Introduction
Diversity can be seen from a gender perspective or it can include a variety of factors such as multiplicity of thought, geography, age, career, and experience. Why is diversity often associated with placing women on boards? What is diversity and does it improve 
board performance? Do the problems boards face really have anything to do with diversity?
Diversity Needed or Not
An article by Yilmaz Arguden , June 7, 2012, where it is stated that “Diversity on boards is critical to sustaining performance. Broadening the composition of the board increases the size of the candidate pool and, more importantly, helps expand perspectives at the top.” He goes on to state that “studies show that the presence of at least three women is necessary to change boardroom dynamics.”
There are arguments that women assist boards to deal more effectively with risk and long-term priorities. Research by Catalyst indicates that women board directors align with strong performance at Fortune 500 companies.
That is one side of the argument. The other side is that diversity does not make any difference. An article in the Wall Street Journal states that
“Sounds great. And it is, in theory. Unfortunately, few boards that pursue diversity ever see the wished-for returns. Many report no significant change in their performance, while others bog down in conflict and gridlock.
Why the gap between potential and reality? Why does it appear to be a lot easier to appoint a diverse board than to make it function well?
Blame it on human nature: As much as diversity is something we prize, the truth is that people often feel baffled, threatened or even annoyed by persons with views and backgrounds very different from their own. The result is that when directors are appointed because their views or backgrounds are different, they often are isolated and ignored. Constructive disagreements spill over into personal battles.”
Why Diversify
The report Board Diversity Training: A Toolkit (2008) states that diversification is important. This report designed for the non-profit sector states that it is intended:
• To help nonprofit boards of directors become more inclusive and reflective of the community by providing training, tools, support and resources that will enable them to implement organizational change.
• To increase the capacity, knowledge and confidence of individuals from ethno-racial communities who are interested in serving in leadership positions, thereby creating a new pool of skilled board candidates.
• To consult and work with ethno-racial communities, providing a connection to nonprofit organizations that address the needs and interests of both groups.
• To raise awareness in the nonprofit sector and beyond about the importance of creating inclusive, responsive and accessible organizations and institutions.
To write such a report for non-profit boards indicates that diversity in the board room is not only a good thing to do but it is essential.
Is there Proof
Douglas Y. Park, September 14, 2009, wrote that Virtcom Consulting concluded that financial performance improved after a company’s board diversity increased. However, several factors limit the generalizability and robustness of the results. The factors outlined were:
1. This is a small set of case studies, not a large sample.
The hypothesis that diversity increases corporate performance must be rigorously tested through statistical analysis of a large sample.
2. The time period is too short.
The data covers only a few years. Further, the data covers only the first several years after board composition is altered. But it is certainly possible that corporate performance improves after any substantial change in board composition, regardless of whether its diversity increases.
3. Alternate explanations are not examined.
The study did not control for the effects of other explanatory or control variables. Thus, we have no idea whether the results would hold after other factors are considered.
At this point, the body of research on this topic is insufficient and inadequate. Further study is needed to determine whether board diversity can be shown to have a positive, statistically significant effect on corporate performance. Follow this link to view the full article.
R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, Monday January 2, 2012, wrote that “To date there is almost no evidence that the market reacts to female director appointments.” Even though there is a positive reaction to the appointment of women to boards, it appears that it is difficult to demonstrate a causal relationship between the appointments and final outcomes.
Therefore, why diversify?
Benefits of Diversification
The benefits to diversification include
- representation of distinct values
- provision of an avenue for divergent opinions
- increased relationships
- improved connections
- improved risks analysis
- increased opportunities, and
- demonstration of inclusionary practices
There may need to be more studies but it is essential to hear from real people who sit on boards and are facing the everyday challenges of board governance. What is your experience? Is there proof that board of director diversification is essential for the practice of excellence in governance?
