Racially diverse boards enjoy higher credit quality: Moody’s

New research from Moody’s Investors Service finds that North American companies with more racially diverse boards also tend to have higher credit ratings.

In a new report, the rating agency noted that the racial composition of corporate boardrooms and executive offices generally doesn’t match the makeup of the overall workforce.

Its analysis of almost 600 corporate boards found that racial minorities represent 16% of corporate directors and just 12% of executives, despite minorities accounting for 26% of employees in Canada and 23% in the U.S.

It also found a positive correlation between racial diversity and rating quality.

“Higher-rated North American companies have more racially diverse boards,” it said, adding that top-rated (AAA) companies have “the most racially diverse board members and executives in our cohort.”

While the data indicate a correlation between diversity and credit ratings, the data don’t necessarily prove causation, Moody’s said.

It suggested that the relationship between board diversity and credit quality likely reflects the impact of increased diversity on corporate governance.

“A diversity of perspectives supports good governance and is positive for credit quality,” it said, noting that efforts to improve transparency of corporate board demographics will also drive increased demand for minority directors.

“New mandates requiring the disclosure of information on the racial makeup of corporate boards will provide more transparency to investors and will likely lead to heightened public pressure for greater racial diversity in boardrooms,” Moody’s said.

As it stands, a lack of data on race helps explain why efforts to enhance the racial diversity of boards has lagged efforts to boost gender diversity, it suggested.

The Canadian Securities Administrators (CSA) are currently consulting on two competing visions for improving disclosure of corporate board composition beyond gender.

One proposal would require issuers to disclose specific demographic characteristics of their directors and officers, while the other proposal would require companies to disclose their approach to diversity, without mandating details on specific under-represented groups, apart from the existing requirements regarding gender.

The CSA’s competing proposals are out for comment until July 12.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.