At the start of this week, I thought nothing could be more darkly funny than a libertarian-tinged entity called Silicon Valley Bank requiring a rescue by regulators. But I was wrong. Something could be funnier — namely, an attempt to blame the bank’s collapse on the diverse make-up of its board.
Silicon Valley Bank, critics noted, had boasted that 45 per cent of its board directors were women, while one was black, one was LGBTQ+ and two were military veterans. Perhaps if it had been less concerned about diversity, the argument went, it might have been more appreciative of the risks of interest rate rises. Naturally this argument was aired on Fox News by Republican presidential hopeful Ron DeSantis, and on social media with the slogan #GoWokeGoBroke.
If you’d told me after the financial crisis of 2008 that the next big bank failure would be blamed on banking being too socially inclusive, I may have required emergency medical attention. But this was personal. What if banks really were being held back by having too few straight white males with no military experience? Maybe I missed an opportunity. Could I have saved Silicon Valley Bank?
At first glance, the link between boardroom diversity and financial disaster does not appear strong. Companies such as Enron and Theranos had no problem going insolvent with far fewer women on their boards. And before its share price collapsed in 1720, the South Sea Company did not perform strongly in diversity and inclusion rankings.
But what about the conventional wisdom that diversity is good for companies? This idea is preached in business schools and on corporate diversity days. Many of us wish to believe it, because it aligns with our notion of how society should be. How well founded is it?
One of the most cited sources is a 2018 report from consultants McKinsey. The report argued that the most gender diverse companies — in terms of their proportion of female executives — were 15 per cent more likely “to experience above-average profitability”. The most ethnically diverse companies were 33 per cent more likely.
McKinsey, however, admits that “correlation does not demonstrate causality, which would be challenging to demonstrate”. Just as importantly perhaps, it is conflicted, given its interest in convincing companies to pay for its consultancy services. Or, if we must use the firm’s own attempt at the English language: “Craft a targeted portfolio of inclusion and diversity initiatives to transform the organization.”
Academic research has been more cautious in highlighting the benefits of gender diversity. (Studies on racial diversity are scarcer, because of the lack of representation.) An early study, published in 2006 in the Harvard Business Review, was entitled: “How many women do boards need?” It concluded that, when boards had one female director, she tended to feel isolated. Two female directors could 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 Kris Byron, combined evidence from 140 studies and found that “the relationship between female board representation and market performance is near zero”. Another meta-analysis found similarly. As Katherine Klein, a professor at the Wharton School at the University of Pennsylvania, wrote, the studies suggest that “there is no business case for — or against — appointing women to corporate boards.” One possible explanation was that the women appointed as directors tend to be quite similar to the men, in terms of their values and skills.
Research continues. A 2021 paper by London Business School found that FTSE-350 companies with at least one female director had higher operating profit margins three to five years later. Mixed boards are reliably more collaborative, although this dynamic doesn’t benefit performance in all contexts, says LBS professor Randall Peterson. In his study, companies with at least one-third female directors didn’t always have significantly better margins. Where does that leave the FTSE-350, which has just hit its target for having 40 per cent of directors female?
The most directly relevant paper to Silicon Valley Bank that I found was a study of listed European banks, which found that those with more diverse boards had been less likely to receive public bailouts between 2005 and 2017. But perhaps it’s not just the 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 academia has to say on this issue? In politics, not the right, which wants to beat up on “woke capitalism”, and arguably not the left, which wants to claim that diversity is a win-win for business, instead of making a straightforward case that it is socially desirable. We seem doomed to argue by cherry-picking. Republicans painted Sam Bankman-Fried, founder of collapsed crypto exchange FTX, as a major Democrat donor. Democrats argued that FTX had also contributed large sums to Republicans, and anyway the crypto agenda was fundamentally libertarian. The whole thing is a giant “causation or correlation?” void.
In the same way that people in a bar brawl occasionally stumble across loose change, arguments over “woke capitalism” occasionally stumble across interesting issues. For example, I am intrigued by the question of whether executives can become too distracted from their core job. So far we only have limited evidence that this happened in the case of SVB. Its proxy filing did have a few lines boasting about a diverse board, and the company did have a Pride town hall, but could this really be the reason for chief executive Greg Becker’s sometime lack of a chief risk officer?
Elon Musk, chief executive of multiple companies, is evidently distracted by his political activity, ie Twitter. And you could make a case that Manchester United footballer Marcus Rashford was distracted by his brilliant work on social justice. Rashford had a poor season when he was most active advocating for free school meals. Is he now scoring more goals because he’s less distracted? Or because he has better teammates, a better manager and fewer injuries?
SVB did apparently care about microaggressions. But if such things were fatal to profitability, the tech industry would not be based in California. Indeed, the details of SVB’s collapse suggest that a lack of diversity may have been more of a problem. The bank was big in Silicon Valley. But this meant it was heavily reliant not just on a group of depositors in the same industry — technology — but also in the same group chats, where they discussed the bank’s viability. (Customers included the funds of the most proudly “anti-woke” venture capitalists, Peter Thiel and Marc Andreessen.)
As one chief executive wrote about the days before SVB’s collapse: “Thursday, 9 AM: in one chat with 200+ tech founders (most in the Bay Area), questions about SVB start to show up. 10 AM: some suggest getting the money out of SVB for safety.” As like-minded tech bros withdrew their deposits, the downward spiral accelerated.
We will never know for sure if SVB would have survived had it not held a Pride town hall, or had its chief executive been Boris Becker, not Greg Becker, or indeed had I been appointed to the board to reduce diversity. It seems unlikely. But it’s easier and more satisfying to debate this than thinking about the hard regulatory issues around interest rate bets.
By the end of the week, I had thankfully 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 will make thousands of jobs redundant anyway. Funny, in a pretty dark way.
Henry Mance is the FT’s chief features writer
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