The belief that “diversity is good”, and probably “and more diversity is better” pervades our public debate. Sometimes people just mean intellectual diversity, sometimes diversity of managerial style, sometime gender diversity, sometimes ethnic diversity, sometimes diversity of nationalities. But too often is all lumped together in some amorphous mass. Who, after all, would argue that diversity might not always be good?
Enthusiasm for diversity pops up all over the place. The Secretary to the Treasury – often, it seems, something of a bellwether of elite sentiment – has celebrated diversity and called for more of it (but Eric Crampton has cast significant doubt on Makhlouf’s use of the literature on gender diversity).
Even amid the general elite celebration of “diversity”, I was a bit surprised to note a letter in last week’s Listener from a representative of top-tier law firm Russell McVeagh declaring that at that firm “we have made diversity our No. 1 priority in the past couple of years”. If I were a client, I’d probably have hoped that delivering top-notch legal advice had been the top priority. It may well have been, but it is telling that it sounded better to claim that diversity was their “No. 1 priority”.
Of course, a range of perspectives on many issues that face firms or public agencies or even individuals is likely to be helpful. For hard issues there is rarely only one useful way of looking at a problem, and all of us are prone to our own biases and blind spots. Then again, all cultures (national, organizational, local, or even family) rely on not too much diversity, and on shared assumptions (usually tacit) about how things are done, how differences are dealt with, debate encouraged (or suppressed), and about what sorts of behaviours are acceptable and which ones are not. And so on. It is simply how societies work, and that doesn’t change because a particular tide of liberal opinion wishes it were otherwise.
The alleged benefits of “diversity” are part of the case often made by the champions of our large-scale non-citizen immigration policy. Late last year, supported by taxpayer funding, lawyer Mai Chen published a 400 page Superdiversity Stocktake , championing the benefits of the diversity of ethnicities and nationalities that now make up modern New Zealand. She champions in particular the alleged economic benefits
Most of the benefits from superdiversity, such as greater innovation, productivity and investment, increase New Zealand’s financial capital, whereas most of its challenges adversely impact New Zealand’s social capital
Ian Harrison has done a nice piece reviewing how flimsy the economic case, and the evidence cited for it, in the Superdiversity Stocktake really is. But “diversity is good” seems to remain one of those mantras that business and political leaders repeat to each other.
Professor Bart Frijns of AUT (himself an immigrant) has been doing some interesting empirical work on one particular aspect of the impact of diversity. His co-authored paper is The Impact of Cultural Diversity in Corporate Boards on Firm Performance , and a couple of weeks ago I went along to hear him present it at a Victoria University seminar.
Frijn and his co-authors look specifically at the impact on the performance over 13 years (2002 to 2014) of 243 listed UK firms (excluding financial sector ones), making up 95 per cent of British stock market capitalization, of having directors who were not British citizens. Performance is here measured by the change in the market value of the firm (share price) relative to the book value (Tobin’s Q) and return on assets. The proportion of firms with at least one foreign director has been increasing, reaching 72 per cent by the end of the sample. Previous studies along these general lines have, so they report, produced mixed results, but those results included negative effects from the presence of foreign independent directors.
Here is the abstract to the paper
We examine the impact of cultural diversity in boards of directors on firm performance. We construct a measure of cultural diversity by calculating the average of cultural distances between each board member using Hofstede’s culture framework. Our findings indicate that cultural diversity in boards negatively affects firm performance measured with Tobin’s Q and ROA. These results hold after controlling for potential endogeneity using firm fixed effects and instrumental variables. The results are also robust to a wide range of board and firm characteristics, including various measures of ‘foreignness’ of the firm, and alternative culture frameworks and other measures of culture. The negative impact of cultural diversity on performance is mitigated by the complexity of the firm and the size of foreign sales and operations. In addition, we find that the negative effects of cultural diversity are concentrated among the independent directors. Finally, we find that not all aspects of cultural differences are equally important and that it is mainly the diversity in individualism and masculinity that affect the effectiveness of boards of directors.
As someone who hadn’t looked into this literature in any detail previously, those results surprised me. As a sceptic of the value of such “diversity”, I might have expected them to fail to find any statistically significant economic benefits (to the owners of the firms), but in fact they found statistically significant negative effects. Try as they might, they couldn’t consistently get rid of the negative effects. They test for all sorts of things. Does being based in a metropolitan area as opposed to a smaller town matter? Does the complexity of the business matter? Does it matter whether the foreign directors are independents or executive directors? Does it matter if the firm is also listed in the US? The negative effects aren’t there in every possible alternative specification – they disappear for executive directors, for very complex firms, and for those with large proportions of foreign sales for example – but there were no alternative specifications that generated statistically significant positive results.
The authors look at the nationalities of the foreign directors, using a (now quite old) cultural values framework developed by Hofstede for classifying each country. People from different countries (loosely “cultures”) differ on things like individualism, uncertainty avoidance, attitudes to the relationship between superiors and juniors (“power distance”), and “masculinity” (assertiveness, outspokenness, driven-ness, rather than gender per se). They also use some more recently developed “cultural scores” capturing dimensions like religion, language, or even genetic differences. As they note in the abstract above, not all cultural characteristics seem to matter much, but “individualism” and “masculinity” did in the results of this study.
Why might these effects exist? Boards need a variety of perspectives on the sorts of issues they face. But one element of a common culture is about trust, and cultural diversity seems to have the potential to undermine some of that trust (if one doesn’t understand quite how someone operates one is less likely to trust them, and perhaps less likely to take seriously their perspectives – even if you were part of appointing the person to the group). Thus cultural diversity looks as though it can be disruptive to group problem solving. There are benefits, but there are also costs, and – at least in this study – the costs generally seem to have outweighed the benefits.
However good this particular paper is, it is only one study. And, importantly, it is only one dimension of diversity, or even cultural diversity. In fact, it is only measuring nationality diversity – anyone who is a naturalized British citizen, no matter how recently, is British for the purposes of this study, even though their cultural similarity with most natural-born British directors might be considerably less than that of, say, an Australian citizen director who might have resided in the UK for thirty years. (As it happens, around half of all the foreign directors were from Anglo countries). And it doesn’t deal with cultural diversity within countries at all – the differences between a black and white South African director (in this period, only a decade after apartheid), and between most white and black British directors (given the socioeconomic disadvantages in the background of most of the latter) may be as important as those between “South Africans” and “British” directors.
Knowledge advances one paper – and one database – at a time. Other authors will be able to refine, or perhaps even refute, some of these results, and perhaps extend the analysis further. But it is the sort of paper that should be taken seriously by those enthusiastically championing the possibility (near- certainty many would have us believe) of diversity economic dividends here in New Zealand.
I was interested to see yesterday an article from the Financial Times economics columnist Martin Wolf on immigration and the Brexit debate. Wolf is a pretty reliably voice for elite informed UK opinion. He regards himself as a classical liberal, but seems to me pretty representative of a David Cameron/Tony Blair view of the world.
Economists tend to think it evident that immigration is beneficial to all parties. I am not convinced. High net immigration imposes significant negative externalities: greater congestion, more stress on social services, higher land prices and a need for significant investment in infrastructure and housing. If necessary investments are made, people suffer significant costs. If they are not, the costs will be higher still.
All this cannot be entirely ignored. Moreover, while I fully accept the arguments for the benefits of diversity, I understand why many differ, even feeling that they are “losing” their country. Some would argue that this idea of having inherited property rights in a country is illegitimate. I feel it is politically fundamental.
8 thoughts on “Diversity dividends? Maybe not”
There is a fascinating empirically based report by Credit Suisse on good corporate governance.
Amongst other things the report uses the MSCI database of ESG (environmental, social and governance) factors on 900 global companies for which governance data is available back to 2006. The authors select the 90 companies (ie 10% of the total) rated best on ESG factors and the 90 rated worst and compare the relative performance over the period since 2006.
The “badly” governed companies have done better than the “well” governed companies. Even when returns are risk adjusted.
However when good/bad companies are broken down by sectors, it seems that some sectors have out performance from good governance and some don’t.
Its very had to draw clean conclusions, but I’d say that it is possible to infer that in some sectors ESG matters (finance) and in some sectors (technology) it doesn’t.
It probably supports your scepticism about diversity being an end in itself.
Thanks Tim. Looks really interesting.
On a related issue, someone sent me this link
Failure to express minority views may distort the behavior of company boards, committees, juries, and other decision-making bodies. Devising a new experimental procedure to measure such conformity in a judgment task, we compare the degree of conformity in groups with varying gender composition. Overall, our experiments offer little evidence that gender composition affects expression of minority views. A robust finding is that a subject’s lack of ability predicts both a true propensity to accept others’ judgment (informational social influence) and a propensity to agree despite private doubt (normative social influence). Thus, as an antidote to conformity in our experiments, high individual ability seems more effective than group diversity. \
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These days I think you would have to expect to have muli-cultural and multi- ethnicity and diversity in your senior management team. The days are gone where you can expect a single monogamous team in place. In my place of work where the business has been operating now for 17 years in NZ. The Managing director is UK born, General Manager is also UK born, Sales Manager is Australian born, Financial Controller is Malaysian born of Chinese ehnicity, Operations Manager is Indian born and HR manager is Malaysian born of Chinese Ethnicity.
I’m sure that is right, as a description of current NZ. Whether it has benefits for the performance of the firm, or for the economy as a whole, is another question (a very hard one to resolve, despite papers like Bart Frijn’s).
For what it is worth, the RBNZ is rather different from your workplace. At least when I left a year ago, the senior management group was overwhelmingly male, and had only one adult migrant (UK). Not sure about the birthplaces of all the rest, but it was a pretty overwhelmingly Anglo group. And, in my view, not an overwhelmingly well-performing one!
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I saw in the herald last week some airhead demanding legislation and other draconian measure to increase ‘diversity’ in senior management… I can’t find the article again…
The only ‘diversity’ that matters, it would seem, is diversity of opinion and experience. A group of middle aged white men may all have quite divergent contributions to make on an issue. Equally they may all be ‘yes’ men and be meek and mild in the face of an alpha male..
The mixed research results are not a surprise, because having x% of one particular attribute really doesn’t mean much.. and a board focused on being diverse before being success is not one that investors should concern themselves with…
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It would be good to see what you think about the recent election results in the UK?. Maybe Martin Wolf should be answering that too. In short: 8.5 million people have chosen an immigrant’s son to run their capital city. It is the best example of people embracing diversity for good. Well, the question is: Are you terribly disturbed by that? Would you be happy if that happens in New Zealand? This article might also help for your thinking;
I don’t have a strong view on the recent UK elections. I thought the results were interesting – a little surprising Labour didn’t do worse given their train wreck leader – but I’m much more interested in the coming referendum.
As I noted, plenty of places have immigrants or immigrants’ childen as mayors. Actually, Boris Johnson was born in the US and was proud of his Turkish Finance Minister ancestor. But more seriously, Wellington has an immigrant as mayor at present. I think she is a dreadful mayor, but that is about policy not birthplace. At the other end of the spectrum Marco Rubio is an immigrant’s son as is John Key, and the man who should be Prime Minister of Australia, Tony Abbott, was an immigrant.
Re your article, yes there are many of them. It is the sort of stuff Mai Chen goes on about in her Superdiversity Report. But….the academic research to back-up the breathlessness is thin to non-existent, and in the case of the Bart Frijns paper fairly robust results seem to run in the other direction.
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Nine to Noon
Tom Peters – thriving in the tech tide
“Diverse groups of problem solvers—groups of people with diverse tools—consistently outperformed groups of the best and the brightest. If I formed two groups, one random and (therefore diverse) [by definition], and one consisting of the best individual performers, the first group, the diverse group, almost always did better.” Bottom line, as he puts it, “diversity trumped ability.”
Wow, is that counterintuitive, and, wow, is it ever important. Diversity, remember, lefthanded, right-handed, short, tall, came from America, came from Jamaica, came from China, every race, every gender, left-handed, right-handed—I don’t care what the difference is. If you sit down with a group to work on something and it is not a diverse group, you are really screwing it up big-time. And never, ever, ever let a group consist entirely of insiders from your organization or part of the organization. Diversity with a lowercase “d”—absolutely imperative to doing good work, and 9 out of 10 times we just don’t come close.
Click to access rnoti-p1024.pdf