A new study has found that diversity on corporate boards of directors leads to statistically significant increases in the representation of under-represented groups at the manager and staff level.  The study – “Do Diverse Directors Influence DEI Outcomes?” 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 the growing literature on board diversity and human capital management, two significant ESG considerations for many corporations and investors.  While proponents of ESG sometimes focus on advancing each of those goals individually, the study links 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 sought to examine “whether greater board diversity is associated with more diverse workforce hiring, more equitable pay practices, and more inclusive corporate cultures, as evidenced through employees’ perceptions of cultural norms.”  The authors used data from a sample of S&P 1500 firms over the period from 2008 through 2020, focusing on directors and their skills, employee pay and salary gaps, corporate culture, and ESG ratings from three rating agencies.

The study “repeatedly” found “statistically significant increases in the representation of under-represented groups (URGs) at the manager and staff level when board diversity improves.”  Those findings were based on analyses 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 questioning of the status quo,” “homophily and in-group preferences” (i.e., “the tendency of individuals to associate, interact, and bond with others who possess similar characteristics and backgrounds”), and “allyship and diverse leader[s’] agentic role in advocating for other URGs” (i.e., “when a person in a position of privilege and power seeks to operate in solidarity with another marginalized group”).

Some of the study’s findings include the following:

• “Broad-based board diversity” (a measure that includes gender, ethnicity, age, education, expertise, and board experience) “is statistically associated with increased diversity at all depths.”

• Companies “with an increase in female representation on the board increase the female representation at the company.”  The study conservatively estimated that an increase of two percentage points in female board representation is associated with an increase of 5.2% in female employment and an increase of 3.0% in female staff.

• Companies with an increase in female representation on the board also show an increase in non-white representation at the company.  An increase of two percentage points in female board representation is associated with an increase of 5.0% in non-white employment, “primarily driven by hiring of non-white staff.”

• The study showed “a meaningful relationship” between non-white directors and non-white employees, but “no relation between non-white directors and female employees within the firm once control variables have been included.”  “Thus, the evidence on allyship suggests 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 salary gaps for non-white employees,” but “mostly [saw] little evidence that board diversity alters salary gaps.”

• “Greater broad-based board diversity is significantly associated with a higher number of stars for Glassdoor’s five-star rating system for company culture” and with other metrics evaluating employees’ perceptions of their workplace and management.

• The study found disagreement among rating agencies as to ESG ratings and the S component of ESG.  “This suggests that asset managers looking to incorporate gender and racial equity into their investment decision-making process need to look beyond check-the-box approaches to ESG ratings.”

Implications

The study on board diversity’s impact on employee diversity could be of interest to companies grappling with the extent to which they wish to consider DEI issues for their boards and workforces.  But the study might also play into ongoing fights about legislation and other rules either 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 invalidated two different statutes relating to diversity on corporate boards:  Senate Bill 826, which required public companies with their principal executive office in California to have two or three female directors (depending on the company’s size), and Assembly Bill 979, which required such companies to have at least one director from an under-represented community.  Both courts ruled that the statutes violated the Equal Protection Clause of the California Constitution because they supposedly affected two or more similarly situated groups in an unequal manner and did not serve a compelling state interest.  Future legislative deliberation and litigation about laws of this type might consider the type of evidence produced by the study showing that diversity on corporate boards can affect not only board performance and corporate decision-making, but also the employment prospects and conditions for the workforce at large.