Boardroom racial diversity: Evidence from the Black Lives Matter protests

• Published date: 01 March 2024
• Author: Anete Pajuste,Maksims Dzabarovs,Romans Madesovs
• Date: 01 March 2024
• DOI: http://doi.org/10.1111/corg.12497

SPECIAL ISSUE ARTICLE

Boardroom racial diversity: Evidence from the Black Lives

Matter protests

Anete Pajuste

1,2,3

| Maksims Dzabarovs

1

| Romans Madesovs

1

1

Stockholm School of Economics, Riga, Latvia

2

Harvard University, Cambridge,

Massachusetts, USA

3

ECGI, Brussels, Belgium

Correspondence

Anete Pajuste, Stockholm School of

Economics, Strelnieku iela 4a, Riga LV-1010,

Latvia.

Email: anete.pajuste@sseriga.edu

Abstract

Research Question/Issue: This paper provides evidence that the Black Lives Matter

(BLM) protests that followed the killing of George Floyd on May 25, 2020, brought

immediate changes to the US corporate boards.

Research Findings/Insights: Using a sample of S&P 500 index companies, we find

that companies with higher representation of Black directors are associated with

higher stock returns during the mass BLM protests. Within 1 year after the BLM pro-

tests, 10.7% of the sample firms hired at least one Black director (compared to having

no Black representation on the board before the protests), and 31% of the newly

appointed directors were Black. We find that companies typically add new diverse

directors by increasing the board size, but there is no evidence of negative value

effect or decreasing director quality.

Theoretical/Academic Implications: We have observed increased disclosures of

racial equity topics in the proxy statements, as well as significant increase of Black

director representation in the boards. In the meantime, we do not find any valuation

or stock performance effects related to boardroom racial diversity 1 year after the

BLM protests.

Practitioner/Policy Implications: Mass protests play an important role in shaping cor-

porate governance responses. The finding that racial diversity can be increased at an

unprecedented speed without loss in value is consistent with the view that a boost in

boardroom diversity is possible under strong multichannel pressure from investors,

consumers, employees, and regulators.

KEYWORDS

corporate governance, boardroom diversity, Environmental, Social, Governance (ESG), mass

protests, racial bias

1|INTRODUCTION

The killing of George Floyd, an African-American male, by a US police

officer on May 25, 2020, led to widespread protests against police

brutality, re-igniting the Black Lives Matter (BLM) movement that

brought worldwide attention to racial injustice. The protests reached

a peak on June 6, gathering almost 500,000 people in 550 different

locations across the United States. As of July 2020, the total number

of demonstrators reached 15–26 million people, which makes BLM

protests the most heavily attended civil movement in US history

(Buchanan et al., 2020). The protests spread around the world, raising

awareness of issues of racial inequality, discrimination, and systemic

racism.

With increased attention on systemic racism, growing numbers of

stakeholders recognize racial diversity on corporate boards (or rather

lack thereof). Although calls for companies to increase ethnic diversity

are not new (Reeve, 2017), as of May 2020 most of the attention was

on increasing the number of gender-diverse boards.

1

The BLM

Received: 21 September 2021 Revised: 10 October 2022 Accepted: 11 October 2022

DOI: 10.1111/corg.12497

170 © 2022 John Wiley & Sons Ltd. Corp Govern Int Rev. 2024;32:170–189.wileyonlinelibrary.com/journal/corg

protests changed the focus. For example, Environmental, Social, and

Governance (ESG) funds, that had experienced increasing money

inflows before the protests, now devoted more attention to racial

diversity in companies (Kishan & Marsh, 2020), and many corpora-

tions and asset management firms recognized issues of insufficient

racial diversity and focused on inclusion and equal opportunities poli-

cies (Nauman, 2020). Institutional investors started to demand disclo-

sure of boardroom racial composition (Butler, 2020) and urged

companies to act accordingly (Edgecliffe-Johnson & Nauman, 2020).

2

Also, media drew attention to large public companies that did not

have a single Black person on their board of directors and noted that

“Corporate America has a long way to go to achieve meaningful black

representation in its leadership ranks”(Newsweek, June 17, 2020).

And on December 1, 2020, NASDAQ proposed a “comply or explain”

Board Diversity Rule that was accepted by the SEC on August

6, 2021.

In this paper, we examine how investors assess the racial diversity

of corporate boards during the BLM protests and 1 year after the pro-

tests. The widespread BLM campaign was an exogenous shock that

prompted investors to reevaluate risks associated with racially nondi-

verse boards. We posit that stock returns of companies with Black

representation in the board differ from those of companies without a

single Black director during the BLM protests, and the sign of this

relationship depends on investor expectations about the costs and

benefits of increasing racial diversity on the board.

There are two contradicting theories—the knowledge view and

the conflict view—explaining the relationship between racial diversity

and company performance (Richard et al., 2007). The positive “knowl-

edge-based view”(Andrevski et al., 2014) supports the idea of racial

diversity as increasing the variety of viewpoints and opinions (and

thus aggregated group knowledge), in turn leading to superior

decision-making and better performance (Carter et al., 2003;

Conner & Prahalad, 1996; Erhardt et al., 2003; Watson et al., 1993).

Previous literature documents a positive relationship between board-

room racial diversity and firm reputation (McMillan et al., 2010;

Miller & Triana, 2009), better innovation and global outreach

(Cox, 1991), more efficient response to market volatilities and unprec-

edented events (Hunt et al., 2015), and higher firm productivity

(Richard et al., 2020).

In contrast, the negative “theory of heterogeneity”(Richard

et al., 2007), initially developed by Blau (1977), states that group racial

diversity might lead to obstacles in communication (due to discrimina-

tion, biases, and differences in beliefs and values) and facilitate con-

flict (Baugh & Graen, 1997) thus hindering performance and decision-

making efficiency (Richard et al., 2007). The overall effect differs

depending on the level of diversity (Blau, 1977), the team's organiza-

tional hierarchy (Richard et al., 2020), the time period, and the indus-

try (Richard et al., 2007), as well as diversity management practices

and level (e.g., group vs. organization) (Richard, 2000).

Although corporate boards might embrace different levels of

diversity—such as gender, experience, and field of expertise—with

race and ethnicity being one of them, we hypothesize that the BLM

mass protests illuminated racial diversity issues and prompted the

reevaluation of the effect of boardroom racial diversity on firm value.

At first sight, the lack of Black representation on the board should

have been a concern to investors during the BLM protests. Drawing

parallels with the #MeToo Movement (beginning in October 2017)

that shifted investors' beliefs about higher risks associated with no or

minimal board gender diversity and resulted in positive abnormal

returns for firms with gender-diverse boards (Billings et al., 2022), we

would expect that firms with racially diverse boards outperform other

firms during the BLM protests. Similarly, if investors expect that com-

panies with racially nondiverse boards end up having less capable

boards and deviate from the “optimal”board structure under the pub-

lic pressure to increase boardroom racial diversity (Ahern &

Dittmar, 2012), we would observe negative abnormal returns for firms

with racially nondiverse boards. Alternatively, if investors praise this

public pressure that induces firms to solve race problems, reduce dis-

crimination, and hence improve efficiency and overall welfare

(Denes & Seppi, 2022), we would expect positive abnormal returns

for firms without Black representation in the board.

To address this empirical question, we analyze stock price reac-

tions during a 25-day period from May 25, the day George Floyd was

killed, through the peak of the BLM protests on June 6, and until June

19, when attention towards the protests normalized. We measure

interest towards certain search patterns and keywords related to the

protests (such as “BLM,”“protests,”“racial inequality,”and “racial

injustice”) using Google Trends. We start by collecting the board com-

position of companies included in the S&P 500 index as of May 25.

Since in most cases companies do not disclose their board's racial

diversity data or the race of their board members, we use external

resources to hand-collect the necessary information. As a result, we

have a comprehensive data set of all the S&P 500 index companies'

board members.

We find a positive association between the representation of

Black directors and stock returns during the BLM protests, especially

among the largest and most popular companies. In the sample of top

250 companies by market capitalization, the relationship is both eco-

nomically and statistically significant. For example, firms with at least

one Black director are associated with 3.1% higher Fama–French–

Carhart (four-factor) adjusted cumulative abnormal returns (CARs) at

the peak of the BLM mass protests than firms without Black directors.

This relationship is not driven by general board diversity, such as the

proportion of all ethnic minorities or the proportion of female direc-

tors on the board.

Our sample covers 5524 board seats and 4665 unique individuals.

We find that all ethnic minorities on average hold 16% of board seats

and Black directors hold 8% of board seats; meanwhile 17% of sample

companies have no ethnic minorities on the board of directors and

37% have no Black directors. Interestingly, the average number of

board seats per Black director is 1.34, compared to 1.17 board seats

per director of other ethnic origin, the difference being statistically

significant at the 1% level. As in previous literature (Carter

et al., 2003), a positive correlation exists between the size of the

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