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Talking Too Much About Board Diversity

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A backlash has emerged in response to diversity and
inclusion initiatives.

In the past several years, activists, institutional
investors and some companies — including banks — have advocated for increased
diversity and inclusion on their boards and throughout their firms. These groups
believe that a diversity of race, gender, age and opinion is good for business
and, ultimately, for shareholders.

But two recent studies draw attention to a burgeoning backlash to these efforts. Whether from message fatigue or concern about the board’s focus, companies may need to be mindful about the promotion and communication of their D&I efforts.

Director support to increase gender and racial diversity in the boardroom fell for the first time since 2013 in PwC’s 2019 governance survey. Thirty-eight percent of directors said gender diversity was very important in 2019, down from 46% in 2018. Those who said racial and ethnic diversity was very important fell to 26%, down from 34% the year prior.

Directors seem to be fatiguing of these messages, says
Paula Loop, leader of PwC’s Governance Insights Center, who adds she was
surprised at the recent trend.

“The way that we rationalized it is that it appears that
directors have heard the message and they’re trying to acknowledge that,” she
says.

Respondents to PwC’s survey acknowledged that diversity has added value to their discussions and decisions, Loop says, and that it increasingly makes sense from a business perspective. This finding is supported more broadly: Bank Director’s 2018 Compensation Survey found that 87% of respondents “personally believe” that board diversity, either through age, race or gender, has a positive impact on the bank’s performance.

“We have to remember, especially when you’re thinking
about boards, they … don’t move necessary as quickly as one might think,” Loop
says. “I feel like we’re in an evolution — but there’s been a lot in the last
couple of years.”

Interestingly, PwC observed different responses to the survey based on the gender of respondents. A higher percentage of female directors reported that gender and racial/ethnic diversity on the board was “very important.” Male directors were less inclined to report seeing evidence of the benefits of diversity, and more than half agreed that diversity efforts “are driven by political correctness.”

Male directors were three times as likely as a female
director to assert that investors “devote too much attention” to both gender
and racial/ethnic diversity. Overall, 63% of directors believe investors are
too focused on gender diversity, up from 35% in 2018; 58% report the same when
it comes to racial/ethnic diversity, up from 33%.

The different responses along gender lines demonstrates why diversity matters, Loop says. The report shows that gender-diverse slate of directors do have a “different emphasis or different way of thinking.”

“It validates why it’s good to have a diverse group of
people in a room when you have a conversation about an important issue,” she
says.

But even if a bank makes headway on increasing the gender
diversity on its board, there is still another group to think about:
shareholders. A recent study found that companies that appoint women to the
board experience a decline in their share price for two years after the
appointment. The study looked at more than 1,600 U.S. companies between 1998
and 2011.

“Investors seem to be penalizing, rather than rewarding, companies that strive to be more inclusive,” wrote INSEAD researchers Isabelle Solal and Kaisa Snellman in a November 2019 Harvard Business Review article about their study.

What we think is happening is that investors believe that firms who choose to appoint women are firms who care more about diversity than about maximizing shareholder value,” writes Solal, a postdoctoral research fellow at the Stone Centre for the Study of Wealth Inequality at INSEAD, in an email interview.

In subsequent research, they found that investors view
appointments of female directors with a company’s “diversity motivation.” The
association is “not that surprising,” she writes, given that “almost all” press
releases feature the gender of the appointee when that person is a woman, and
will often include other references to diversity.

“Gender is never mentioned when the director is a man,” she writes.

Solal says that companies should still appoint women to
their boards, especially given that the shareholder skepticism dissipates in
two years. But companies should be mindful that overemphasizing a director’s
gender or diversity may be unhelpful, and instead highlight the “skills and
qualifications of their candidates, regardless of their gender.”

The post Talking Too Much About Board Diversity appeared first on Bank Director.

This content was originally published here.

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