Why Age Diversity Never Grows Old
Bank boards with directors from different generations are better at managing risk
We hear a lot about the role diversity plays in organizations and on company boards, but the discussion tends to revolve around ethnicity. There does not seem to be any regulation or governance code emphasizing the importance of age, even though nearly 90 per cent of directors of firms in the S&P 500 consider age diversity important.
Despite the seeming importance of diverse age cohorts in a group setting, only six per cent of S&P 500 firms have directors younger than 50, according to research conducted by PwC in 2018. There are also very few academic papers that tackle the subject, according to research I conducted with colleagues Mohamed Janahi (University of Bahrain) and Georgios Voulgaris (University of Manchester).
Our research looked deeper into the issue of age diversity. We based our study on the banking sector, partly because banks are so opaque in their management that it can be difficult for external stakeholders to assess how effectively they manage risk.
Our theory was that the more diverse a group—particularly regarding age—the more prone it would be to arguments and weak social cohesion. The logic is that a mix of backgrounds, perspectives, experiences and reference points would make it less likely for a board to develop a herd mentality.
A governing board that regularly argues might sound problematic, but boards essentially are designed to do two roles: give advice and monitor activity. Our contention was that a less homogeneous board made up of a diverse range of individuals and ages would be slower at providing advice, as it would be prone to disagreement. But a more diverse board would be better at monitoring how well executives do their jobs.
Risk and age diversity
Our study looked at 232 U.S. banks and assessed the impact of age diversity among non-executive directors on loan loss provision (LLP). This is the amount of money banks put aside to cover cases of bad loans, and is generally considered a reflection of a bank’s approach to risk.
One initial finding was that bank boards in general are older and less age-diverse than boards in non-financial industries. The average age of bank directors is 62, which is—at least in our study period between 1996 and 2018—some three years older than directors in non-financial firms listed on the S&P 500.
Most importantly, our research confirmed that bank boards with greater age diversity are better at identifying risky or less-than-prudent behaviour. They are more careful with customers’ money and more likely to make greater discretionary loan loss provisions (DLLP). Our results hold even after controlling for CEO characteristics, tenure diversity and board education.
We also found a positive association between reduced earnings management and bank growth. In the current uncertain environment, banks that adopt a more prudent approach are more likely to save themselves from potential losses and gain a reputation for responsible management.
Diversity for uncertain times
The 2007–09 financial crisis shows that excessive risk-taking by banks can be costly to the larger economy. With the recent downfalls of Silicon Valley Bank and Credit Suisse, now would be a good time for boards to consider improving the diversity of their director team.
But just putting in place one person of a different age—whether older or younger—does not make for an age-diverse board. Any conscious attempt to improve the age diversity of a board will typically require a concerted effort to extend the age profile at both ends of the spectrum, taking on younger and older people.
For some organizations, this will mean actively extending the potential pool of candidates for non-executive roles and not rejecting people who may be considered too young for the responsibility. It also means boards should avoid thinking that someone already in place may be too old. They may even look to welcome individuals who are instinctively prone to challenge, rather than overlooking them.
All this fits with other studies that have regularly demonstrated the benefits of having more diverse workforces in general. Age diversity should be seen as a central part of this agenda, and welcomed rather than feared.
Yuval Milo is a professor of accounting at Warwick Business School. A version of this article appeared in CoBS Insights, a publication of the Council on Business and Society (CoBS). Smith School of Business is a member of CoBS. The article was first published in CORE Magazine edition 14. With kind acknowledgements to Warwick CORE Insights.
