Boardroom Racial Diversity: Evidence from the Black Lives Matter Protests

Anete Pajuste is Professor of Finance at Stockholm School of Economics (Riga), and Visiting Senior Fellow at the Program on Corporate Governance of Harvard Law School; Maksims Dzabarovs and Romans Madesovs are Researchers at the Stockholm School of Economics (Riga). This post is based on their article forthcoming in the Corporate Governance: An International Review. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite (discussed on the Forum here) by Alma Cohen, David Weiss, and Moshe Hazan; Will Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried; and Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine, Jr.

With increased attention on systemic racism in the aftermath of the killing of George Floyd (on May 25, 2020) and the widespread Black Lives Matter (BLM) protests, growing number of stakeholders recognize racial diversity on corporate boards (or rather lack thereof). After the BLM protests, institutional investors started to demand disclosure of boardroom racial composition and focused on inclusion and equal opportunities policies. Media drew attention to insufficient boardroom diversity, noting that “Corporate America has a long way to go to achieve meaningful black representation in its leadership ranks”, and a series of diversity driven derivative lawsuits against boards and officers were filed in the second half of 2020, containing allegations that despite publicly emphasizing the importance of diversity, the boards and management remained largely white and male. Furthermore, in August 2021, NASDAQ accepted a “comply or explain” Board Diversity Rule.

Our recent paper, forthcoming in the Corporate Governance: An International Review, empirically examines how investors assessed the racial diversity of corporate boards during the BLM protests and one year after the protests, using a sample of S&P500 companies. We posit that stock returns of companies with black representation in the board differ from those of companies without a single black director during the BLM protests, and the sign of this relationship depends on investor expectations about the costs and benefits of increasing racial diversity on the board. Given public pressure to improve boardroom racial diversity, our paper also addresses the following questions: How quickly companies added new diverse directors? And do we observe any potential deviations from “optimal” board structure?

At first sight, the lack of black representation on the board should have been a concern to investors during the BLM protests. Drawing parallels with the #MeToo Movement (beginning in October 2017) that shifted investors’ beliefs about higher risks associated with no or minimal board gender diversity and resulted in positive abnormal returns for firms with gender-diverse boards (Billings, Klein, and Shi, 2022), we would expect that firms with racially-diverse boards outperform other firms during the BLM protests. Similarly, if investors expect that companies with racially non-diverse boards end up having less capable boards and deviate from the “optimal” board structure under the public pressure to increase boardroom racial diversity (Ahern and Dittmar, 2012), we would observe negative abnormal returns for firms with racially non-diverse boards. Our empirical results are consistent with the above predictions and show a positive association between the representation of black directors and stock returns during the BLM protests, especially among the largest and most popular companies.

Previous literature shows that board seat quotas (either mandated or nudged under the pressure of the public) can have a negative effect on firm value as firms deviate from the optimal board structure by appointing less experienced and less capable boards. Another point of concern is representation quotas in the boardroom or “tokenism”—the inclusion of minorities to satisfy a certain quota that would facilitate perception of the board as “racially diverse”. Tokenism may lead to decreased incentives in terms of continuous stimulation of racial diversity, reduced influence, decision power, and inclusion of racial minorities, as well as a perception of inferiority and biases towards the person appointed. In this context, we examine the characteristics of newly appointed diversity directors.

We document that within one year after the BLM mass protests, firms have considerably increased the proportion of board seats held by black directors (from 8.2% to 9.6%), and, more noteworthy, 10.7% of the sample firms (53 out of 496) hire at least one black director after the protests (compared to having no black representation on the board before the protests). This increase is mostly driven by firms adding new board seats, rather than replacing existing directors. However, we find no evidence of new black directors being hired in a rushed manner, as most of the new directors are appointed in between annual meetings and put up for shareholder vote at the nearest annual meeting, and there is no difference in appointment timing for black directors and other new directors. We also examine the characteristics of new directors and find no evidence of newly appointed black directors being less qualified. Quite on the contrary, we find that newly appointed black directors have on average higher number of qualifications than other new directors.

Finally, we examine the relationship between boardroom racial diversity and some longer-term firm performance measures, such as Tobin’s Q and portfolio returns, and find no significant difference between more and less racially diverse firms one year after the BLM mass protests. This no result is not surprising given that we observe only a short time period after the respective board changes and more research is needed to investigate the racial diversity and firm outcome relationships in the long-term. Nevertheless, that the unprecedented rapid increase of black representation in the corporate boards is not followed by immediate negative stock returns is reassuring.

Overall, our findings support the view that the BLM protests and simultaneous pressure from all stakeholders—investors, consumers, employees, and regulators—brought immediate changes to US corporate boardrooms. For those who are looking for the economic efficiency argument—in addition to social justice argument—to justify board diversification, our paper supports the view that new diverse directors do not harm firm value and firms are capable of hiring qualified directors of color. We argue that in the past this search for a business case for the boardroom diversity contributed to racial bias and has resulted in higher demands for diverse directors to secure their place on the board. It also might have reduced the pool of appropriate minority directors who felt that they would be forced (internally, by incumbent board members, and externally, by opponents to representation quotas) to over-perform to justify their seat on the board.

Our results add to the debate about increasing pressure for companies to embrace different dimensions of diversity beyond gender, race and ethnicity. In particular, boards are expected to have expertise in sustainability, cybersecurity, geopolitical risks, and other fields. At the same time, investors want companies to keep their board size to a manageable number, which means that each director must fill “several boxes”. In this context, the observation that racial diversity was increased at an unprecedented speed without a loss in value should give the market reassurance that boosting multi-dimensional boardroom diversity is possible if there is strong market pressure.

The complete paper is available for download here.

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