37 Pages Posted: 28 Mar 2011
Date Written: March 23, 2011
In this Article, we point out that advocates for board diversity in public companies feel pressure to justify it in terms of its contribution to shareholder value. This pressure is not surprising, insofar as the dominant social identity of boards, which itself is partly a creation of the discipline of finance, views shareholder value as the ultimate criterion for any company action, including eligibility for the board. We observe, however, that accepting this criterion poses a problem for diversity advocates, because the empirical evidence for a diverse board’s contribution to shareholder value is not strong or definitive, and the chain of causation from a diverse board to increased shareholder value is a long and tenuous one. We similarly note that there is no conclusive evidence that a diverse board addresses well-known pathologies of boards as decision-making groups and thus improves board functioning. We draw parallels between this quandary of diversity advocates in satisfying the shareholder value mandate and recent anti-discrimination law jurisprudence, which, in discriminatory impact settings, makes business necessity determinative of the outcome of cases. We believe, however, that the lack of strong empirical support for board diversity with respect to shareholder value or board performance does not necessarily doom the cause of diversity advocates. We argue that diversity advocates should endorse justifications and normative frameworks other than shareholder value to support diverse boards. Corporate law allows boards to base their decisions with respect to many matters, including board composition, on business-related grounds that are only loosely connected to shareholder value. In our view, diversity advocates should take advantage of this freedom, although we acknowledge the resistance to, and risks associated with, any questioning of shareholder value. We contend that, if diversity advocates, as well as non-diverse board members and others, justify board diversity on other grounds and norms, they could promote a transformation in the social identity of boards. This transformed identity might improve board functioning, but it is enough for us that it reflects and promotes anti-discriminatory norms.
Keywords: board, directors, corporations, diversity
Suggested Citation: Suggested Citation
Fanto, James A. and Solan, Lawrence M. and Darley, John M., Justifying Board Diversity (March 23, 2011). North Carolina Law Review, Vol. 89, 2011; Brooklyn Law School, Legal Studies Paper No. 224. Available at SSRN: https://ssrn.com/abstract=1793172