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The Promise of Diversity, Inclusion, and Punishment in Corporate Governance

Posted by James Spindler (University of Texas) and Jeffrey Meli (Barclays), on Tuesday, May 11, 2021

Editor’s Note: James C. Spindler is Hart Chair in Corporate and Securities Law at the University of Texas Law School, and Professor at McCombs School of Business; and Jeffrey Meli is Head of Research at Barclays. This post is based on their recent . Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

In a recent trend, “governance inclusion mandates” intercede directly in internal corporate governance by requiring specific changes to board membership. Some are “constituency mandates,” which add representatives of a specific constituency to the board; an example is the Accountable Capitalism Act, a plank of Senator Elizabeth Warren’s recent presidential bid, which would require 40% of the directors of large firms to be selected by the firm’s employees. Others are “diversity mandates,” which require minimum levels of board membership of females or members of underrepresented communities; examples include California’s A.B. 979 and NASDAQ’s recent proposal for listed companies. Underlying these proposals is the conjecture that inclusive boards will, somehow, make better decisions—and, in particular, more socially responsible decisions—than laissez-faire, market-constituted boards.

In a forthcoming paper, we develop a framework to assess if, and how, board inclusion mandates can lead to more pro-social corporate decisions. Underlying our framework are two principal assumptions about what it means to be included in corporate governance and, in particular, in the corporate board room. First, the board room represents a sort of Coasian bubble, in which its participants are able to bargain efficiently (or, at least, more efficiently than those outside it). Second, the director’s privilege is a sort of property right, in that those possessing it will garner a greater fraction of corporate surplus, ceteris paribus, than those without. Overall, then, inclusion in the board room is valuable, and those so included will use it to maximize their objectives, whatever those may be. With such tools at hand, it is possible to say something about the channels through which inclusion mandates work, and how to engineer them to have socially beneficial effects.


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