Increasing Diversity And Profits? Investors Think Companies Can’t Do Both
The pandemic has forced many struggling companies to focus on increasing their bottom line. At the same time, recent protests have strengthened the calls for greater diversity at work. And now, according to three studies, there’s evidence that investors don’t think that organizations can do both at the same time. According to three new studies, there’s a belief that a focus on diversity detracts from efforts to maximize shareholder value (it doesn’t).
Study One: Adding Women To Board Decreases Market Value
The first study found that as firms increase the number of female directors on their boards, their market value decreases. Researchers Isabelle Solal and Kaisa Snellmana from INSEAD also found that those companies that make clear commitments to diversity suffer an even greater decline in value when they increased female representation on their boards.
But this isn’t really about the women, it’s about judging the priorities of an organization that appoints women. “Our research suggests that it is not that investors believe women on boards are an impediment to shareholder value, but that the firm, by choosing to appoint women directors, is prioritizing diversity. And if the firm is prioritizing diversity, then it must be de-prioritizing shareholder value maximization,” clarifies Solal.
This puts women who are calling for more diversity in a Catch-22 situation according to Solal. “As calls for greater diversity increase, it is even more likely that the presence of female board directors, senior executives or other leaders will be attributed to some kind of diversity initiative rather than simply the woman’s skills and experience,” she explains. Solal suggests that how the appointment is framed is important. She believes that if companies put less emphasis on touting their diversity and more on the woman’s qualifications, then investors would be more likely to assume it was the woman’s qualifications earned her the job.Most Popular In: Careers
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Study Two: Female Board Members Get Fewer Shareholder Votes When Company Is Struggling
In a second study, forthcoming in Organization Science, researchersexamined 50,202 board director elections from 2003 to 2015 and found that female board members typically get more support from shareholders than their male counterparts. But in times like we’re in right now, when companies are financially underperforming, this preference reverses, and shareholders are more likely to disapprove of female directors. This result held even after controlling for the qualifications of the candidates.
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According to this study, shareholders are only OK with diversity efforts when things are going well. So, if shareholders are pro-women in good times, why the change of heart when things start to go bad? Again, they believe that shareholder value is at stake. “Shareholders want to maximize their own value and when any kind of condition threatens that, they start withdrawing their support for female directors,” says Arjun Mitra, study co-author and Professor of Management at California State University Los Angeles.
This bias can have a real impact on the female corporate board members. “It’s a very real experience when you’re sitting on a board and you see the votes coming in and you see your colleagues being shooed in and you’re getting more dissent. For those women there’s a risk of feeling like maybe I just don’t belong here,” says coauthor Corinne Post, Professor of Management at Lehigh University. Post hopes this research can bring some relief for these board members who feel rebuffed by shareholders. “Knowing this is a pervasive fact of life can free one from this feeling that I don’t really belong here. It’s not about me, it’s about them,” she says.
“Directors compare themselves in terms of votes on the board, and if you get more dissenting votes than your colleagues, you’re more likely to leave the board,” adds study coauthor Steve Sauerwald, a Professor of Management at University of Illinois. Research supports the notion that those with more dissenting votes may end up leaving the board.
The race and ethnicity of corporate board members is not as readily available as gender, so we don’t know whether the results of these first two studies also apply to board members of color.
Study Three: Corporate Social Responsibility Is Perceived As Signal Of Waste By Activist Hedge Funds
Activist hedge funds seek out companies that they believe are not maximizing shareholder value, and then they make a large enough investment in that company so that they can influence the company’s management and decision making. According to a third study, activist hedge funds see corporate social responsibility as a signal of waste.
“Activist hedge funds—an unintended audience—treat CSR (corporate social responsibility) as a signal that firms have wasteful intentions and capabilities, which prevent firms from maximizing shareholder value in the short term,” write study authors Mark DesJardine, Emilio Marti and Rodolphe Durand. Their research found evidence that activist hedge funds are more likely to target firms with higher levels of corporate social responsibility.
Diversity Efforts Do Not Detract From Profits
The notion that efforts to provide opportunities to people other than white men is somehow taking too much attention away from the business at hand is ridiculous and demonstrates how difficulty that lies ahead in achieving true equity. Although investors may think diversity efforts are at odds with profit-seeking, in the short to medium term, there is no evidence that diversity efforts either enhance or detract from profitability.
“In the short term, focusing on diversity should not negatively affect a company’s profitability, but it is also unlikely to have any material positive impact on profitability. Diversity tends to produce financial returns by creating a more engaged and satisfied workforce, thus improving productivity and lowering employee turnover, or by bolstering team performance as diversity in groups has been connected to enhanced creativity and problem solving. Higher productivity, lower turnover and stronger team performance are all outcomes that should materially benefit a company over the long term,” says Mark DesJardine, a professor at Penn State and lead author on the third study.
Companies that do a great job increasing diversity and equity should be proud to tout their accomplishments, and we can only hope that they will continue to advocate for these causes despite the perceptions of uninformed investors.