Marrying Diversity and Independence in the Boardroom: Just How Far Have You Come, Baby?

Abstract:     
Corporate governance reform, with its focus on agency costs, and corporate diversity, with its emphasis on social equity, would appear to have little common ground, other than the corporate setting. Both strands of reform, however, share an important goal: improved functioning of the corporation through more active decisionmaking by its board. The spectacle of boards asleep at the wheels of governance jarred Congress into action in the wake of the multibillion dollar Enron/Worldcom string of debacles. Despite massive regulatory changes in corporate governance mandated by Sarbanes-Oxley, however, skyrocketing executive compensation, backdating of options, and mis-reporting of financial statements continue to command the news. This article examines the theoretical and empirical basis for independence as a solution to director dereliction of monitoring duties, and posits that the lack of empirical support for independence may be due to a definitional quandary, and that defining independence as mere absence of financial conflicts rather than diversity of opinion may be the root of the problem.

This article takes an interdisciplinary approach to accountability of large publicly held corporations, using economics and cognitive insights into human rationality to assess the role of law in structuring human interactions - in this case focusing on the decision making processes of directors of large publicly held corporations. In particular, this article examines the Sarbanes-Oxley Act's corporate governance solution of emphasizing the role of independent directors in the firm. This article further explores the psychology of small group dynamics, examines the inherent problems of homogeneous groups, and suggests ways in which diversity of opinion mitigates the effects of small group dynamics. My article recognizes that the trust fostered by homogeneity has the dark side of quashing dissent, and suggests ways to overcome resistance to diversity. This article concludes that nourishing a culture of dissent is the foundation for the kind of decisionmaking that leads to effective monitoring, and that while gender and ethnic diversity are no guarantors of diverse viewpoints, they are a good place to start in creating the kind of board culture that will begin to take its monitoring duties seriously.

Working Paper Series