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Research on the Benefits of Diversity – Better Corporate Governance and Board Dynamics

Research suggests a causal link between the proportion of women on the Board and the quality of corporate governance (Adams and Ferreira, Journal of Financial Economics, 2008). This suggests overall macroeconomic risk, of which we have become acutely aware in recent years, may be reduced when there are more women on company Boards.

Sir David Walker’s Review of Corporate Governance in UK Banks and other Financial Industry Entities (2008) and his Final Recommendations, 2009 highlighted the dangers of overly collegiate "groupthink", and how more diverse boards would avoid its pitfalls. Groupthink is a psychological phenomenon defined as "A mode of thinking that people engage in when they are deeply involved in a cohesive in-group, when the members’ strivings for unanimity override their motivation to realistically appraise alternative courses of action" (Irving Janis, Victims of Groupthink: a Psychological Study of Foreign-Policy Decisions and Fiascoes. Boston: Houghton Mifflin, 1972)

Speaking before the House of Commons Treasury Select Committee on 22nd May 2012, Sir David described the need for "challenge" in the Boardroom, and how gender diversity can help avoid groupthink:

"The word I have been very keen to deploy and promote, greatly irritating some, is "challenge."

Diversity is likely to provide, invite, elicit challenge and women are part of it."

Sir David Walker

A Credit Suisse Report published in 2012 examined how gender diversity might affect corporate governance and board dynamics, noting in particular that those companies with women directors that were analysed fared better during the economic crisis than those without. A link was made between this and earlier research indicating that women in general are more risk averse and companies with women on their Boards have lower relative debt levels. This earlier research is mirrored by Credit Suisse’s own analysis and, more generally, the Report describes an "unusually strong consensus within academic research that a greater number of women on the Board improves performance on corporate and social governance metrics."

More recently, a report published in 2016 by Jayne-Anne Gadhia CBE, the CEO of Virgin Money, entitled Empowering Productivity, found that in 2015 women made up only 14% of Executive Committees in the Financial Services sector, and blamed the culture of these institutions for lack of progress. The report’s three overarching recommendations are that firms should set their own internal targets for change, against which they should publicly report progress; that there should be an Executive accountable for improving gender diversity at all levels of an organisation and in all business units; and that executive bonuses should be explicitly tied to achieving the internal targets that firms have set themselves.

The Report says: "Meaningful change will require senior Executives in Financial Services to take direct and personal responsibility for addressing gender imbalances within their organisations."

Finally, in 2016 KPMG, the YSC and the 30% Club published an update to their 2014 Cracking The Code Report, titled Revisiting the Executive Pipeline. They found that the involvement of more women in the Boardroom has so far failed to create a trickle-down effect for women in the executive pipeline, and highlighted a gap between Boards’ and ExCos’ words on gender diversity, and their actions. The authors said: "Would-be senior female executives are starting to vote with their feet – not to spend more time with their families – but to find better environments and opportunities for career progression."

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