Oct 22 • 4 min read

Diversity, equity and inclusion are on the minds of top executives in almost every office in America. In the wake of continuous acts of racial violence, diversity is no longer only a talking point, but a conscious force that is now impacting boardrooms. 

This push for the inclusion of women and minorities in the C-suite has led to an immense amount of research being done on the changes in firm value in response to the new regulations.

Lalitha Naveen, associate professor of finance at the Fox School, is wading through the ocean of insights to hone in on the key findings. She summarizes and compiles results from various academic studies on the effects of board diversity in her recent article “Diversity on Corporate Boards,” forthcoming in the Annual Review of Financial Economics. 

Some studies show a positive correlation between hiring more women and an increase in firm value, while some others show a negative trend. A few studies even conclude that diversity board hiring has no significant effect on firm value.

“Some of the evidence is so contradictory,” says Naveen, “We thought it would be useful for people to have a survey paper that kind of puts together all the current research.”

She firmly believes that all of these papers agree on one thing: that board diversity has increased over the past decades. Today, half of the workforce comprises women and large investor corporations feel that it is important that boards reflect that. 

“Laws have been especially instrumental in facilitating diversity,” states Naveen. For example, California passed a law that states that boards of U.S. corporations headquartered in California are required to have at least one woman director (two women directors if the board has five members, and three women directors if the board has six or more members).

Naveen’s study finds that 69.7% of corporate boardrooms in America now have at least one female director and 33% of them have at least two female directors.

While this may seem like progress, there’s more work to be done. Naveen explains that women CEOs are twice as likely to hire female directors when compared to their male counterparts, but only 3% of S&P 1500 companies have women CEOs.

“These numbers are surprisingly low and suggest that successful board diversity initiatives may require parallel efforts to increase diversity in the top management team,” says Naveen.

Despite this, some studies covered in Naveen’s research find that diversity has a positive impact on firm value. When a board comprises people who think and behave alike, consensus on important decisions is reached faster. This is called groupthink. However, boards could use more deadlock on opinions that involve riskier investments.

“Diverse boards add value by dissenting more often with management about risky, value-reducing proposals, expanding the board’s information network, and eventually facilitating innovation,” concludes a study mentioned in Naveen’s paper. Women in particular can bring new perspectives on decision-making when it comes to investment and risk-taking

Another study, however, finds that gender diversity mitigates the negative effects of groupthink only when more than 35% of the board is diverse. Anything less than that, the study argues, is a “symbolic gesture” and may not influence board decisions.

Surprisingly, Naveen’s research also finds that not all studies agree that board diversity is beneficial. In many cases, diverse boards are associated with a decrease in shareholder value. 

“It is possible that firms that needed qualified women already had them on board,” argues Naveen. “By forcing firms to level the playing field more, the law was pushing them (corporations) to step out of their comfort zone.”

This does not mean that gender diversity and minority representation on boards shouldn’t be encouraged, because, without a push, real change takes time to implement. Naveen advises that the best solution to offset these concerns is to hire women and minorities that have the requisite skills to enhance firm value.

When thinking about board diversity, firms can and should recruit more women and minorities at all levels, from entry-level to executive. This ensures that leadership has opportunities to promote from within a larger, more diverse pool of qualified applicants in their workforce. “We need to have enough qualified women candidates for the job,” says Naveen.

Annual Review of Financial EconomicsBoardroomsCorporate innovationFinanceFirm valueGender diversityInvestmentLalitha NaveenLeadership