Economic Analysis of Board Diversity

49(5) Journal of Corporation Law 1043 (2024)

45 Pages Posted: 10 Mar 2025 Last revised: 9 Mar 2025

See all articles by Michal Barzuza

Michal Barzuza

University of Virginia School of Law; ECGI

Gideon Parchomovsky

University of Pennsylvania Carey Law School

Date Written: January 01, 2024

Abstract

Critics of initiatives to diversify corporate boards frequently rely on efficiency arguments. Diversity opponents marshal four principal claims. First, they contend that if diversity were efficient, firms would have adopted it by now. Second, they posit that there is a lack of supply of qualified minority candidates, and thus, mandates will lower the quality of board members. Third, they point to evidence that arguably shows that board diversity and, in particular, mandated quotas harm firm value and performance. Fourth, they maintain that the campaign to diversify is motivated by populist ideology. The debate about board diversity, thus, pits fairness and equality, on the one hand, against efficiency, on the other. In this Article, we argue there is neither theoretical nor empirical basis for the position that the current trend to diversify boards is inefficient. We posit that inefficient discrimination in board nominations entrenched itself in American corporations due to a lack of information, network effects, and agency costs. Furthermore, we argue that board diversity could improve board performance by tapping into a hitherto unused talent pool, thereby increasing directors' quality. In addition, the inclusion of members of currently underrepresented groups could improve board oversight of management. Consistent with the hypothesis of inefficient discrimination on American boards, recent studies find that minority directors were not less, and even more qualified than non-minority directors. Our analysis has far-reaching normative implications. We contend that in light of our theoretical analysis and recent empirical studies, courts should have shifted the burden to diversity opponents to show that the striking under-representation of females and minorities on corporate boards does not result from discrimination. Doing so would have probably led the courts to uphold the California legislation, and as importantly, would have enabled the individual members of under-represented groups to sue corporations that unjustifiably passed them up.

Keywords: Corporate law, Board diversity, gender diversity, racial diversity, mandated quota, california law, index funds activism, pension funds activism, nasdaq diversity listing standards, board diversity effects

Suggested Citation

Barzuza, Michal and Parchomovsky, Gideon, Economic Analysis of Board Diversity (January 01, 2024). 49(5) Journal of Corporation Law 1043 (2024), Available at SSRN: https://ssrn.com/abstract=5171777 or http://dx.doi.org/10.2139/ssrn.5171777

Michal Barzuza (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

HOME PAGE: http://https://www.law.virginia.edu/faculty/profile/mb9fg/1144316

ECGI ( email )

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1000 Brussels
Belgium

HOME PAGE: http://https://ecgi.global/users/michal-barzuza

Gideon Parchomovsky

University of Pennsylvania Carey Law School ( email )

United States

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