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What is the Value of Diversity?
By Sara Laks

Although it is becoming more common to find mention of diversity in corporate literature, the answer to our leading question is, to say the least, elusive in corporate diversity disclosure statements.  Though the severe under-representation of women and minorities in corporate boardrooms probably speaks for itself, there is clearly a disconnect between the academic research and the perceived value of diversity at many corporations.

There is a growing body of academic research that supports the notion that diversity can have a significant and positive impact on the governance of a company.  This is particularly true for women in senior management positions and on corporate boards.  The research strongly suggests that diverse boards act with increased intensity in monitoring company affairs and provide more accurate value assessments.

In response to advocates who, for many years, have sought more board diversity among U.S. companies—especially gender diversity—the SEC (Securities and Exchange Commission) recently mandated greater corporate diversity disclosure.  However, in a post-proxy survey of corporate statements by the Corporate Library in preparation for their recent report, Beyond the Boilerplate: The Performance Impacts of Board Diversity, it became apparent that company disclosure remains lacking in this area.  The Corporate Library found that what qualifies as diversity was often vague, and that explanation of why diversity matters was somewhat “boilerplate.”

The SEC stopped short of defining diversity, leaving the door open for corporations to interpret the meaning to include anything from gender, race, ethnicity, and national origin, to professional background, qualifications, and experience.  The Corporate Library reports that the most cited reasons for the value of diversity in corporate statements are 1) the value of a variety of knowledge; 2) the value of a variety of opinions; or 3) no mention of value at all (most common).  Another 2009 study of corporate views on diversity produced similar results: there was no consistent understanding of diversity’s importance or why it mattered on boards or in business generally.

Socially conscious investors have long advocated that factors such as corporate governance and diversity are material considerations for investors because of the very value that corporations are having a difficult time articulating and that the academic research supports.

Investing in companies with management representing diverse backgrounds, not only allows investors to support values of equality and fairness, but provides an additional metric for identifying well-run and profitable companies.

Sara Laks

Posted: August 12, 2010