Corporate Governance Essay

Submitted By televyh
Words: 1595
Pages: 7


“Discuss the potential and actual benefits of boardroom diversity in publicly listed companies.”

Boardroom diversity has been increasingly championed as an avenue that publicly listed companies can use to drive themselves forward in the wake of the recent financial crisis (Kumra & Manfredi, 2012; Groom, 2014; Cable, 2014). It must be noted though, that boardroom diversity is in itself, not a new issue and has been around since the 1990’s as evidenced by literature found in Wiersema and Bantel (1992) and Watson, Kumar, and Michaelsen (1993) amongst others. Before advocating boardroom diversity as the new way forward, it is imperative to understand what potential benefits boardroom diversity brings to publicly listed companies and more crucially, to ascertain if these potential benefits have manifested themselves into actual benefits. This essay will aim to discuss these potential and actual benefits by examining the relevant literature and evidence.

Boardroom diversity has the potential to prevent board members from engaging in negative groupthink (Ferreira, 2010) and it fosters improved decision making through healthy debates arising from heterogeneous board members who have divergent backgrounds and life experiences, tackling a similar problem in different ways (Myatt, 2013). Homogeneous board members might suffer from tunnel vision and fail to think “outside the box” when discussing issues concerning the company’s management and strategy (Allen, 2008) and this serves to blunt a publicly listed company’s competitive edge.

According to a report by NUS (2013), it was found that there was a positive relationship between both the ratios of return on equity and on assets with the ratio of men to women in the boardroom. In addition, there was a marked improvement in business performance following the appointment of a new female director (NUS, 2013). This can be seen to be evidence of boardroom gender diversity having a positive impact on publicly listed companies. However, it is unclear whether gender diversity actually prevented groupthink or instead, brought about improvements in business performance through effects such as increased attendance at board meetings (Adams & Ferreira, 2009). Furthermore, the findings of the report are in line with the predominant discourse on boardroom diversity which focuses largely on gender diversity and less so on other forms such as ethnic and sexual orientation diversity in the boardroom. Therefore, there is a lack of direct empirical evidence suggesting that increased boardroom diversity actually fosters healthy debate and prevents groupthink although its potential to do so is obvious.

Proponents of increased boardroom diversity suggest that a more diverse boardroom is better representative of the customer base in which publicly listed companies serve (Rogers, 2014). As publicly listed companies and especially those that are multinational grow, so too does their customer base in terms of ethnicity. Therefore, it makes business sense to have a board that is representative of its multi-ethnic consumers to better serve consumers’ interests and needs (Marimuthu, 2008). This has manifested into public companies such as Microsoft (2014) having an ethnic minority CEO like Satya Nadella.

Although concrete steps towards a diverse board have been taken (Yahoo, 2013; Rogers, 2014) by publicly listed companies on the FTSE 100 such as Prudential and Petrofac, both with an ethnic minority CEO, and Imperial Tobacco and Severn Trent, both with a woman CEO, the majority of FTSE 100 companies (Rogers, 2014) are still led by white-males. While this hints at the lack of diversity, in reality, there have been an increasing number of women taking up directorships in FTSE 100 boards rising from 12.5% in 2011 to 20.4% in 2014 (Groom, 2014). Likewise the FTSE 250 has 15.1% of women directors, up from 7.8% in 2011 (Groom, 2014). Although results from Boardwatch (2014)