Earlier this week, I thought that nothing could be more darkly funny than a libertarian-tinged entity called a Silicon Valley bank that needs to be rescued by regulators. But I was wrong. Something might be more ludicrous – namely, trying to blame a bank’s collapse on the various make-up of its board.
Silicon Valley Bank, critics noted, had 45 percent of its board directors women, while one was black, one was LGBTQ+ and two were military veterans. Perhaps if he were less concerned about diversification, the argument went, he might appreciate more the risks of rising interest rates. Naturally the argument was aired on Fox News by a Republican presidential hopeful Ron DeSantisand on social media with the slogan #GoWokeGoBroke.
If you had told me after the 2008 financial crisis that the next big bank failure would be blamed on banking being too socially inclusive, I might have needed emergency medical attention. But this was personal. What if banks are really holding back because there are too few straight white males with no military experience? Maybe I missed an opportunity. to be able to eye Has Silicon Valley saved the bank?
At first glance, the link between boardroom diversity and financial disaster does not appear strong. Companies like Enron and Theranos had no problem going bankrupt with very few women on their boards. And before its share price plummeted in 1720, the South Sea Company did not perform strongly in the diversity and inclusion rankings.
But what about the conventional wisdom that diversity is good for companies? This idea is promoted in business schools and at corporate diversity days. Many of us want to believe it, because it is consistent with our idea of what society should be like. How well established is it?
is one of the most cited sources 2018 report from consultants McKinsey. The report argued that the most gender diverse companies — in terms of their proportion of female executives — were 15 percent more likely to “experience above-average profitability.” The most ethnically diverse companies were 33 percent more likely.
McKinsey, however, admits that “correlation does not imply causation, which would be challenging to demonstrate”. Perhaps just as importantly, he is conflicted, given his interest in persuading companies to pay for his consultancy services. Or, if we must use the firm’s own effort in the English language: “Build a targeted portfolio of inclusion and diversity initiatives to transform the organization.”
Academic research has been more careful to highlight the benefits of gender diversity. (Studies on ethnic diversity are rare due to lack of representation.) A preliminary study, published in A 2006 headline in Harvard Business Review: “How Many Women Do Boards Need?” It turns out that, when there is a woman director on the board, she feels isolated. The two women directors can be seen as a separate group. Only when the number of female directors reached a critical mass of three did female directors report not being “isolated or ignored.” This finding was based on subjective insights from interviews with board members.
A better metric is financial performance. In 2014 two management researchers, Corinne Post and Chris Byron, combined evidence from 140 studies and found that “the correlation between female board representation and market performance is close to zero”. Another meta-analysis found similar results. as Catherine KleinThe study suggests “there is no business case for — or against — the appointment of women to corporate boards,” wrote a professor at the Wharton School at the University of Pennsylvania. One possible explanation was that women appointed as directors are similar to men in terms of their values and skills.
Research continues. a 2021 Paper by London Business School FTSE-350 companies with at least one female director saw higher operating profit margins after three to five years. LBS Professor Randall Peterson says mixed boards are reliably more collaborative, although this dynamic does not benefit performance in all contexts. In their study, companies with at least one-third women directors did not always have significantly better margins. Where does that leave the FTSE-350, which has only hit its target of having 40 per cent women directors?
The most directly relevant paper I could find for Silicon Valley Bank was a study of listed European banks, which found that those with more diverse boards were less likely to receive public bailouts between 2005 and 2017. But maybe it’s not just directors we need. To worry about: One paper concluded that, when the chief executive has a daughter, the company’s corporate social responsibility rating is higher.
Who even cares what the academics have to say on this issue? In politics, not the right, which wants to beat up on “whack capitalism”, and arguably not the left, which wants to claim that diversity is a win-win for business, rather than making a straightforward case that it is socially desirable. We seem doomed to argue by cherry-picking. Republicans portrayed Sam Bankman-Fried, the founder of the embattled crypto exchange FTX, as a major Democrat donor. Democrats argued that FTX also contributed large sums of money to Republicans and that the crypto agenda was fundamentally libertarian anyway. The whole thing is a giant “cause or correlation?” Void
Just as people in bar brawls occasionally stumble upon loose change, arguments over “whack capitalism” occasionally stumble upon interesting points. For example, I am interested in the question of whether executives can be too distracted from their core jobs. So far we have only limited evidence that this is the case with SVB. There were a few lines in its proxy filing bragging about a diverse board, and the company had a pride town hall, but could this really be the reason for Chief Executive Greg Baker’s lack of a chief risk officer?
Elon Musk, the chief executive of multiple companies, is apparently distracted by his political activity, namely Twitter. And you could make a case for Manchester United footballer Marcus Rashford deviating from his brilliant work on social justice. Rashford had a poor season when he was the most active advocate for free school meals. Is he scoring more goals now because he’s less distracted? Or because he has better teammates, a better manager and fewer injuries?
SVB apparently cared about microaggressions. But if such things were fatal to profitability, the tech industry wouldn’t be based in California. Indeed, the details of SVB’s decline suggest that lack of diversity may be more of a problem. The bank was big in Silicon Valley. But this meant it was heavily dependent not only on a group of depositors in one industry — technology — but also on those same group chats, where they discussed the bank’s viability. (Clients include the funds of the most proudly “anti-vac” venture capitalists, Peter Thiel and Marc Andreessen.)
as one The chief executive wrote about the days before SVB’s collapse: “Thursday, 9am: In a chat with 200+ tech founders (mostly in the Bay Area), questions about SVB begin to appear. 10 AM: Some suggest getting money from SVB for safety.” As like-minded tech bros withdrew their deposits, the downward spiral accelerated.
If SVB hadn’t held a Pride Town Hall, or if its chief executive had been Boris Becker, not Greg Becker, or if I had actually been appointed to the board to reduce diversity, we’ll never know for sure. It seems unlikely. But discussing this is easier and more satisfying than thinking about the tough regulatory issues surrounding interest rate bets.
By the end of the week, I luckily found something to distract me. Days after warning that thousands of jobs would be lost without a bailout, Silicon Valley was back in the news: unveiling new AI chatbots and tools that would make thousands of jobs redundant anyway. Funny, in a very dark way.
Henry Mance The main features of FT are the author
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