology by Shrader mentioned above has a limited significance when hypothetically applied to the recruitment processes used by boards. A report published in 2003 exhibited the true nature of recruitment on boards of large publically traded companies. The Higgs Report, as it is known, unveiled that of the non-executive directors surveyed fewer than 50% had been appointed to their role through a pre-existing friendship or personal contact. This significance of that statistic is dwarfed when you consider that only 4% of the directors were required to attend a formal interview.
The two findings of the aforementioned reports call into consideration what the exact aims of large publically traded companies are. On the one hand you have a report highlighting the financial performance benefits of employing from a vaster pool for top positions yet, on the other hand, you have a report stating that once you’re in the ‘old boys club’ you will be looked after even if your impact on the firm is not as beneficial as an EM or woman could be.
A world of change
Is it time for the world largest companies to lead the charge of Board diversification?
© 2018 John Wolfgang