Corporate Board Governance & the Diversity-Participation Paradox: A Note on the Banking Sector

Abstract

In June, 2009, James Surowiecki, wrote in his regular New Yorker column The Financial Page of the failure of bank boards of trustees to stop banks disastrous behavior. He cited decades of attention to improving bank boards by adding outside and independent members and [thereby] making them more diverse with respect to age, gender, and background. He went on to say that there is little evidence that these changes have made a difference in improving bank performance. This notion leads to the paradox that we want diverse groups to represent more stake-holders in making decisions, but because the members are diverse, it reduces their ability to communicate with each other. The purpose of this paper is to consider four related questions pertaining to Mr. Surowieckis observation of bank boards. First, why should banks trustee boards be diversified, and how should that make a difference in bank performance? Second, at what cost are bank trustee boards diversified? Third, did bank trustee board diversification actually happen, and what are the outcomes to which we can point?