Board diversity can catalyse business success

Research on board diversity shows that more women independent directors can lead to enhanced business success, and over half of all Fortune 500 companies have more than 40% non-male directors.
Research on board diversity shows that more women independent directors can lead to enhanced business success, and over half of all Fortune 500 companies have more than 40% non-male directors.

Summary

  • Studies find a positive correlation between the proportion of women on boards and performance metrics like return on assets or equity. What’s lagging is the mindset shift needed for diversity to fulfill its promise.

In the modern workplace, the impact of board diversity on enterprise performance is of high relevance. The term ‘board diversity’ describes the presence of people from different backgrounds in a company’s leadership, including but not limited to gender, caste, age and professional expertise. This variety affects a company’s overall performance and sustainability significantly.

The board’s responsibility is to safeguard the interests of shareholders by holding management team responsible for its decisions and deeds. Through corporate governance, board directors aim to mitigate and even eliminate the principal-agent dilemma. They offer value by advising executives and overseeing management operations.

Gender diversification is at the forefront, with firms under pressure to appoint female directors, break glass ceilings and move towards gender parity. That many of them only meet the bare minimum regulatory requirement of having one female director is sometimes seen as proof of tokenism.

The 2023 edition of the Global 500 says 29 of these 500 big businesses are led by women CEOs. That’s up 20% from the previous year’s count, but the share is just 5.8%. The Global 500 trails the Fortune 500, where women now run 10.4% of businesses.

Research on board diversity shows that more women independent directors can lead to enhanced business success, and over half of all Fortune 500 companies have more than 40% non-male directors. As of January 2024, female directors had 20% of the total board seats in these businesses.

The relationship between board gender diversity and enterprise performance is a complex subject, but some conclusions can be drawn. Studies generally find a positive correlation between the proportion of women on boards and financial metrics like return on assets or equity (RoA and RoE). Some studies suggest the influence of other factors such as a company’s cultural environment or industry. 

For instance, diversity may have a positive impact on performance in certain sectors or in countries with strong gender- equality norms. Even if the financial performance link is weak in some enterprises with more female directors, research suggests potential benefits of board diversity beyond immediate finances. These include:

Improved decision-making: Diverse perspectives can lead to more comprehensive discussions and a wider range of ideas.

Enhanced risk management: Diversity might be better for identifying and mitigating potential risks.

Stronger corporate governance: Increased diversity can contribute to a more transparent and accountable board culture.

Reputation and talent acquisition: Firms with diverse boards are better able to attract and retain top talent and improve their public image.

A Credit Suisse study discovered that average RoE and RoA were higher in businesses with more gender-diverse boards. It is found that diverse boards are better at refuting presumptions, bringing new viewpoints to the table, producing better judgements and driving creative problem-solving. They also often benefit from a deeper comprehension of markets. Diverse boards tend to interact with a wider set of stakeholders, carry out efficient supervision and searching for alternate funding sources to avoid debt, the latter perhaps because of diverse views on risk.

Diversity, equity and inclusion (DEI) is increasingly considered a strategic driver of business performance, apart from being a moral imperative. Corporate diversity policies are often reflected in board diversity and vice-versa.

The presence of female board members surpassing the current regulatory requirement, as seen in some Indian businesses, is an encouraging sign. Also, a trend of increasing global participation, which brings wider viewpoints to the table. Yet, 41 companies listed on the National Stock Exchange do not even have a single woman director. Such businesses stand out and must do something about their diversity deficiency.

Why do India Inc’s boards have fewer women than they should? Some reasons:

Systemic biases: Subconscious behaviour could be a problem. It’s possible that decision-makers, mostly men, unintentionally support candidates who meet traditional leadership stereotypes or look like them. This can mean qualified women are overlooked despite their qualifications.

Work-life balance challenges: The advancement of women’s careers might be disproportionately impacted by societal expectations and the country’s scarcity of reliable childcare services. It is difficult to juggle highly demanding corporate roles with maternity or elder care.

Confidence and self-promotion: Studies reveal that women are less likely than males to promote themselves and tend to undervalue their qualifications. This may work against them in competitive settings where self-advocacy is an important factor.

Organizational haze: Women may find it difficult to strategically manage their careers if promotion criteria are unclear or if there are opaque routes to leadership.

Workplace hostility: Micro-aggressions, covert sexism and even outright discrimination can create a work environment that discourages women from trying to achieve leadership positions.

Gender diversity in businesses will get a fair run and chance to meet its potential once we eliminate all biases against women. This demands a shift away from male-dominated management mindsets.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

MINT SPECIALS