First published in The Toronto Star - https://www.thestar.com/opinion/commentary/2014/12/07/diversity_on_boards_means_more_than_gender.html
By: Anita Anand and Vijay Jog
Diversity on boards of directors is the topic du jour in corporate governance these days. The focus in the news and in policy-making has been on getting more women on boards. But “diversity” refers to more than just gender; it also includes ethnic diversity that considers other demographic groups — especially critical as Canada continues to become increasingly multicultural. Statistical approximations reveal that visible minorities comprise at least 27 per cent of our national population and almost 50 per cent of the population in Toronto.
The business case for increasing diversity on boards revolves around the claim that diversity will improve the firm’s organizational effectiveness, including the time taken to reach critical decisions; the generation of new ideas; the ability of companies to attract new talent; and access to expertise and global experience.
Of course, a board that is diverse in terms of gender alone may reap some of these benefits. But extending the diversity definition to visible minorities would bring additional distinct advantages to the boardroom table. Visible minority directors likely have fewer connections to pre-existing directors and may be more inclined to question management’s decisions and assumptions than established directors. Their global background and success in a possibly adverse business environment would bring a different type of experience to the board discussion. This argument is akin to the rationale for having independent directors on the board; visible minority directors lend objectivity and an external view to the decision-making process because they are unrelated to management and other long-standing board members.
Having a visible minority director on the board may also send positive signals to the corporation’s customers, suppliers, shareholders and employees as well. Moving beyond the corporation’s immediate stakeholders, they may improve the public image of the corporation domestically and globally. An ethnically diverse public face of a corporation may be politically and socially popular, resulting in greater consumer demand for the company’s products or even investor demand for its securities.
In light of these arguments in favour of board diversity and given the ever changing mix of the Canadian population in general, one might think visible minority directors would be more present on Canadian corporate boards. But this is not the case. We have found they represent 5.5 per cent of directors of TSX-listed firms (and less if certain foreign-owned firms are excluded). Visible minorities represent only 4.2 per cent of those graduating from director-education programs, some of whom have previous board experience as an admission requirement.
The percentage of women is much higher in both cohorts; white women comprise 26 per cent of graduates of director programs but only 12 per cent of public company board members. Thus corporate boards have much fewer visible minority directors relative to both white women and white men.
But does diversity even matter? Prior academic research has been somewhat inconclusive. We find that firms with white male boards do not show significantly better performance than firms with boards comprised of females and visible minorities. We do not claim that these results show causality since it is possible that firms that demonstrate superior stock performance are forward-thinking or that investors respond positively to such proactive measures. At the very least, our results suggest that there is no performance deterioration by having a diverse board.
Visible minorities contribute significantly to GDP and represent a high growth segment of the population. Let’s open up the conversation about board diversity beyond gender parity and consider whether boards should bear some demographic similarity to the society in which the corporation operates. Corporate Canada will need to face this issue at some point: why not now?