By Manos Schizas, senior economic analyst, ACCA
If you have been following any European politics this week, apart from the ECB’s bond-buying programme, you will already know the European Commission is expected to propose that, by 2020, 40% of all non-executive board members of European companies should be women – with companies risking fines or other penalties if they fail to comply. Although no one has seen anything other than leaks for the time being, plans are predictably meeting opposition from many quarters.
ACCA being well versed in Brussels etiquette, we do not comment publicly on proposals the EU institutions haven’t placed in the public domain. However, we’re also not new to the debate on quotas, which has been going on throughout Europe and beyond (e.g. in Pakistan) for quite a few years. Our positions have evolved over time (see here, here and here) and will continue to do so, reflecting the new experiences and evidence in our markets. On the other hand, our core values of diversity, opportunity, innovation, integrity and accountability haven’t changed.
While we wait for the full proposal and ACCA’s response, I thought I’d share with you a real gem in the diversity research literature. It comes from the Bank of Finland of all places, which recently published a remarkable research paper on the subject by Yiwei Fang, Bill Francis and Iftekhar Hassan. Its title: More than connectedness – Heterogeneity of CEO social network and firm value.
Rather than focusing on diversity among board members, the researchers looked instead for the diversity within – the extent to which individuals have access through their social networks to truly different perspectives and could draw on experience, skills, knowledge and mindsets different from their own.
In order to measure the diversity of CEOs’ social networks, the researchers used a massive biographical database of EU and US CEOs in order to track down business leaders’ contacts among the business world from their school days onwards. They then analysed the heterogeneity of these social networks in terms of gender, ethnicity, academic and professional background, as well as geographical dispersion around the globe. To be safe, they controlled for the overall size of CEOs’ social networks – after all, it’s easy to have a more diverse network if you know more people!
They also included as control variables a battery of factors already known to influence firms’ financial performance, including two traditional measures of board diversity (by ethnicity and gender), and tested against four kinds of outcomes:
a) sustained share price reactions following a change of the CEO
b) patents filed (as a proxy for innovation)
c) sustained share price reactions to mergers and acquisitions initiated by the CEO’s company
d) proxies of firm value and financial performance.
Their overall finding was that the more diverse the CEO’s social network, the more value they tended to add to their companies – they made a difference by enhancing innovation and export potential, as well as extracting more value from the firm’s investments, including major items such as mergers and acquisitions. As a result, investors typically pay a premium for the shares of companies who have just replaced their CEOs with someone with a more diverse network.
This resonates with earlier ACCA research. Back in 2011, we worked with Forbes Insights to look into the personalities of Europe’s business executives and whether they help influence company performance, and our work resulted in the report, Nurturing Europe’s Spirit of Enterpriseas well as some excellent online coverage. But what we found was even more satisfying.
The most innovative business executives, and the ones most likely to become CEOs, were a category we named ‘the Star Pupils’. This is what we had to say about them at the time:
STAR PUPILS. These are professionals who invest heavily in their own personal development, acquiring mentors with ease and making the most of other people’s expertise. Of the entire sample they are the likeliest to rise through the hierarchies of organisations, even when the dominant business culture is stacked against them. Women who thrive in masculine environments often fall into this category, and CEOs are significantly more likely than other executives to match the Star Pupil profile.
Star Pupils form the largest category at about 24% of the respondents. Over half of the Swiss respondents fall into this group, as well as 30% of the French and Italians, as opposed to only 16% of British executives.
Otherwise, Star Pupils exist in similar numbers everywhere: large companies and small, finance and IT, men and women. However, only 5% of CFOs, treasurers or controllers are Star Pupils. It is not clear why this might be, as the traits of Star Pupils would appear to be adaptive in any function, but one possible explanation arising from the research literature would point to the lack of a full-fledged mentoring culture in these functions.
Looking even deeper into the Forbes data, we were able to unpack the particular personality traits that made up different categories – ‘pursuing personal development through others’ was the dominant characteristic of Star Pupils (see a comparison here). The Movers and Shakers, who shared a lot of the Star Pupils’ innovative capacity, also scored well in this dimension.
Here’s an interesting question – would the findings of Fang et al apply to CFOs as well? Do CFOs with more diverse social networks create more value? Is it important that the social networks of CEOs and CFOs overlap/complement each other? And at any rate, how diverse are the social networks of CFOs? Going by the Forbes data on ‘pursuing personal development through others’, finance professionals were slightly worse than average social networkers and our small sample of CFOs in particular were even worse. I’ve written to the researchers and maybe one day we can repeat their analysis.