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Diversity on Boards

Anita Anand & Vijay Jog

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Anita Anand & Vijay Jog, “Diversity on Boards” (2016) 58:2 Canadian Business Law Journal 165.

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Abstract

Examinations of public company board composition have focused on the absence of women but

rarely on the absence of visible minorities. Given an increasingly diverse domestic population

and the increased participation of second-generation immigrants in the professional cadre, we

think that board diversity, especially in terms of the proportion of visible minority directors

(VMDs), warrants academic attention. Accordingly, we examine VMDs on boards of TSX-listed

firms and the performance of those firms. We also analyze graduating classes of director

programs (DPs) in Canada as this qualification may facilitate one’s ability to obtain future

directorships. Our preliminary analysis indicates that VMDs represent 5.5 percent of directors of

TSX-listed firms (and less if certain foreign-owned firms are excluded). Visible minorities

represent 4.2 percent of those graduating from DPs. The percentage of women is much higher in

both cohorts; white women comprise 26 percent of DP graduates but only 12 percent of public

company board members. We note the much lower representation of visible minorities relative to

both white women and white men on corporate boards. We also examine the types of firms that

are more likely to place visible minorities and women on their boards, noting that firms in certain

industries such as mining and oil and gas have been historically less likely to have diverse

boards. Finally, we examine the question of firm performance in relation to board composition.

Our findings suggest that firms with boards comprised of only white males do not show

significantly better performance than firms with boards with females and VMs. This finding is

even more evident when we analyze relative stock market performance.

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1. Introduction

Examinations of board composition in public companies focus on the absence of women but

rarely on the absence of visible minority directors (VMDs). In countries such as Canada, the

United States and Australia, where visible minorities contribute significantly to GDP and

represent a high growth segment of the population, a question arises as to whether boards

should bear some demographic similarity to the society in which the firm operates. In order

to understand board composition and its potential impact on a firm’s performance, more

information is required about the complement of VMDs on boards of directors. This study

fills this gap in the literature.

“Diversity” in the corporate context refers to the composition of the board, taking into

account individual characteristics of board members, such as gender, race, disability, age and

ethnicity. The relative paucity of women on boards has dominated the academic debate

(Francoeur et al, 2007; Terhesen et al, 2009; Peterson and Philpot, 2006) with visible

minority representation falling a distant second (Brammer et al, 2007).2 We begin by

questioning this divide in the literature and argue that characteristics other than gender are

relevant to the discussion about board diversity. Indeed, the aim of this study is to provide a

deeper look at board composition by examining VMDs and subgroups of VMDs.3

To this end, we analyze board composition and performance of sample firms listed on the

Toronto Stock Exchange as well as visible minorities in the graduating classes of director

programs (DPs) in Canada. Our preliminary analysis indicates that the representation of

VMDs on boards and in DPs is less than 5.5 percent in both cohorts (and less in the TSX

                                                                                                                         2 C Francoeur, R Labelle, & B Sinclair-Desgagne, Gender diversity in corporate governance and top management 81 Journal of Business Ethics 83 (2008); Siri Terjesen, Ruth Sealy & Val Singh, Women Directors on Corporate Boards: A Review and Research Agenda 17, Corporate Governance: An International Review 320 (2009); Craig A Peterson & James Philpot, Women's roles on U.S. Fortune 500 boards: Director expertise and committee memberships 72 Journal of Business Ethics 177 (2007). 3 As discussed infra, we define “visible minority” as non-white, in accordance with the StatsCan definition of ethnic groups. StatsCan divides ethnicity into 13 distinct ethnic sub-groups: White, Chinese, South Asian (e.g. East Indian, Sri Lankan), Black, Filipino, Latin America, Southeast Asian (e.g. Vietnamese, Cambodian), Arab, West Asian (e.g. Iranian, Afghan), Japanese, Korean, Aboriginal (North America Indian, Metis Inuit). StatsCan - Housing, Family and Social Statistics Division, Ethnic Diversity Survey STC/HFS-028-75215, (April 2002) 10, available at http://www23.statcan.gc.ca/imdb-bmdi/instrument/4508_Q1_V1-eng.pdf.

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group of companies if six foreign-owned firms are excluded).4 Certain visible minority

groups, including those from South Asia, are more prevalent on public company boards than

other visible minority groups, such as Aboriginal peoples. Finally, firms in consumer-based

industries (such as financial services) demonstrate a higher propensity than other industries

(such as mining) to place VMDs on their boards.

We believe that additional attention should be paid to potential contributions that VMDs can

make to corporate boards. Building on Becker (1957), we hypothesize that VMDs may bring

specific advantages to the firm and as a result firms will be at a competitive disadvantage if

firms fail to hire these directors. Specifically, VMDs may have a unique ability to understand

diverse labour and consumer markets, to provide access to untapped and new networks, and

to exercise useful approaches in negotiations around the boardroom table.

Our data is useful for lawmakers who are currently considering the question of board

diversity, including whether to compel boards to appoint a minimum number of women to

the board. In this regard, we note that some countries (such as Norway, Germany, France,

Iceland and Spain) have implemented mandatory gender but not visible minority quotas,

which may simply be because visible minorities constitute a very small percentage of the

overall professional cadres in these countries. Other jurisdictions have implemented a less

strict approach. For example, nine Canadian provinces recently adopted a "comply and

explain" approach under which public corporations must disclose whether they have a

written policy relating to the nomination of women directors, whether they have targets for

getting more women on their boards and measures taken to ensure that the policy has been

effectively implemented. If the corporation does not consider the representation of women on

the board in its nominating process, or has not adopted a target, it must disclose its reasons

for not doing so.5

While legislative initiatives across the globe seek to increase the representation of women on

boards, they generally do not address the paucity of VMDs. It may be that the legislation is

likely a response to empirical data that evidences a low percentage of women on boards. For                                                                                                                          4 These six firms in the basic materials (mining) area are owned by foreign firms. 5 See Amendments to National Instrument 58-101, available at http://www.osc.gov.on.ca/documents/en/Securities-Category5/csa_20141014_58-101_noa-national-instrument.pdf.

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example, Catalyst found that women on corporate boards in U.S. public companies increased

from 10.3 percent in 2011 to 12.1 percent in 2013 (Catalyst, 2014; see also Peterson and

Philpot, 2006). The number of public companies with no women board members was about

50 percent. By industry, firms in the mining and oil and gas sectors had just 7 percent of

women on their boards while utilities had 23.2 percent (Catalyst, 2014; see also Arfken et al,

2004). Our efforts are complementary to this research in that we seek to provide data on the

numbers of VMDs as well as the types of companies that are more or less likely to have

VMDs. We also examine the issue of the relationship between firm’s performance and board

composition and find that firms with boards comprised of only white males do not perform

significantly better than firms with VMDs and females on their boards. We believe that the

current policy discussion regarding board composition will be better informed with empirical

data such as that which forms the basis of this paper.

After this introduction in Part 1, we set forth our motivation and examine the literature in

Part 2. We focus on the contributions that VMDs can make to the board, include opening the

corporation up to broader client or customer networks. We then describe our hypotheses and

methodology in Part 3 before turning to the results and analysis of the data in Part 4. We

conclude the discussion in Part 5 with suggestions for future research. We note at the outset

that our primary motivation is to respond to the descriptive question of the complement of

VMDs on corporate boards. We do not address the normative question of whether companies

should, from an ethical standpoint, increase the number of VMDs on their board, though our

study has implications in this regard. To our knowledge, there is no academic research on the

presence of VMDs on Canadian public company boards or on the relationship between

VMDs and firm performance, which is a gap that this study assists in filling.

2. Motivation and Background

Historically, the term “corporate governance” has not included a discussion of whether

certain sectors of society are represented on a firm’s board of directors. Following the fall of

Enron in 2001, board composition was central to countries’ reform agendas but primarily in

terms of the ratio of independent to non-independent or inside directors. For example, the

Sarbanes-Oxley Act of 2002 requires U.S. public companies to have a majority of

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independent directors on the audit committee.6 Both NYSE and NASDAQ require that a

majority of the board of directors of a listed company be independent.7 Similarly, Canadian

securities regulators recommended a majority of independent directors on the board, audit

and nominating committees and an explanation from the public corporation if it does not

adopt these recommended best practices.8 In the last ten years, however, “corporate

governance” has come to include discussions about “diversity” on the board (Dhir, 2014).

The term “diversity” in this context typically refers to the board’s gender complement (van

der Walt & Ingley, 2003; Konrad et al, 2006; Sealy et al, 2009). But there is some literature

in the area of “ethnic diversity,” a term that refers to the number of visible minorities or

people of colour in the boardroom (Fairfax, 2011; Rhode and Packel, 2014). The literature

focuses on the business case for increasing diversity on boards. One strand of this case has

revolved around the claim that in some measure it is in the corporation’s interest to ensure

that diversity will “improve organizational processes and performance” (Rhode and Packel at

368), including: the time taken to reach decisions; the generation of new ideas; the ability of

companies to attract new talent; and the development of diverse networks which in turn

improve the board’s access to expertise and other business contacts (Dhir, 2010; Hafsi &

Turgut, 2013).

The literature indicates that these advantages could be present if the board is only diverse in

terms of gender but leaves open whether ethnic diversity could have a comparable effect on

board performance. Thus a question worth pursuing is whether VMDs bring distinct

advantages to the boardroom table as a result of their ethnicity rather than their gender.

VMDs likely have fewer connections to pre-existing directors, as will be noted in the

empirics provided relating to DPs and board membership. If this is true, VMDs may be more

inclined to question management’s decisions and assumptions than established directors (van

der Walt & Ingley, 2003). This argument is akin to those relating to independent directors on

                                                                                                                         6 Sarbanes-Oxley Act of 2002, Pub. L. No.107-204, § 301, 116 Stat. 745 (codified in scattered sections of 15 U.S.C. and 18 U.S.C. (2002)). 7 See NYSE Rule 303A.02 and NASDAQ § 4200(a)(15). 8 See TSX Company Manual, § 473-475, available at http://tmx.complinet.com/en/display/display_main.html?rbid=2072&element_id=1. This approach is referred to as “comply-or explain.” For analysis see Anand, Milne and Purda, “Voluntary Corporate Governance Mechanisms” (2012).

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the board; they are unrelated to management and other more longstanding board members

and lend objectivity to the decision-making process.

Outside the boardroom, VMDs may bring a network of contacts previously unavailable to the

corporation. They may improve business clients’ perceptions of the likelihood of a board’s

consideration of interests similar to their own (van der Walt & Ingley, 2003). In particular, if

the board reflects the ethnicity of a client or a specific customer segment, the client may

believe that the board is more likely to respond to its business needs. Having a VMD on the

board may send positive signals to the corporation’s customers, suppliers, shareholders,

employees as well. Moving beyond the corporation’s immediate stakeholders, VMDs may

improve the public image of the corporation. An ethnically diverse public face of a

corporation may be politically and socially popular, resulting in greater consumer demand for

the company’s products or even investor demand for its securities.

A second strand of the business case for diversity is tied to empirical data relating to board

diversity and firm performance. These studies examine the relationship between gender

diversity and firm performance. Carter et al (2010) find no statistically significant

relationship between gender and financial performance for a sample of major U.S.

corporations. By contrast, Catalyst tracked Fortune 500 companies between 2004 and 2008

and found that companies with the most female directors outperformed those with the fewest,

yielding a 26 percent higher return on invested capital and a 16 percent higher return on sales

(Catalyst, 2011).9 Financial benefits linked to having women on boards were more

pronounced in the post-2008 period than in the prior three years (Credit Suisse, 2012).10

These results support earlier findings by Erhardt et al (2003), who argue on the basis of

boards for 127 large U.S. companies that diversity is positively associated with firm

performance. Yet the empirical results are mixed, leading some to assert that the empirical

evidence regarding board diversity and firm performance is inconclusive (Fairfax, 2013;

Rhode, 2014).                                                                                                                          9 Nancy M Carter & Harvey M Wagner, The Bottom Line: Corporate Performance and Women’s Representation On Boards 2004–2008 (2011), available at http://www.catalyst.org/knowledge/bottom-line-corporate-performance-and-womens-representation-boards-20042008. 10 Credit Suisse Research Institute, Gender Diversity and Corporate Performance (2012), available at https://www.credit-suisse.com/newsletter/doc/gender_diversity.pdf. Another strand of related literature is performance of firms with female CEOs; our focus is on the Board composition.

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Carter et al (2010) argue that board diversity and firm financial performance are endogenous,

a point that we acknowledge and discuss below. But we pursue the performance question

because it is at least relevant to understanding the motivations of firms in terms of populating

their boards. If VMDs enhance the firm’s operational performance, the failure to appoint

them to the board would result in a competitive disadvantage relative to other firms in the

industry (Becker, 1957). Effectively the firm, which speaks through the board and its

nominating process, would be refusing to appoint VMDs even though VMDs may enhance

value. The board would be imposing a cost on the firm and its shareholders in the amount of

what Becker calls the ‘discrimination coefficient,’ which in this context would essentially be

the loss of value a firm is willing to bear to indulge its taste for discriminating against VMDs.

Discriminating firms will fail to hire VMDs who are as productive, and in fact even more

productive, than non-VMDs directors. Given the empirical results we discuss below (that is,

that firms with VMDs are performing at least as well as firms with boards comprised of

white males only), firms may be able to enhance value, or at least would be at no competitive

disadvantage, if they appointed VMDs.

We note that qualitative research suggests that boards themselves are divided in terms of

whether board diversity is positive. After conducting 57 interviews with corporate directors,

institutional investors and others, Krawiec et al (2013) provide evidence of tensions in

boards' views of diversity. For example, while most directors in their study favoured

diversity of viewpoints, they also indicate the importance of collegiality.11 Nevertheless,

building on the above-noted notions about incentives to include VMDs on boards, we explore

the complement of visible minorities in DPs and corporate boards and also test whether there

is any correlation between VMDs and corporate performance. Specifically, we probe the

composition of boards and performance of companies listed on the Toronto Stock Exchange

and courses that offer education and training for directors and potential directors.

                                                                                                                         11 Interestingly, it is not clear why the predominantly white males in this study felt that increasing diversity would lead to a lower degree of collegiality.

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3. Methodology

We seek to measure the proportions of VMDs on corporate boards in Canada and the pool of

candidates graduating from director programs. With hand-collected data, we analyze

biographical profiles of both DP graduates and board members of TSX-listed firms.

Consistent with other studies (Grosvold et al, 2007 and Bernardi et al, 2005), we determine

individuals’ ethncity by examining pictures available on the DP and company websites. For

data on financial performance, we use the Bloomberg database.

We began by examining the pool of candidates in DPs over the past 10 years. We pulled lists

of graduates of DPs from three DP websites: the Directors College (DC), the Institute of

Corporate Directors (ICD), and the Collège des Administrateurs de Sociétés (CAS). 12

These lists contain names, then-current company affiliation, month and year of graduation,

and a black and white or colour portrait of each alumnus, resulting in 3,905 data points from

these DPs. With reference to photographs available online, we coded the individual’s gender

and whether he or she is a visible minority for 100 percent of the DP graduates. We define

“visible minority” in accordance with the StatsCan definition, which divides ethnicity into

11 distinct visible minority groups: Chinese, South Asian (e.g. East Indian, Sri Lankan),

Black, Filipino, Latin America, Southeast Asian (e.g. Vietnamese, Cambodian), Arab, West

Asian (e.g. Iranian, Afghan), Japanese, Korean and Aboriginal (North American Indian,

Metis, Inuit).13 We include more information about the DPs in Appendix A below.

Next, to investigate VMDs in publicly listed companies, we gathered data on board members

as of June, 2014 for 219 firms in the TSX Composite Index and 138 other TSX-listed firms.

The TSX Composite Index contains stocks of the largest companies on the Toronto Stock

Exchange and is the Canadian equivalent of the S&P 500. We compiled this information                                                                                                                          12 The three primary organizations offering DPs are also affiliated with other institutions: (1) the Director’s College offers the Directors College Chartered Director (C.Dir.) Program and is partnered with DeGroote at McMaster University, the Sauder School at the University of British Columbia, the Rowe School of Management at Dalhousie University, and the Collège Des Adminstrateurs de Société at Laval University, which offers the Administrateurs de Société Certifié qualification; (2) the Institute for Corporate Directors (ICD) offers the Directors Education Program and is partnered with Rotman at University of Toronto, as well as a number of satellite programs including: Beedie Business School at Simon Fraser University, the Alberta School of Business at University of Alberta, Haskayne School of Business at University of Calgary, and McGill Executive Institute at McGill University; and (3) the Chartered Secretaries Canada under the Institute of Chartered Secretaries and Administrators, which offers the Director’s Education and Accreditation Program (DEAP). 13 StatsCan, supra note 3.

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from company websites and photographs of board members on those websites. Where

photographs of board members were not available on company websites, we used

photographs from other databases, including LinkedIn and Google Images, where there was

at least one clear link between the photo and the individual director. We located photographs

for board members in 94 percent of the cases and compiled profiles for 3,075 of directors for

357 companies, which include 219 firms in the TSX Composite Index and 138 other TSX-

listed firms.14 In addition to visible minority status, we collected information on the VMD’s

gender and the industry of the company in which he or she serves as a board member (see

Appendix B for a list of industries).

We understand that this methodology, and in particular the use of pictures for classification

purposes, can result in undercounting as individuals who are visible minorities may not be

classified as such. The approach may also lead to overcounting, though this seems less likely

If an individual’s ethnicity were difficult to identify, we researched the etymology of the

individual’s name (first surname and then given names) and the likelihood of that name

belonging to a given minority group.15 For example, we searched last name and ethnic origin

on Google, scanned the top 10-20 Google hits for an indication as to which visible minority

group a name likely belongs, and then used that minority group as the individual identifier.16

Of the 357 companies for which data were collected, six were highlighted as being special

due to abnormally high proportions of VMDs.17 On further investigation, we found that these

firms were all “foreign owned.” The abnormal instances were then verified as non-

coincidental by searching for the companies’ major shareholders and comparing the ethnicity

of these shareholders with the ethnicity of the VMDs. In all cases except one, we found that

ownership of the firm was concentrated among those with the same ethnicity (Chinese and,

in one case, Latin American) as those VMDs that appeared in abnormal proportions. In the

                                                                                                                         14 We could not easily find data on all companies in the TSX Composite Index. However, we believe that the 219 companies are representative of the Index and respective industry sectors. 15 Whenever there was ambiguity regarding the ethnicity or a director, we proceeded to perform the name etymology search to reduce subjectivity in coding individual directors. 16 In case of ambiguity in the ethnicity of a name, we coded the director according to the ethnicity most often associated with that name in the Google search results. 17 These firms are as follows: China Gold International Resources Corp., Husky Energy Inc., Pacific Rubiales Energy Corp., Boyuan Construction Group Inc., Magindustries Corp., and Century Iron Mines Corp.

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case of one firm (Boyuan Construction), we concluded that the abnormal proportions were

non-coincidental since the firm has extensive operations in China. We compiled two sets of

results, one including and one excluding these firms. When analyzing performance data, we

excluded these firms as well as 39 other firms due to incomplete financial data. Financial

performance metrics were measured over a five-year time horizon (2009 to 2013) or less if

the company was less than five years old. Data were collected from Bloomberg.

4. Results and Analysis

We present the summary statistics for the DPs before turning to examine board composition

of firms on the TSX.

(a) Descriptive Statistics - DPs

Over the 10 years of graduating DP classes from the DC, the ICD and the CAS, we found

that a vast majority (96 percent) of graduates are white. The breakdown of visible minorities

within the remaining 4 percent indicates that South Asians comprise 33 percent of that group

with Chinese (19 percent), Arabs (13 percent) and Blacks (10 percent). The numbers of

visible minorities over the time period has remained fairly constant with a high of 6.17

percent in 2008 and a low of 2.80 percent in 2007. In terms of gender, 73 percent of

graduates were men and 27 percent women. The number of women in DPs dipped sharply in

2005 to 19 percent but in the past few years the proportion of women graduates has remained

fairly constant at about 29 percent. The proportions of white males and females in the DP

graduate sample are 70 percent and 26 percent, respectively. The proportions of male and

female visible minority DP grads are 3 percent and 1 percent, respectively.

Table 1: Percentages of VMDs in Director Programs

White Male White Female VM Male VM Female

# % # % # % # %

2004 89 71.77% 31 25.00% 2 1.61% 2 1.61% 2005 246 78.85% 55 17.63% 7 2.24% 4 1.28% 2006 261 72.10% 84 23.20% 12 3.31% 5 1.38% 2007 296 69.16% 120 28.04% 9 2.10% 3 0.70%

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2008 289 71.36% 91 22.47% 22 5.43% 3 0.74% 2009 315 70.47% 111 24.83% 16 3.58% 5 1.12% 2010 276 66.19% 127 30.46% 11 2.64% 3 0.72% 2011 279 65.80% 119 28.07% 16 3.77% 10 2.36% 2012 370 68.01% 151 27.76% 16 2.94% 7 1.29% 2013 301 68.10% 120 27.15% 12 2.71% 9 2.04%

We then examined DP graduates over time and found that the majority of graduates have

consistently been white males, with the next largest proportion being white females. Visible

minorities are graduating in much fewer numbers and there are more visible minority male

graduates than female graduates as indicated in the table below. We do not have a breakdown

of these graduates by the type of program since these programs are designed for both for-

profit and not-for-profit boards. However, our anecdotal observation indicates that the visible

minorities and women may be over represented in the programs tailored for the not-for-profit

boards.

A question may arise with regards to the admissions criteria for DPs. DP programs prefer that

their applicants have board experience and, if candidates do not have such experience, at a

minimum, candidates must have senior executive experience as an appropriate substitute. For

example, the Institute of Corporate Directors looks at the following criteria in determining

whether to accept a candidate for its DP program: board experience (which we understand

can include not-for-profit board experience), executive experience, letters of

recommendation, business acumen, motivation, and any other information deemed relevant

for suitability by the candidate. The Directors College similarly evaluates board experience

and considers executive or other experience that would adequately substitute for it. The cost

of the program is almost $17,000 with application fees attached to the tuition.18 We raise the

possibility that if board experience (even in the not-for-profit sector) is a criterion for

admission, and VMDs are not prevalent on boards, they may have difficulty gaining

18 The Institute for Corporate Directors (ICD) website has an admissions requirements page that indicates that it is not an entry-level directors program. “Except in exceptional situations all admitted participants will have appropriate experience as a director. Preference is given to DEP applicants who have experience on for-profit boards.” Institute of Corporate Directors, Admissions Overview, available at http://www.icd.ca/Courses/Directors-Education-Program/Admissions-Overview.aspx.

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admission to the DP. It is true that DPs may consider accepting candidates who do not have

board experience, but this seems to be the exception rather than the rule.19

b) Descriptive Statistics – TSX firms

Next, we turned our attention to the board composition of Canadian publicly-listed

companies. We found that 12.36 percent of board seats in the total dataset are held by

women and 5.5 percent by visible minorities. The average number of directors per board is

8.6 with women comprising on average 10.7 percent of board members and visible

minorities 5.63. The proportions of white males and white females in the sample are 82.73

percent and 11.77 percent, respectively. The proportions of male and female visible

minorities are 4.91 percent and 0.59 percent, respectively. The breakdown of visible

minorities shows that 2.1 percent of board members are Chinese, 1.04 percent are South

Asian, and 0.88 percent are Latin American.

Table 2: Summary Statistics of VMDs in TSX Firms

Ethnicity Number Proportion Gender Number Proportion White 2906 94.50% Male 2695 87.64% Chinese 65 2.11% Female 380 12.36% South Asian 32 1.04% Total 3075 100.00% Black 13 0.42%

Filipino 0 0.00% Gender/Ethnicity Number Proportion Latin American 27 0.88% White/Male 2544 82.73% Southeast 2 0.07% White/Female 362 11.77% Arab 11 0.36% VM/Male 151 4.91% West Asian 0 0.00% VM/Female 18 0.59%

                                                                                                                         19 Ibid. We note that the ICD has instituted the DEP Diversity Scholarship for qualified DEP candidates from an under-represented group – women, visible minorities, and Aboriginal and Indigenous peoples - and who demonstrate a financial need. The ICD’s Diversity Scholarship aims to “foster diversity in its classrooms across the country” by “ensuring that diverse and qualified candidates have the means to further develop their skills as effective board directors.” Institute of Corporate Directors, DEP Diversity Scholarship, available at http://www.icd.ca/Courses/Directors-Education-Program/DEP-Diversity-Scholarship.aspx.

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Japanese 3 0.10% Total 3075 100.00% Korean 4 0.13%

Aboriginal 1 0.03% Other 11 0.36% Visible

Minorities 169 5.50% Total 3075 100.00%

These percentages change when six foreign owned firms that also have abnormally high

proportions of VMDs are excluded. In examining the results without these firms, we found that

12.47 percent of board seats in the total dataset are held by women and 4.2 percent by visible

minorities. The average number of directors per board is 8.6 with women comprising on average

10.7 percent of board members and visible minorities 4.42 percent. The proportions of white

males and white females in the sample are 83.82 percent and 12 percent, respectively. The

proportions of male and female visible minorities are 3.71 percent and 0.46 percent, respectively.

The breakdown of visible minorities shows that 1.06 percent of board members are Chinese, 1.03

percent are South Asian and 0.6 percent are Latin American.

Table 3: Summary Statistics of VMDs in TSX Firms (excluding special firms)

Ethnicity Number Proportion Gender Number Proportion White 2890 95.82% Male 2640 87.53% Chinese 32 1.06% Female 376 12.47% South Asian 31 1.03% Total 3016 100.00% Black 13 0.43%

Filipino 0 0.00% Gender/Ethnicity Number Proportion Latin American 18 0.60% White/Male 2528 83.82% Southeast 2 0.07% White/Female 362 12.00% Arab 11 0.36% VM/Male 112 3.71% West Asian 0 0.00% VM/Female 14 0.46% Japanese 3 0.10% Total 3016 100.00% Korean 4 0.13%

Aboriginal 1 0.03%

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Other 11 0.36%

Visible Minorities 126 4.18%

Total 3016 100.00%

We also sought to test the claim that larger boards are more likely to have more women and

VMDs (Carter et al, 2003). Initially, we found that there is, generally speaking, a higher

proportion of visible minorities and women on larger boards than smaller boards as indicated in

the table below. But when we expanded our dataset, this proposition no longer held true. That is,

the number of visible minorities and women on the board did not increase in lock step with board

size.

Table 4: Average Proportions by Board Size of TSX Firms

Board Size

# of Companies

White Male

White Female VM/Male VM/Female

1 0 0.00% 0.00% 0.00% 0.00% 2 0 0.00% 0.00% 0.00% 0.00% 3 1 100.00% 0.00% 0.00% 0.00% 4 5 85.00% 5.00% 5.00% 5.00% 5 34 91.76% 3.53% 4.71% 0.00% 6 39 91.03% 4.27% 3.85% 0.85% 7 69 85.30% 6.21% 7.87% 0.62% 8 53 86.79% 8.73% 4.01% 0.47% 9 49 85.03% 9.07% 5.44% 0.45% 10 26 79.23% 16.92% 3.46% 0.38% 11 26 77.97% 19.23% 2.45% 0.35% 12 14 76.19% 15.48% 8.33% 0.00% 13 14 75.82% 21.43% 1.65% 1.10% 14 13 73.63% 20.33% 4.95% 1.10% 15 6 72.22% 16.67% 8.89% 2.22% 16 5 80.00% 16.25% 3.75% 0.00% 17 2 79.41% 17.65% 2.94% 0.00%

  16  

18 1 83.33% 11.11% 5.56% 0.00% 19 0 0.00% 0.00% 0.00% 0.00% 20 0 0.00% 0.00% 0.00% 0.00%

Finally, we conducted an industry-based analysis and in particular, analyzed whether firms

in certain industries have more (or fewer) visible minorities on their boards. Most striking

about our data is the very high proportion of white males on boards across all sectors. Firms

in the financial industry, such as banks, have more women but not VMDs on their boards.

Firms in the basic materials sector have the most VMDs (and these VMDs are male).

Table 5: Average Proportions by Sector of TSX Firms

Sector

Sector Average White Male

Sector Average White Female

Sector Average

VMD Male

Sector Average

VMD Female

Energy 89.99% 6.54% 3.15% 0.32% Industrial 87.54% 9.85% 2.26% 0.35% Financial 76.88% 17.82% 4.68% 0.61% Basic Materials 85.28% 5.76% 8.38% 0.58% Communications 78.79% 18.88% 1.91% 0.42% Consumer, Cyclical 81.77% 12.69% 3.80% 1.74% Utilities 78.38% 18.61% 3.01% 0.00% Consumer, Non-cyclical 79.92% 14.84% 4.84% 0.40% Technology 84.87% 7.39% 5.65% 2.08% Diversified 77.78% 22.22% 0.00% 0.00%

Note: Sector Categorization from Bloomberg

(b) Diverse Boards and Corporate Performance

As discussed above, one strand of the literature relating to board diversity focuses on firm

performance. The literature is somewhat mixed. That is, taken together the studies suggest no

definitive causal relationship between board composition and firm performance has been

found to exist (see Rhode and Packel, 2014). The inconclusive results are consistent with

other corporate governance studies that tend to find no causal relationship between corporate

governance mechanisms, such as independent directors on the board, and a firm’s

  17  

performance (Anand, 2013). Nevertheless, it is important to take the somewhat descriptive

analysis provided here to bear on the question of firm performance to see if any conclusions,

even if tentative, can be drawn about the importance of VMDs from this perspective.

Thus, in this section, we analyze the average and median performance of companies in each

of four groups. We examine firms with boards comprised of: white males only; white males

and white females but no VMDs; no females but VMD males; and white females and VMDs

(male or female). The latter two boards also had white males on them. We undertook our

analysis using four measures: Return on Equity (ROE), Return on Assets (ROA), 5 year

Total Stock Return (TSR), and the ratio of Market Value to Book Value (M/B).20 The ROE

and ROA measures provide a view into companies’ past performance while TSR provides

the added insight of investors’ outlook for the future. M/B is similarly impacted by investor

sentiments as they progressed over the 5-year period. We calculated total stock returns over

the 5-year period from January 1, 2009 to December 31, 2013. We then analyze how

companies in each group performed relative to their sector peer group using the same

measures, since financial performance is often influence by factors unique to that sector. It

should also be noted that the results for firms with VMDs are based on a small number of

companies and influenced by the industry characteristics in that sub-sample.

i) Average Performance

Overall, boards with white males and white females performed the best while boards with

only white males performed the worst. Boards with both VMDs and females performed

better than boards with male VMDs and no females.21 Specifically, as noted in the chart

below, boards that were entirely comprised of white males delivered the poorest ROEs over

the period (-16.2 percent) and also delivered relatively poor ROAs (-7.9 percent). TSRs

(12.43 percent) were weaker than other groups indicating a relatively reasonable stock

market performance. Unsurprisingly, the overall performance on the ROE and ROA                                                                                                                          20 We exclude the six foreign-owned firms in this section. Also note that these financial metrics evaluate financial performance of firms using accounting data (ROA and ROE) and stock market data (TSR and M/B) and are routinely used in the finance literature. 21 It should be noted that we make no conclusion about either the correlation or the causality between diversity and performance.

  18  

measures is negative, which may be more representative of the time period under

consideration when the entire world economy faced a recessionary period.

Chart 1: Average Performance by Level of Diversity

Chart 2: Average Performance by Level of Diversity

-­‐20.00%  

-­‐15.00%  

-­‐10.00%  

-­‐5.00%  

0.00%  

5.00%  

10.00%  

15.00%  

20.00%  

ROE Average ROA Average TSR Average

White/Male

White/Female

VM/Male

VM/Female

  19  

Companies with boards that included white females showed the best (relatively less worse)

ROEs (-4.46) and strong ROAs (-2.62 percent). This group performed the strongest out of

the four groups. TSRs of 16.96 percent indicate that during the period under consideration,

companies in this group demonstrated a strong stock market performance. Companies with

male VMDs but no females performed poorly with average ROEs of -10.91 percent and

ROAs of -2.27 percent. M/Bs of 1.69 indicate that investors expected such performance.

TSRs however, were stronger (15.28 percent), indicating investors’ optimism for stronger

performance in the future. Companies with both VMDs and females were in the middle

with ROEs of -13.331 percent and ROAs of -8.37 percent. TSRs were the weakest of the

four groups at 12.01 percent, indicating that investors received the lowest stock market

returns from the companies in that group. The review of market to book ratio of the four

sub groups shows only minor differences. Since these metrics show market’s valuation of

expected future returns from invested capital; we see no major differences in relative

expectations.

ii) Median Performance

Since averages are sometimes influenced by outliers, we provide results using median

values. As seen in the table below, boards with white females showed the best median

0.00  

0.50  

1.00  

1.50  

2.00  

2.50  

M/B  Average  

White/Male  

White/Female  

VM/Male  

VM/Female  

  20  

performance with an ROE of 9.24 percent and ROA of percent. The median TSR of 15.08

percent and M/B of 1.93 indicate strong market performance. Boards with white males

only again show weakest performance with an ROE of 0.98 percent and ROA of percent,

although less so than indicated by averages (very poor performers are pulling the average

down). The median TSR of 11.68 percent and M/B of 1.51 indicate that stock market

performance was also relatively weaker. The median performance of companies with male

VMDs but no females is also poor with ROE at -0.02 percent and ROA at -0.11 percent.

Boards with both VMDs and females are next from the accounting metrics perspective;

however, the stock market performance was not stellar. Since results based on averages

may be influenced by outliers within each sub group, the results below are based on the

median values that remove the influence of the outliers. Table 6 below shows the results

based on both average and median values.

Table 6: Average and Median Performance by Level of Diversity

Average

Perf.

ROE ROA Market to Book TSR %

# of

companies AVG MD AVG MD AVG MD AVG MD

White/Male 96 -16.18% 0.98% -7.91% 0.34% 2.21 1.51 12.43% 11.68%

White/

Female 138 -4.46% 9.24% -2.62% 2.84% 2.05 1.93 16.96% 15.08%

VM/Male 38 -13.33% -0.02% -8.37% -0.11% 1.69 1.61 15.28% 15.63%

VM/Female 40 -10.91% 4.24% -2.27% 1.51% 2.13 1.78 12.01% 11.03%

  21  

Although the numbers using averages versus median are different, the conclusions are the

same. Overall, boards with white females performed the best, followed by boards where

both females and VMDs are present. Companies with boards with only white males

performed the worst in our sample.

iii) Relative Average Performance (sector adjusted)

Since firms in our overall sample are comprised of many sectors, and board compositions

differ across sectors, the results based on overall averages and medians as shown above

may be impacted by these sectoral differences. Therefore, we focus on the performance of

individual companies relative to the performance of all companies in their own sector. To

account for these possible sectoral differences, we calculate the relative performance of

each firm on all metrics by dividing their own performance by the average of all companies

in their sector. We call this ratio “relative” performance; these results are shown below. A

number greater (smaller) than 1 implies that the performance of companies in that sub

group is better (worse) after taking into account the sectoral composition.

As can be seen in the charts below this normalisation of performance to take into account

sectoral differences shows somewhat different results. Boards with white males only

performed better than their sector peers from an accounting standpoint (ROE = 1.37; ROA

= 1.93); however, these companies were the poorest performers on the stock market (TSR

= 0.52) and only made par in terms of value creation (M/B = 0.99).

  22  

Chart 3: Relative Average Performance by Sector

Chart 4: Relative Average Performance by Sector

Boards with white females and visible minority males were not as strong as their peers

from the perspective of relative accounting performance but, from an investor perspective,

these companies performed very well. Boards with white females and male VMDs show

0.00  

0.50  

1.00  

1.50  

2.00  

2.50  

Average ROE Average ROA Average TSR

White/Male

White/Female

VM/Male

VM/Female

0.00  

0.20  

0.40  

0.60  

0.80  

1.00  

1.20  

Average M/B

White/Male

White/Female

VM/Male

VM/Female

  23  

low and mixed performance than other groups from both an accounting and stock market

perspective.

Overall, relative to their respective sector, boards with white males demonstrated relatively

better performance compared to the performance of the average company in their

respective sectors using accounting metrics (ROA and ROE) but not so when it comes to

stock market performance where this group (i.e. boards with only white males)

demonstrated the worst performance. Companies with boards comprising of white females

and VMD males showed very good stock market performance. Companies with boards of

VMDs and females had poor accounting performance but were not as poor from a stock

market perspective. Thus, it is difficult to conclude that firms with boards comprised of

only white males demonstrate significantly higher and consistent absolute or relative

performance on all performance metrics.

5. Conclusions

In this study, we examine the complement of VMDs on boards of companies listed on the

TSX. We find that the proportion of VMD is less than 5 percent of the sample with some

visible minority groups completely unrepresented (Filipinos, West Asians and

Aboriginals). Our results related to the financial performance of companies in four

subgroups indicate that companies with only white males actually have inferior stock

market performance than companies with more diverse boards based both on absolute and

"relative to the sector" basis. We also find that firms with boards with only white males do

not show significantly better performance than firms with boards comprised of females and

VMDs. We do not claim that these results show causality since it is possible that firms that

demonstrate superior stock performance are forward-thinking or better able to conduct

searches that lead to a diverse board. However, if nothing else, our results do show that

there is no performance deterioration by having a diverse board.

We see at least three avenues for further research. First, we plan to investigate that

acceptance to application ratios of various DP programs. There are two possibilities: either

both VMs and females do not apply in large numbers to these programs or, the acceptance-

  24  

to-applicant ratio is much lower for these two groups. Second, we plan to track the

evolution of the DP graduates’ post-graduation state: how many of the VM and female

graduates actually find positions on the boards of for profit companies, whether they are

private or are publicly listed, and whether these firms happen to be owned by their families

and relatives. Third, we aim to contact females and VMDs in our sample and investigate in

a systematic way their perception about the degree of their contributions and the reasons as

to why companies may have chosen to have them to be members of their boards.

  25  

Appendix A: Description of Director Programs in Canada

There are three primary director programs (DPs) in Canada:

(1) the Director’s College (DC), which offers the Directors College Chartered Director (C.Dir.) Program and is partnered with DeGroote at McMaster University,22 and the Collège Des Adminstrateurs de Société (CAS) at Laval University, which offers the Administrateurs de Société Certifié (ASC) qualification;

(2) the Institute for Corporate Directors (ICD), which offers the Directors Education Program (DEP) and is partnered with Rotman at University of Toronto;23 and

(3) the Chartered Secretaries Canada under the Institute of Chartered Secretaries and Administrators (ICSA), which offers the Director’s Education and Accreditation Program (DEAP). The DC C.Dir., located in Hamilton, Ontario, program began in 2003 and has graduated 667 directors from its C.Dir. program. The ICD DEP has graduated 3,004 directors since its program began in 2004, now running DEPs in 5 major cities across Canada – Calgary, Edmonton, Montreal, Toronto, and Vancouver. The CAS began its ASC program in 2005 out of Montreal, Quebec, and has graduated more than 330 directors to its “Cercle des Administrateurs de Sociétés Certifiés,” who represent the CAS graduates and participants.

Our dataset includes graduates from the DC, the ICD, and the CAS since their programs’ inceptions 11, 10 and 9 years ago, respectively.

The DPs are designed to improve the skillset of individuals with previous director experience. The CAS ASC is the longest program at 15 days of instruction,24 with the ICD and the DC at 12 and 11¼ days, respectively.25 Upon successful completion, the DPs provide candidates with a formal certification for each of their respective director programs. However, the DPs are generally open only to those with past board experience and are themselves not necessary or sufficient to find a placement on a for-profit corporate board.

                                                                                                                         22 The Directors College has also partnered with the Sauder School at the University of British Columbia and the Rowe School of Management at Dalhousie University to offer its C.Dir designation. 23 The Institute of Corporate Directors has also partnered with a number of satellite programs including the Beedie Business School at Simon Fraser University, the Alberta School of Business at University of Alberta, the Haskayne School of Business at University of Calgary, and the McGill Executive Institute at McGill University. 24 Collège des Administrateurs Société, “Certification universitaire en gouvernance de sociétés”, https://www.cas.ulaval.ca/cms/site/college/cas-gouvernance/certification-gouvernance/programme (accessed January 10, 2015). 25 Directors College, “Delivering Canada’s University Accredited Chartered Director Development Program”, http://thedirectorscollege.com/#sthash.7XspKqQ5.dpbs (accessed January 10, 2015); Institute of Corporate Directors, “Curriculum Overview”, https://www.icd.ca/Courses/Directors-Education-Program/Curriculum-Overview.aspx (accessed on January 10, 2015).

  26  

The ICD admissions requirements are the most stringent of the three DPs, followed by comparable requirements for the CAS and the DC. Though there is some variation in admissions criteria, the admissions requirements for DPs are comparable across the three major programs. Of particular note is the consistent requirement for past experience.

  27  

Appendix B: Sample of Sectoral Classifications

NAME INDUSTRY_SECTOR ADVANTAGE OIL & GAS LTD Energy AECON GROUP INC Industrial AGF MANAGEMENT LTD-CLASS B Financial AGNICO EAGLE MINES LTD Basic Materials AGRIUM INC Basic Materials AIMIA INC Communications AIR CANADA-CLASS A Consumer, Cyclical ALACER GOLD CORP Basic Materials ALAMOS GOLD INC Basic Materials ALGONQUIN POWER & UTILITIES Utilities ALIMENTATION COUCHE-TARD -B Consumer, Cyclical ALTAGAS LTD Energy ARC RESOURCES LTD Energy ARGONAUT GOLD INC Basic Materials ATCO LTD -CLASS I Utilities ATHABASCA OIL CORP Energy

Source: Bloomberg

  28  

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