Across all industries, boards of directors are responsible for steering organizations to a sustainable future. With this mandate, the board is held accountable for overseeing corporate strategy and managing the risk of the organization. Too much risk and the possibility of company failure increases, too little risk and the company may fail to achieve its strategic goals. Board failures have global consequences. The global think tank, the Organisation for Economic Co-operation and Development (OECD), stated that the worldwide 2008 financial crisis can be attributed to failures and weakness in corporate governance which did not protect financial institutions from excessive risk-taking.
Different approaches, such as increasing the number of independent directors, increasing the role of risk oversight, and evaluating the performance of corporate boards, have been undertaken to improve corporate governance to prevent a reoccurrence of the financial crisis. Most recently, boards have been under increasing pressure from lawmakers, regulators, stakeholders and the media to improve their ethnic and gender diversity. In 2018, Canadian lawmakers passed Bill C-25 which requires corporations to provide shareholders with information regarding the ethnic diversity of directors and the members of senior management. Despite this focused attention on corporate board member diversity, little is known about whether increases in ethnic diversity across board members improve corporate decision making.
In my doctoral work, I address this question by studying the effect of board ethnic diversity on risk management and performance in Canadian property and casualty (P&C) insurance companies. Insurance is a promise for the future; policyholders pay premiums now, and in the future, if they have a claim, insurance companies assist in recovery by paying for the loss. This promise is broken if an insurance company fails. How could an insurance company fail? According to industry guaranty fund, the Property and Casualty Insurance Compensation Corporation (2007), over 60% of failures of Canadian P&C insurance companies result from the risk strategy decisions made by the board of directors.
My analyses are based on a sample of 187 Canadian P&C insurance companies between 1999-2017. There are many advantages to examining insurance companies: They have a highly regulated disclosure requirement for data, both public and private companies disclose results and, finally, the nature of their business is risk. Because of this risk-centric focus, it is easy to obtain several direct measures of risk, something that is difficult to do for most industries.
I find that boards with greater ethnic diversity implement less risky strategies overall. This is due to the differences in ethnic values of the board members. For example, board members with ethnic backgrounds from countries that avoid uncertainty, decrease firm risk while board members with ethnic backgrounds from countries that display low uncertainty avoidance increase the risk.
I also investigate the sources and the conditions which could moderate this ‘diversity effect,’ and show that in a diversified business environment (companies that sell many different types of insurance and/or write insurance across Canada), the ethnic diversity of directors has a less critical role in implementing risk-reducing strategies.
Finally, I also find that board ethnic diversity improves company performance. Insurance companies have two primary sources of income, underwriting (money they earn from pricing insurance correctly) and investment (money they earn from their portfolio of assets). My results show that increased board ethnic diversity has a positive effect on return on revenue and investment yield.
My research makes a strong case for disclosure requirements including personal information such as ethnicity, since these personal characteristics of directors impact corporate decisions in general and risk strategies specifically. Governance mechanisms, such as Bill C-25 that mandates disclosure, could contribute to safer financial institutions, provide stakeholders with peace of mind, and prevent catastrophic corporate failures.
Olga Kanj completed her PhD in 2020, studying in Finance at Lazaridis School of Business and Economics. Kanj’s general research interests are in empirical corporate finance, corporate governance, culture, risk management and insurance. Currently, she focuses on the effect of cultural backgrounds of decision makers on corporate outcomes and the risk management of insurance companies.
She is a recipient of an Ontario Graduate Scholarship and has presented her research at international annual meetings of the Financial Management Association, World Risk and Insurance Economics Congress, American Risk and Insurance Association, Southern Risk and Insurance Association and Paris Financial Management Conference. She has also been invited to present her research at universities in Canada, Europe and United States.
Prior to joining the PhD program, Kanj earned her MBA in Finance and Economics and BBA in Banking and Finance from Notre Dame University-Louaize with highest distinction. She also worked at Citibank NA for five years where she won numerous awards and commendations.