In 2021 the U.S. Securities and Exchange Commission approved a rule requiring most companies on the Nasdaq exchange to have at least two directors from underrepresented groups—minority, female, or LGBTQ+—or to explain why they don’t. Such initiatives are laudable not only for reasons of fairness: Research shows that heterogeneity in groups boosts the quality of decision-making. Yet little evidence has persuasively linked increased board diversity with improved firm outcomes. A new study explores why and suggests conditions that can help.
Diversity on corporate boards is an urgent priority, emphasized by company leaders and public policy agendas. For example, in 2021 the U.S. Securities and Exchange Commission approved a rule requiring most companies on the Nasdaq exchange to have at least two directors from underrepresented groups—minority, female, or LGBTQ+—or to explain why they don’t. Such initiatives are laudable not only for reasons of fairness: Research shows that heterogeneity in groups boosts the quality of decision-making. Yet little evidence has persuasively linked increased board diversity with improved firm outcomes. A new study explores why and suggests conditions that can help.
The researchers worked with the auditors of 54 U.S. public companies to code the transcripts of every board meeting from 1994 to 2006 to determine the number of minutes each director spoke. This revealed, unsurprisingly, that women and Black directors typically held the floor much less than white men did. (The coding did not extend to other underrepresented groups.) Controlling for the differing sizes of corporate boards, each white man spoke, on average, for 11% of the total annual board meeting time, whereas each Black man spoke for just 4% and each woman just 8% of the time. The researchers continued tracking transcripts after the close of the study and saw the same results: Black and female members were still not speaking out. “Without the participation of underrepresented directors,” the researchers write, “the potential benefits of board diversity are lost.”
Because board transcripts are confidential, the analysis was solely quantitative and thus the researchers could not document why such directors were so reticent. But anecdotal evidence suggests that white male members’ behavior often exerted a chilling effect. They cite the experience of Liz Dolan, who resigned from the board of the action sports and apparel company Quiksilver in 2015 after learning she had been excluded from critical discussions. “Even when a woman earns a seat at the table,” Dolan wrote in Fortune, “the men can put you in a soundproof booth.” It may also be that members of underrepresented groups felt insecure and censored themselves. “It’s difficult to imagine corporate directors being intimidated; they are usually very successful and dynamic people,” says the University of Central Arkansas’s Christopher Tuggle, who led the study. “But relative status matters even in a group of highfliers.”
Two factors helped boost participation among Black and female directors. First, those who had previously held a high-status role—such as CEO, dean or president of a university, general or admiral in the military, or state- or national-level political office—were much more likely than others to speak up. White female directors with such experience participated, on average, more than twice as much as their lower-status counterparts, while high-status Black male directors participated 150% more than theirs. (High status had a minimal effect on the participation of white men, presumably, the researchers note, because as members of the majority group, they were less likely to feel insecure.) “High-prestige individuals seemed to have the confidence to speak up—and white men appeared to cede the floor when they did,” Tuggle says.
Second, boards with two or more Black or female directors experienced more-equal participation among members than boards with only one member of an underrepresented group. This suggests that those directors felt a kinship—even if their race or gender differed—that helped them hold their own in the group. The process of recruiting a second member of an underrepresented group may also make a difference, the researchers say. Imagine that you’re listening to your board make the case for why it needs another female or minority member. “You’ve heard all about the importance of heterogeneity,” explains Texas A&M’s Leonard Bierman, a coauthor of the study. “That might boost your confidence to participate while also encouraging white male directors to act in accordance with their stated beliefs.” The participation bump was particularly strong when one of the Black or female directors had high-status leadership experience. Such people appeared to serve as role models and to create an environment in which non-white-male directors felt psychologically safe speaking up.
A couple of caveats should be noted about the study: The researchers were unable to evaluate the content of directors’ speech, so minority members’ low participation could stem from a “blowhard” effect: Some white male directors may have talked a lot without contributing much of value, whereas Black or female directors may have been more incisive when they spoke. Also, the researchers had no way to measure diversity beyond the basics of gender and race, so the boards may have been more homogeneous than the number of female or minority directors suggests. “If you have a Black or female director who grew up in the same socioeconomic class as white male directors, went to the same schools, and belonged to the same clubs, have you achieved true diversity?” Bierman asks.
Those caveats notwithstanding, the findings offer several lessons for policy makers and companies. For starters, it’s not enough simply to add one or two female or minority members to a large group of white male directors. “Boards should be thinking more about proportionality than about absolute numbers,” Tuggle says.
The researchers also argue that although the SEC may have been right in approving the 2021 Nasdaq rule, it should not have allowed exemptions for boards with five or fewer directors. “There are some large family-controlled companies with small boards; they shouldn’t be given this carve-out,” Tuggle notes. What’s more, government policy and other guidelines restricting the number of boards a director may serve on—enacted with the goal of breaking up old boys’ clubs and promoting diversity—may have the unintended consequence of limiting the impact of high-prestige female and minority directors. “No one would argue that Vernon Jordan—a Black civil-rights leader—was part of an old boys’ club,” Bierman says. “Yet at one point he was on the boards of nearly a dozen major corporations. Our research suggests that he would have increased the diversity of thinking on each one.” Today’s rules might make that kind of contribution impossible.
Finally, board chairs can increase contributions from underrepresented groups by encouraging members to lay out their opinions on important issues in writing before the board meets, which can help prevent dominant voices from hijacking the discussion. And they should emphasize how crucial it is to listen to one another and remind directors of the perils of groupthink. “Our research shows the importance of structural change to enhance board diversity,” Bierman says. “But leadership matters, too.”
About the research: “From Seats at the Table to Voices in the Discussion: Antecedents of Underrepresented Director Participation in Board Meetings,” by Christopher S. Tuggle et al. (Journal of Management Studies, forthcoming)
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