Boardroom diversity improves financial performance

July 23, 2021

Higher stock returns and more social justice come from boardroom diversity, Financial Reporting Council says

Businesses that encourage boardroom gender diversity achieve better financial results, new research has found.

The report from the UK’s Financial Reporting Council (FRC) found that corporate cultures are being reshaped by a greater representation of women in the boardroom – which is correlating with better financial performance.

The researchers found that the financial impact of gender diversity was most pronounced after three to five years, as measured by the company’s EBITDA, while FTSE 350 boards with good gender representation were found to be less likely to receive shareholder dissent and experienced higher stock returns.

The report said that, prior to these findings, “researchers have largely failed to confirm any causal link between board demographic diversity and a firm’s overall performance or market value”.

Sir Jon Thompson, CEO of the FRC said: “I want to see boards invest time and energy in making diverse appointments not to achieve a target but because it will have a positive impact on their business.”

To maximise these benefits, boards should recognise that change takes time and that diversity without active inclusion is unlikely to encourage new talent to the board. The report recommended that the chair of a board be the driving force behind inclusivity efforts. In addition, the FRC said regulators and companies should focus on collecting more data on the types of diversity, board dynamics, and social inclusion.

Beyond financial benefits, the report describes how boardroom diversity results in greater social justice and improves workplace cultures.

However, ethnic minority diversity had not developed significantly enough during the period to be measured with confidence.

Dr Randall Peterson, academic director at the London Business School, who co-published the report, added: “The findings of the report remind us what is at stake: diversity is not just a numbers game with regards to who is on the board, how board members interact really matters.”

Find out more about the latest trends in boardroom diversity in the recent contribution to the Minerva blog from the Workforce Disclosure Initiative.