Attila Balogh is an Assistant Professor of Finance at the University of Melbourne and Scott E. Yonker is a Professor of Finance at the Cornell University SC Johnson College of Business. This post is based on their recent paper.
Public firms in the United States have seen a significant push towards increasing racial diversity on corporate boards, spurred by a combination of legislative action, listing requirements and shareholder pressure. In 2019, California’s Assembly Bill No. 979 was proposed in the legislature, mandating that publicly traded companies headquartered in the state include racial-ethnic minorities on their boards. The bill became law in September 2020, following the rise of the Black Lives Matter (BLM) movement, which sparked a nationwide call for racial equity and placed additional social pressure on companies to diversify their leadership. In December of 2020, the Nasdaq introduced a listing requirement for firms to include women and racial-ethnic minorities on their boards, a proposal that was approved by the Securities and Exchange Commission (SEC) in August of 2021.
These developments have sparked considerable debate and several legal battles. Proponents argue that board diversity brings fresh perspectives, mitigates groupthink, and ultimately benefits shareholders—a concept known as “the business case for diversity.” Opponents not only question the legality of these mandates but also contend that requiring diversity could lead to suboptimal board selections, potentially reducing firm performance and ultimately harming shareholders.
In our recent study, we empirically test whether there is a business case for racial diversity on corporate boards. We analyze a large sample of over 2,400 U.S. public firms, using the California legislation and the BLM movement as key demand shocks to assess the causal impact of increased board racial diversity on firm performance, value, and risk. Our findings are available in our new working paper, Is There a Business Case for Racial Diversity on Corporate Boards?, and offer novel insights into this ongoing debate.
READ MORE »
