Thursday, March 31, 2016

Diversity chicken and egg question

Interested to come across by chance two research papers which 1) rebut the common wisdom and 2) comport with commonsense.

The issue is whether diversity on company boards improves company performance or not. The right-thinking argument is that they do. Diversity always includes gender diversity, usually racial diversity, sometimes industry diversity and occasionally geographical diversity. They almost never include class diversity.

The complicating factor is that large companies usually only get focused on board diversity once they have become successful. Diversity almost comes across as a luxury which they can now afford. Once a company has established itself and become part of the regulatory system, there are big dividends to head nod towards the diversity advocates. But that doesn't answer the real, underlying, question. Does board diversity precede company success and can that diversity be credited for better decision-making.

In theory the idea is attractive and plausible. But counterarguments are easy to conjure as well.

When Passionate Advocates Meet Research on Diversity, Does the Honest Broker Stand a Chance? by Alice H. Eagly argues that there is no causative relationship between outcomes and nominal board diversity.
In an ideal world, social science research would provide a strong basis for advocacy and social policy. However, advocates sometimes misunderstand or even ignore scientific research in pursuit of their goals, especially when research pertains to controversial questions of social inequality. To illustrate the chasm that can develop between research findings and advocates’ claims, this article addresses two areas: (a) the effects of the gender diversity of corporate boards of directors on firms’ financial performance and (b) the effects of the gender and racial diversity of workgroups on group performance. Despite advocates’ insistence that women on boards enhance corporate performance and that diversity of task groups enhances their performance, research findings are mixed, and repeated meta-analyses have yielded average correlational findings that are null or extremely small. Therefore, social scientists should (a) conduct research to identify the conditions under which the effects of diversity are positive or negative and (b) foster understanding of the social justice gains that can follow from diversity. Unfortunately, promulgation of false generalizations about empirical findings can impede progress in both of these directions. Rather than ignoring or furthering distortions of scientific knowledge to fit advocacy goals, scientists should serve as honest brokers who communicate consensus scientific findings to advocates and policy makers in an effort to encourage exploration of evidence-based policy options.
OK. One study. But it wasn't the only one that randomly floated across my radar in the past 24 hours.

The second one was Does Gender Diversity Promote Nonconformity? by Makan Amini, et al.
Failure to express minority views may distort the behavior of company boards, committees, juries, and other decision-making bodies. Devising a new experimental procedure to measure such conformity in a judgment task, we compare the degree of conformity in groups with varying gender composition. Overall, our experiments offer little evidence that gender composition affects expression of minority views. A robust finding is that a subject’s lack of ability predicts both a true propensity to accept others’ judgment (informational social influence) and a propensity to agree despite private doubt (normative social influence). Thus, as an antidote to conformity in our experiments, high individual ability seems more effective than group diversity.
Two papers in twentyfour hours rebutting the received wisdom. A swallow does not Spring make nor do two papers answer the underlying question. But they are interesting and I hope that they are a harbinger of informed decision-making over emotional advocacy.

My suspicion is that diversity does matter but in different forms than it currently takes and under particular circumstances.

My guess is that boards with a mix of accomplished executives from different industries (and even countries) along with non-business leaders with demonstrated accomplishments are those best prepared to 1) work together constructively even with differing viewpoints, 2) stand firm on facts, 3) bring a diversity of experience to bear on particular decisions, and 4) challenge CEOs on the most critical decisions.

I think the greatest corporate risk is simply deferral to the CEO. The supineness of boards in the face of strong CEOs is common. Only accomplished peers (in industry or out) who have confidence in their capacities are likely to demonstrate the will to challenge.

Non-business leaders who are currently on boards tend to be advocacy people, academics, community leaders of one sort or another. Fine as far as it goes but they usually do not have the accomplishments and experience to pick their battles and lead challenges when they need to be led.

So, for me, the question is not whether boards need to be diverse. I believe they do. The question is what type of diversity do they need (diversity of accomplishments rather than diversity of gender and race), and to what degree do they need diversity under what circumstances? That is where our research ought to trend. We are at the very beginning and we have a long way to go.

In the most recent recession, it would be interesting to see what correlation there might be between company failure and board diversity. For example, we know two of the car companies failed as did multiple financial institutions. These are exactly the companies whose success a decade earlier led them to pad their boards with diverse talent defined on gender and race. The received wisdom is that those companies should have had better decision-making and therefore failed less frequently than companies with non-diverse boards. I would not be surprised if the data contradicted that assumption.

My suspicion is that the current definition of board diversity is essentially just a form of corporate virtue signalling and therefore is either uncorrelated or negatively correlated with future company success.

No comments:

Post a Comment