Is There a Business Case for Racial Diversity on Corporate Boards?

Abstract

Using a large sample of U.S.-based public corporations, we evaluate the business case for board racial diversity. Our analysis shows that board racial diversity is positively associated with firm performance and value, and negatively associated with realized risk. However, causal tests that use mandated board racial diversity in California and the acceleration of the BLM movement as shocks to the demand for racial minority directors indicate that forced increases in board racial diversity have no effect on firm performance, value, risk, or other traditional corporate finance policies. Firms compelled to select racial minority directors find candidates with qualifications similar to those of existing directors, suggesting that in these settings board racial diversity itself does not impact performance and value outcomes. Overall the evidence suggests that the business case is insufficient on its own to either justify or oppose mandated racial diversity on boards.

Keywords: board diversity, board of directors, quotas, mandates

JEL Classification: G34, K2