FAC­ULTY FO­CUS Dae­hyun Kim

Rotman Management Magazine - - CONTENTS - In­ter­view by Jaren Kerr

De­scribe the cur­rent state of ‘women on boards of di­rec­tors’.

The av­er­age pro­por­tion of women di­rec­tors on the boards of S&P 1500 firms has steadily in­creased, from seven per cent in 1998 to 16 per cent in 2015. Nev­er­the­less, women are still sig­nif­i­cantly un­der­rep­re­sented in cor­po­rate boards, given that 47 per cent of the U.S. work­force con­sists of women. As of 2015, about 17 per cent of S&P 1500 boards still had no women di­rec­tors and 35 per cent had only one.

A num­ber of OECD coun­tries are ad­dress­ing this is­sue through var­i­ous forms of reg­u­la­tions. Some coun­tries have ei­ther man­dated or es­tab­lished vol­un­tary quo­tas for cor­po­rate boards; oth­ers, in­clud­ing Canada, re­quire dis­clo­sure ex­plain­ing the rea­son for the lack of gen­der di­ver­sity. These ef­forts are based on an ar­gu­ment that gen­der-di­verse boards im­prove firm value.

How­ever, whether gen­der di­ver­sity ac­tu­ally leads to higher firm value has been ac­tively de­bated, and the lit­er­a­ture doc­u­ments mixed em­pir­i­cal ev­i­dence. One im­por­tant as­pect of un­der­stand­ing the re­la­tion be­tween board gen­der di­ver­sity and firm value is iden­ti­fy­ing the mech­a­nisms through which gen­der di­ver­sity im­pacts firm value. This was the ob­jec­tive of my re­search with Pro­fes­sor Laura Starks.

Based on your find­ings, what does a com­pany lose if it doesn’t have any women on its board?

A board of di­rec­tors with­out any women is more likely to be miss­ing some key skill sets — in other words, func­tional ex­per­tise — that could im­prove the board’s ad­vi­sory ef­fec­tive­ness; and a less ef­fec­tive ad­vi­sory board, in turn, is as­so­ci­ated with lower firm value. We iden­ti­fied 16 skill sets that have been deemed crit­i­cal for cor­po­rate boards to ef­fec­tively ad­vise man­age­ment. When we ex­am­ined the re­la­tion be­tween the­seskillset­sandin­di­vid­ualdirec­tors,we­foundthat­someof these skills are much more likely to be pos­sessed by women, while oth­ers are more of­ten found in men. More im­por­tantly, we found that most of the cur­rent co­hort of cor­po­rate boards al­ready pos­sesses the skills that tend to be male-dom­i­nant; how­ever, not many have the skills that are more likely to be of­fered by women. Therefore, if a board doesn’t have any

fe­male di­rec­tors, it is miss­ing some crit­i­cal skills that would im­prove its ad­vi­sory ca­pac­ity.

De­scribe which skill sets women tend to ex­cel in.

The types of ex­per­tise that women are more likely to pos­sess in­clude risk man­age­ment, hu­man re­sources, sus­tain­abil­ity, cor­po­rate gov­er­nance, reg­u­la­tory/le­gal/com­pli­ance, and po­lit­i­cal/gov­ern­ment. As I men­tioned ear­lier, these skill sets are cur­rently lack­ing on most boards, par­tic­u­larly at smaller firms: Less than half of S&P Small­cap 600 boards have a di­rec­tor with ex­per­tise in risk man­age­ment, hu­man re­sources, sus­tain­abil­ity or po­lit­i­cal/gov­ern­ment. By con­trast, all four of the male-dom­i­nated skill cat­e­gories — fi­nance, merg­ers & ac­qui­si­tions, op­er­a­tions, and tech­nol­ogy — can be found in the ma­jor­ity of those boards.

You in­di­cate that smaller firms are even worse off than big­ger firms. Is there a par­tic­u­lar rea­son why smaller firms strug­gle more with this is­sue?

In­deed, the lack of gen­der di­ver­sity is more se­vere in smaller [S&P Small­cap 600] firms. Per­haps it’s be­cause in­vestors don’t put as much pres­sure on these firms: The smaller a firm, the less scru­tiny it re­ceives from the pub­lic. Also, from an in­vestor’s point of view, the same gov­er­nance change will have a much greater val­u­a­tion im­pact when the change takes place at a larger firm. That is why cor­po­rate gov­er­nance im­prove­ments usu­ally start with the big firms. The ef­fort to di­ver­sify boards hasn’t reached all the way down to the smaller firms yet — at least, not in the U.S.

That said, the sit­u­a­tion isn’t much bet­ter for larger [S&P 500] firms. Even though many S&P 500 firms now have one or more women on the board, an av­er­age S&P 500 board con­sisted of only 20 per cent fe­male di­rec­tors as of 2015. Clearly, we can’t call that ‘di­verse’.

What bar­ri­ers and bi­ases are pre­vent­ing gen­der par­ity— or any­thing close to it—on these boards?

The pri­mary bar­rier is the be­lief that women don’t have the re­quired knowl­edge or ex­pe­ri­ence to serve on cor­po­rate boards. This ‘be­lief ’ is some­times dis­sem­i­nated by in­cum- bent di­rec­tors with no sup­port­ing ev­i­dence back­ing up such a claim. In fact, there is al­ready a sig­nif­i­cant and grow­ing num­ber of women in se­nior man­age­ment with the re­quired ex­pe­ri­ence and ex­per­tise. Know­ing this through data, I find it dif­fi­cult to ac­cept the claim that there aren’t enough qual­i­fied women to be­come board mem­bers.

Since cor­po­rate di­rec­tor­ships can en­hance one’s sta­tus and reputation in the busi­ness com­mu­nity, it is un­der­stand­able that ex­ist­ing di­rec­tors can be very pro­tec­tive of their ‘turf.’ In­for­mally, this so-called ‘old boys’ club’ con­sists of mem­bers of a spe­cific gen­der and race. Un­less you re­sem­ble the other mem­bers of the club, it is ex­tremely dif­fi­cult to pen­e­trate.

Broadly speak­ing, your re­search finds that hetero­gene­ity tends to in­crease firm value. Is this widely ac­cepted in busi­ness cir­cles?

Or­ga­ni­za­tional be­hav­iour stud­ies doc­u­ment that hetero­gene­ity in opin­ions and per­spec­tives among group mem­bers im­proves a group’s de­ci­sion mak­ing. Cor­po­rate di­rec­tors, in gen­eral, tend to agree with this ar­gu­ment and be­lieve such hetero­gene­ity in­creases firm value. How­ever, to my knowl­edge, no prior stud­ies have em­pir­i­cally ex­am­ined whether hetero­gene­ity in opin­ions among board mem­bers ac­tu­ally im­proves firm value. Prof. Starks and I have been work­ing on an­other study that at­tempts to an­swer this ques­tion. In that study, we find that hetero­gene­ity of board mem­bers’ func­tional ex­per­tise — the source for their pro­fes­sional opin­ions at board meet­ings — does in­deed im­prove firm value, as mea­sured by Tobin’s q [the ra­tio of the mar­ket value of a com­pany’s as­sets di­vided by the re­place­ment cost of its as­sets (book value)].

Do you think your find­ings would be sim­i­lar if you ex­plored other types of di­ver­sity, such as eth­nic or racial di­ver­sity?

I haven’t ex­am­ined the val­u­a­tion ef­fect in terms of other di­ver­sity cat­e­gories as of yet, but that is some­thing I am in­ter­ested in do­ing. The rea­son we first ex­am­ined gen­der di­ver­sity is be­cause gen­der is cur­rently the pri­mary fo­cus

Hetero­gene­ity in opin­ions among group mem­bers im­proves a group’s de­ci­sion mak­ing.

of the board di­ver­sity debate, not just in North Amer­ica but world­wide.

Faced with this re­sis­tance, what can pro­po­nents of di­ver­sity do to con­vince boards that this is not just a moral ar­gu­ment but a newly-es­tab­lished bench­mark that will im­prove the health of their busi­ness?

That’s an im­por­tant ques­tion, be­cause as in­di­cated, one thing gen­der di­ver­sity pro­po­nents have been strug­gling with, is the lack of causal ev­i­dence in prior stud­ies. We tried to ad­dress this is­sue by show­ing a mech­a­nism through which women di­rec­tors could con­trib­ute to cor­po­rate boards.

Cor­po­rate laws in the U.S. re­quire boards to act in the best long-term in­ter­est of the cor­po­ra­tion. Based on that, boards have been ve­he­mently op­pos­ing the push for gen­der di­ver­sity when it is pre­sented as a moral or so­cial ar­gu­ment. Of­ten­times, the pri­mary ar­gu­ment against gen­der di­ver­sity is that the board must seek di­ver­sity not in terms of gen­der, but rather with re­spect to ex­per­tise, opin­ions, and per­spec­tives, since it is hetero­gene­ity in these traits — not gen­der per se — that im­proves a firm’s long-term value.

The premise of our study is con­sis­tent with the ar­gu­ment that hetero­gene­ity of ex­per­tise is what mat­ters. That said, our re­sults show that fe­male di­rec­tors are likely to pos­sess spe­cific types of ex­per­tise that are of­ten miss­ing in in­cum­bent boards, and that when added, this broad­ens the opin­ions and per­spec­tives in the board­room. These re­sults, cou­pled with the re­sults from the other work­ing pa­per I men­tioned ear­lier, sug­gest that ap­point­ing more women to cor­po­rate boards makes fi­nan­cial sense: Women di­rec­tors are more likely to bring new per­spec­tives, hence im­prov­ing the qual­ity of a board’s strate­gic dis­cus­sions and the re­sult­ing de­ci­sions; this, in turn, is as­so­ci­ated with a higher firm value.

Is it pos­si­ble that men sim­ply don’t value the par­tic­u­lar skill sets that women tend to hold? That they, for ex­am­ple, pri­or­i­tize fi­nance over hu­man re­sources?

I can­not an­swer why men or women tend to be more dom­i­nant on a cer­tain set of skills, be­cause I don’t have data on that. I think it may be due to dif­fer­ences in ca­reer paths.

What I can say is that cor­po­rate boards do not per­ceive fe­male-dom­i­nant skill sets as unim­por­tant. The 16 crit­i­cal skill sets were de­ter­mined by or­ga­ni­za­tions that rep­re­sent and ad­vo­cate for cor­po­rate boards, such as the Con­fer­ence Board and the Na­tional As­so­ci­a­tion of Cor­po­rate Di­rec­tors. These are or­ga­ni­za­tions who rec­om­mend best prac­tices from the cor­po­rate boards’ point of view.

It would be dif­fi­cult to ar­gue that the fe­male-dom­i­nant skills are not cru­cial for cor­po­rate boards. Take, for ex­am­ple, risk man­age­ment: most boards want to have a risk man­age­ment ex­pert, but ar­gue that it is dif­fi­cult to find qual­i­fied can­di­dates. If the boards ex­pand their search to in­clude more women, I think they would find these ex­perts more eas­ily. Ar­guably, ex­per­tise in HR is one of the most cru­cial needs for any cor­po­rate board. All boards have gov­er­nance or nom­i­nat­ing com­mit­tees that nom­i­nate or ap­point di­rec­tors as well as CEOS, and com­pen­sa­tion com­mit­tees that set ex­ec­u­tive com­pen­sa­tion. Sus­tain­abil­ity is also be­com­ing a very im­por­tant is­sue. Many firms nowa­days are very fo­cused on their cor­po­rate so­cial re­spon­si­bil­ity ac­tiv­i­ties: hav­ing a di­rec­tor with sus­tain­abil­ity ex­per­tise would en­hance the firms’ long-term strate­gic di­rec­tion on cor­po­rate so­cial re­spon­si­bil­ity.

In ev­ery dis­cus­sion about the im­por­tance of em­brac­ing di­ver­sity, there is an im­plicit debate about whether the is­sue is a ‘pipe­line prob­lem’ or a re­cruit­ment prob­lem. It’s not that com­pa­nies don’t want women on their boards; they just can’t find them. Or, is it a re­cruit­ment is­sue, whereby peo­ple are only look­ing within their pre-ex­ist­ing net­works, which tend to be ho­moge­nous—i.e. ‘white men re­cruit more white men’?

I think it’s both. The re­sults of our study sug­gest that a re­cruit­ment prob­lem ex­ists, where in­cum­bent cor­po­rate boards fail to tap into po­ten­tial fe­male di­rec­tor can­di­dates. That said, even though my ex­per­tise is in cor­po­rate boards, I know that there is also an im­bal­ance of gen­der in se­nior man­age­ment roles, and in that case, it is mostly about the pipe­line. Then the im­plicit ques­tion be­comes: Should we

women on boards?

If we take a bot­tom-up ap­proach, we would be say­ing the pipe­line is the main prob­lem. To solve this prob­lem, we have to in­crease the pro­por­tion of fe­male em­ploy­ees along the cor­po­rate hi­er­ar­chy, in­clud­ing se­nior ex­ec­u­tives; and then, hope that such a change will lead to more women serv­ing on boards. Al­ter­na­tively, we could take a top-down ap­proach by, for ex­am­ple, im­ple­ment­ing a quota that in­creases the num­ber of fe­male cor­po­rate di­rec­tors, with the hopes that di­ver­sity at the top will trickle down to the en­tire firm.

Per­son­ally, I think the bot­tom-up ap­proach is very dif­fi­cult to achieve, and I make that claim based on a his­tor­i­cal fact on labour statis­tics: In the U.S., the pro­por­tion of women in the to­tal labour force has grad­u­ally grown from 38 per cent in 1974 to 46 per cent in 1997; since then, this num­ber has stayed con­stant at 46-47 per cent. If the bot­tom-up ap­proach were ef­fec­tive, we would have ex­pected a con­ver­gence be­tween the pro­por­tion of women on boards and in the labour mar­ket. Af­ter 40 plus years of ex­per­i­ment, we now know that this con­ver­gence did not hap­pen nat­u­rally.

In my view, it’s bet­ter to fo­cus on achiev­ing di­ver­sity from the top-down — by start­ing to grad­u­ally add more women on cor­po­rate boards over time, like the French model, to min­i­mize a sud­den, dis­rup­tive change in board com­po­si­tion. That sends a clear sig­nal, not just to em­ploy­ees, but to the next gen­er­a­tion of busi­ness lead­ers. If they see di­ver­sity at the very top of our most suc­cess­ful cor­po­ra­tions, our next gen­er­a­tion will grow up be­liev­ing that di­ver­sity in cor­po­rate lead­er­ship is the norm.

FIG­URE ONE

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