New study finds trickle-down effect of board diversity


A new study has found that diversity on corporate boards leads to statistically significant increases in the representation of underrepresented groups at the manager and staff levels. The Study – “Do Diverse Administrators Influence DEI Results?” by Wei Cai (Columbia Graduate School of Business), Aiyesha Dey (Harvard Business School), Jillian Grennan (Santa Clara University and UC-Berkeley), Joseph Pacelli (Harvard Business School), and Lin Qiu (Purdue University) – adds to literature on board diversity and human capital management, two important ESG considerations for many companies and investors. While proponents of ESG sometimes focus on advancing each of these goals individually, the study connects the two considerations and shows that one of them (board diversity) can promote at least some aspects of the other (diversity, equity and inclusion in the workforce) .

The study

The study aimed to examine “whether greater diversity on boards is associated with more diverse workforce hiring, fairer compensation practices and more inclusive corporate cultures. , as evidenced by employees’ perceptions of cultural norms. The authors used data from a sample of S&P 1500 companies over the period 2008 to 2020, focusing on directors and their skills, employee compensation and pay gaps, corporate culture and ESG ratings from three rating agencies.

The study found “repeatedly” “statistically significant increases in underrepresented group (URG) representation at the manager and staff levels when board diversity improves.” These findings were based on analyzes of three “channels through which board diversity influences the representation of diverse talent”, and the authors found “some support for all three channels”. The three channels were ‘cognitive diversity and challenging the status quo’, ‘homophilia and intra-group preferences’ (that’s to say“the tendency of individuals to associate, interact, and bond with others who possess similar characteristics and backgrounds”), and “diverse alliance and leadership[s’] agent role in the defense of other URGs” (that’s to say“when a person in a position of privilege and power seeks to act in solidarity with another marginalized group”).

Some of the findings of the study include the following:

  • “Extended board diversity” (a measure that includes gender, ethnicity, age, education, board expertise and experience) “is statistically associated with increased diversity at all levels”.
  • Companies “with an increase in female representation on the board of directors increase female representation in the company”. The study conservatively estimated that a two percentage point increase in female board representation is associated with a 5.2% increase in female employment and a 3. 0% female staff.
  • Companies with an increase in female representation on the board also show an increase in non-white representation within the company. A two percentage point increase in women’s representation on corporate boards is associated with a 5.0% increase in non-white employment, “primarily due to the hiring of non-white staff.”
  • The study showed “a significant relationship” between nonwhite directors and nonwhite employees, but “no relationship between nonwhite directors and female employees at the company once control variables were included.” “Thus, the evidence on alliance suggests that women are stronger allies for non-white employees than non-white employees are for women.”
  • The study found “some evidence . . . that having more non-white directors is associated with lower pay gaps for non-white employees,” but “especially [saw] little evidence that board diversity alters wage differentials.
  • “Greater board diversity is significantly associated with higher star ratings for Glassdoor’s Five-Star Rating System for Company Culture” and other metrics assessing employee perceptions in their workplace and management.
  • The study found disagreement among rating agencies over ESG ratings and the S component of ESG. “This suggests that asset managers looking to integrate gender equality and racial equity into their investment decision-making process need to look beyond tick-box approaches to ESG ratings.”

Consequences

The study on the impact of board diversity on employee diversity may be of interest to companies considering the extent to which they want to consider DEI issues for their boards and workforces. . But the study could also play a role in ongoing battles over legislation and other rules requiring diversity on boards or requiring disclosure of board diversity metrics.

Those fights have raged with particular ferocity in California, where two courts earlier this year struck down two different laws relating to diversity on boards: Senate Bill 826, which required public companies with their main executive office in California to have two or three female directors (depending on the size of the company), and Assembly Bill 979, which required these companies to have at least one director from a community under -represented. Both courts ruled that the laws violated the Equal Protection Clause of the California Constitution because they allegedly affected two or more similarly situated groups unequally and did not serve a compelling state interest. Future legislative deliberations and litigation over laws of this type could take into account the type of evidence produced by the study showing that diversity on boards of directors can affect not only the performance of the board of directors and the company decision-making, but also the employment prospects and conditions of the workforce as a whole. .

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