Advantages and disadvantages of board diversity

Many researchers link the board of directors’ structure with the need for companies to have access to key resources necessary for sustainable functioning. This article will analyze the fundamental aspects of board diversity, its pros and cons.

In what way the board diversity is manifested?

An effective corporate governance system is impossible without an independent and impartial board of directors of the company, which, according to best practices, should primarily consist of independent members. It makes it possible to block the decisions of dependent members of the board of directors, which may be aimed at obtaining the benefit of one of the shareholders, thereby causing damage to minority shareholders.

Diversity in corporate governance practices of companies can be analyzed in two aspects: the participation of women and foreigners in the work of boards of directors and executive management bodies.

  • Women on the board

Despite the lack of recommendations on the gender composition of the board of directors, there is a trend towards an increase in women on the boards of directors of companies worldwide. For example, among the world’s largest companies in 2016, women held 20.2% of board positions in Fortune 500 companies, while in 1996, their figure was only 10.2%. Credit Suisse conducted a six-year global study from 2006 to 2012 of more than 2,000 companies worldwide, showing that having women on boards improves business performance across key metrics. Companies with at least one woman on their board of directors outperformed their peers by 26% while having a higher return on equity (ROE) and lower leverage. Norway continues to rank first in Europe regarding female representation on boards of directors (45.4% of board members are women).

  • Foreigners on the board

Many companies today are willing to follow international trends in corporate governance, and to increase the efficiency of their functioning, they attract foreign participants as independent directors whose managerial experience can be adapted to national realities. Such qualitative changes in the composition of the Board of Directors will serve as positive signals for foreign investors and creditors about the prospects of investing in this company.

What are the pros and cons?

The board members, including the personal characteristics of the chairman of the board, become key factors influencing the company’s efficiency and, accordingly, its competitiveness in the market. The unique resources of the council, and its human and social potential, create the economic value of the company. Effective members of the board of directors are professionals, carriers of up-to-date knowledge, and with diverse experience and connections.

In modern corporate governance practice, one of the most discussed topics when analyzing the composition of the board of directors is the issue of including women. In general, the characteristics of the capital of women members of the board enhance the effectiveness of monitoring the board and the decision-making process and make a positive contribution to the advisory function of the council. A feature of the human capital of women members of the board of directors is that they are much more likely to perform the function of “interacting with society” while men act as business managers.

Another characteristic of the human capital of women members of the board is that they are less likely to have a primary mathematical or technical education, and they have fewer connections in the business environment, business incubators, and start-ups. The human capital of women – independent members of the board, is rarely associated with the presence of managerial experience. They often come from social spheres or government structures.