Diverse Representation and Board Leadership Gaps

5 min read · 2019
Laura Casares Field, Matthew E. Souther, Adam S. Yore

Board and Leadership · Gender · People of Colour

This is a summary of “At the Table but can't Break through the Glass Ceiling: Board Leadership Positions Elude Diverse Directors” by Field, Souther, and Yore (2019). In order to reduce the void between representation and leadership during a moment of advancing diversity, the ratio of diverse board leaders needs to increase greater than overall diversity. The authors examine how women and minorities serve on corporate boards in leadership positions.

Summary

Many companies' efforts to improve diversity, equity and inclusion (DEI) in the workplace still need a push to deliver on the promises made. The study explores the labour market effects of gender and race by examining board leadership appointments. The authors read how women and minorities serve in leadership roles on corporate boards, specifically as non-executive chairman of the Board, lead director, or chair of a central board committee (audit, compensation, nominating, and governance).

Using the mixed-method approach, the findings of this study show that diverse (female and minority) board representation has increased over time; most of them have vital qualifications, prior leadership or finance experience, and are equally effective in performing their duties. However, still, we observe a gap in having diverse representation in leadership positions.

Methodology

Several studies have repeatedly mentioned that if we want to eliminate the gap between representation and leadership, the proportion of diverse board leaders would have to increase greater than overall diversity. To find the relationship between multiple variables, the study uses a multivariate regression model to address the trend and correlation between diversity and leadership positions (click here to learn more).

The sample for this research was obtained from the universe of companies listed in the merge ISS(RiskMetrics)/Compustat/ExecuComp/BoardEx database from 2006 until 2017. The sample consists of 16,836 firm-year observations (126,044 directors). The variables considered in this data offer essential characteristics of board diversity (i.e.female and minority board representation); directors are diverse if they are either female or minority. The breakdown of ethnicities for minority directors in this dataset was limited to (Asian, African/American, Hispanic, Hispanic/Latin, Native American, Indian, or Middle Eastern), and providing firm-level statistics for sample firms (i.e., total assets, return on assets, the board size, etc.) also shows the proportion of sample firms each year with a diversity policy on gender or race.

Findings

The planned comparison revealed from the dataset: 

• Over the sample period (2006- 2017), within the sample of corporate boards at major S&P 1500 companies, 53 percent of boards include at least one minority director, while 76 percent of boards include at least one female Director.

• The largest ethnic group of directors is African American, comprising 51 percent of minority directors, followed by Asian directors (26 percent) and Hispanic directors (20 percent).

• While 42.1 percent of non-minority male directors serve as committee chairs, only 28.8 percent of minorities and 32.8 percent of females are committee chairs. These differences are especially evident in the audit and compensation committee chair positions.

The analysis found evidence of minorities (both males and females) being underrepresented in every leadership role throughout the entire sample. Also, women are significantly underrepresented in chairman/lead director roles in the compensation and audit committee chair throughout the sample. To address the relationship between board leadership positions and prior relevant experience, the results cast a new light that having prior relevant committee experience is positively related to receiving a chair appointment, increasing the odds of being tapped for a leadership role by 2 percent to 5 percent. However, the findings conclude that prior committee leadership experience or finance experience increases the likelihood that a director might serve in a board leadership position. Still, the authors conclude the results by saying that even if diverse directors are, on average, exceptionally qualified and yet they are less likely to serve in board leadership roles when compared with non-diverse directors with comparable qualifications.

Do diverse leaders experience a pay gap? 

Overall, the results about director compensation produce clear and consistent evidence that minority and female directors receive lower compensation levels, at least partially driven by committee and leadership roles. These findings align with prior work examining the corporate pay of diverse executives or employees (Bell, 2005; Tate & Yang, 2015). 

Takeaways

The study points out that most diverse directors have similar academic backgrounds, professional credentials, and required experience compared to their peers. Nevertheless, despite these qualifications, diverse directors remain less likely to be appointed to crucial board leadership positions. The data analysis conducted by the authors suggests we still have a long way to go to build a system of equal representation in leadership positions.

The study suggests that diverse representation on the nominating committee seems to address leadership gaps effectively. Also, it increases the likelihood of having diverse leadership appointments.

The study emphasizes the need for concrete, well-defined policies that explicitly promote Diversity and include diverse directors on the nominating committee. However, increasing the representation of diverse directors on the Board does not reduce the leadership gap.

References

Field, Laura Casares, and Souther, Matthew and Yore, Adam S. (October 2, 2019). At the Table But Can't Break Through the Glass Ceiling: Board Leadership Positions Elude Diverse Directors. Journal of Financial Economics (JFE), Forthcoming, 2nd Annual Financial Institutions, Regulation, and Corporate Governance Conference.