Diversity Is Our Strength?

This article in Institutional Investor says that hedge funds are more likely to target companies that have diverse boards of directors:

Activist hedge funds are paying attention to board diversity — and are using that information to decide on their next targets.

New research shows that activist investors are more likely to succeed when boards are less united and slower to act — two characteristics that are common among diverse boards, where members come from different backgrounds and tend to bring different perspectives. The study found that hedge funds exploit differences of opinion among board members, as well as their more deliberate decision-making processes, to sway shareholder votes in their favor.

These numbers are really striking:

The researchers found that the likelihood of an activist investor targeting a board more than triples — from 1.3 percent to 5.1 percent, when a board’s demographic diversity is high.

Of course, the study’s authors are quick to tout the benefits of diversity. But then there is this:

Instead, he added, this research offers insights for diverse boards, especially at corporations that are underperforming: They could become an activist hedge fund’s next target.

Activist hedge funds target companies that underperform. That is a vastly more significant factor than whether the board is diverse and therefore might be slower to act. If companies with highly diverse boards really are targeted more than three times as often as companies with less-diverse boards, that suggests that companies with diverse boards are more likely to underperform. That would be interesting research, and if true a far more significant finding, but it isn’t the question these particular authors wanted to ask.

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