How do companies foster diversity within their ranks? For some, it starts at the top.
That's a central finding of Wei Cai, assistant professor of business in the Finance & Economics Division at Columbia Business School, and her fellow researchers in a study of what they call the “trickle-down effect” of diversity, equity, and inclusion (DEI) in companies with directors from underrepresented groups on their boards.
Cai and her research collaborators explored this effect in their paper “Do Diverse Directors Influence DEI Outcomes?” which they are in the process of publishing. In the study, they investigated whether a higher level of board diversity is linked to three results: improved diversity in hiring at the company, more equitable pay practices, and a more inclusive corporate culture.
Previous research has primarily sought a link between supportive diversity policies and company performance. And while improved profitability and a corresponding increase in company stock price are key measures of success, according to Cai, it can be challenging to link DEI policies with the bottom line. “We wanted to see whether there is something more direct, like a cascading effect on DEI outcomes throughout the organization,” Cai says.
The researchers proposed three possible ways a more diverse board could impact DEI within an organization:
- The first channel is what they call cognitive diversity, which can increase the likelihood that board members' are willing to question the company's status quo.
- The second channel is what they call homophily, which is the theory that people tend to form relationships with others who share their sociodemographic characteristics and are therefore more likely to hire them.
- And the third channel is allyship — the possibility that board members from underrepresented groups will build supporting relationships with members of other underrepresented groups. “The underrepresented directors may feel more empathy for underrepresented groups of any kind,” Cai says. “For instance, female directors could support female employees, but they could also support ethnically diverse employees.”
To test this hypothesis, Cai and her team analyzed more than 2,000 S&P 1500 companies between 2008 and 2020, collecting publicly available data on directors through the Institutional Shareholder Services (ISS) and data on employee pay, salary gaps, and corporate culture from Revelio Labs, which collects and standardizes hundreds of thousands of public employment records. In addition to that body of data, the researchers also mined Glassdoor reviews and applied advanced computational linguistic models that focused on terms showing a firm's tendency to cultivate a range of qualities such as diversity, personal growth, work-life balance, and purpose-driven work.
Through that analysis, they found that when board diversity increases, underrepresented groups are hired at higher rates at the manager and staff level as well — meaning that, to some degree, diversity can trickle down. This research comes at a time when board diversity is increasing broadly among many public companies. This year, ISS reported that minority directors represented more than 20 percent of board seats for the first time among Russell 3000 firms.
Unfortunately, the researchers discovered that a diverse board did not necessarily improve equity or result in equal pay. “We find that with greater diversity on the board, companies are hiring more female and diverse employees, but those diverse employees aren't necessarily paid the same as their white male counterparts,” Cai says. While the research did not analyze new ways to improve equal pay, she notes that the trickle-down effect highlights the role Leadership & Strategy could play in narrowing the pay gap in the future.
Cai and her co-researchers took their results to current, acting board members to see if they reflect the board members' personal experiences. They found diversity is already a central topic on directors' minds, Cai says. “The majority of directors seem to really welcome this idea of having a more diverse board.” And insight from the study potentially provides a compelling argument for increasing board diversity even more. But the board members also agreed with the team's observations about equity: “They feel D and I are easier to change, and that making progress on equal pay and salary is harder,” she notes.
Cai sees multiple benefits stemming from policies that encourage more diversity. First, diversity of thinking could help generate new ideas and ways of approaching problems, she says. But in addition, her prior research on work cultures that nurture innovation suggests that employees are more likely to propose new solutions and new ideas in a supportive atmosphere. “An inclusive culture is very important for innovation,” Cai says. “People need to feel they are respected, and they need to feel comfortable speaking up.”
Looking ahead, Cai expects that companies interested in improving diversity will focus, in part, on their board members. And even small or privately held companies that lack a board of directors can look to Leadership & Strategy to help support these initiatives. But that doesn't preclude them from also boosting inclusive hiring practices throughout the company. “The idea is, OK, now firms are doing the top-down approach with a cascading effect down to the bottom,” Cai says. “But there could also be a bottom-up approach.”
In this webinar, William M. Klepper, PhD and adjunct professor of management at CBS, discusses the importance of inclusion to empower both leaders and teams, shares insight on his integrated Leadership & Strategy model, and provides listeners with ideas to achieve high performance:
