Why are US Corporate Boards Under-Diversified among Genders and Races?

Abstract

The popular and academic literatures report that women, Blacks, Hispanics, and Native Americans are under-represented on US corporate boards of directors, relative to their incidence in the US labor force. We confirm this observation by tabulating the presence of female and under-represented racial minority (URM) directors on the boards of the S&P 1500 firms. We examine two hypotheses that may explain this empirical regularity. The first is that qualified female and URM candidates are scarce. Firms must compete for their services, putting price pressure on their compensation and leading to higher compensation for female and non-URM directors. The second hypothesis is a perception that women and URM directors in general are less valuable to firms, leading to lower compensation for them relative to their white male peers. Our evidence is mixed: we find that women (URM) make significantly higher (insignificantly lower) compensation than males and non-URM directors, controlling for firm and director variables (like age, education, achievements, and committee appointments). However, when we compare the compensation of female and URM directors against male and non-URM directors’ compensation on the same boards, that significant difference reverses, even though they have more education and more achievements than those peers. This result is consistent with the “myopic hypothesis” that predicts female and URM are paid less because of a biased view of their value to the board. However, when we compare the average compensation of female and URM directors who hold board leadership roles (dual CEO-Chairs and independent lead directors), we find very low participation of female and URM directors, but they are paid substantially more than their male and non-URM counterparts. We conclude that females and URM directors are chosen by larger firms with larger and more active boards (and higher base compensation), but are very rarely chosen to lead those boards. When they are chosen for board leadership positions, they are paid significantly more than their non-URM male peers. This result is more consistent with the “glass ceiling” hypothesis that appropriate candidates who add to the diversity of the board are scarce and command higher compensation.

Keywords: corporate governance, diversity, management compensation

JEL Classification: G34, J30, J33, M14, M41