A new study appeared in Strategic Management Journal, which indicates significant progress in the fight against racial disparities in the highest echelons of corporate America. The study provides detailed evidence and transparent analysis to refute a previous research finding, which showed that appointing African American executives might be a risky decision for Fortune 500 companies.
It should be noted that minority CEOs are still a relatively rare phenomenon in the largest 500 companies in the United States, known as Fortune 500. Although some segments of the corporate world are more diversified than ever, White Americans still account for 92.6% of all Fortune 500 CEOs, 85.8% of whom are White men. Only 19 Black people have ever served as the chief executive of one of these top companies (out of a total of 1,800), and the active number has been stagnant since the late-1990s. Currently, only six out of the 500 CEOs are Black – which is actually an improvement over the beginning of this very year – including two Black women since last year. Also in 2021, the Teachers Insurance and Annuity Associated (TIAA) made history by becoming the first Fortune 500 company to appoint two consecutive Black CEOs.
Given this small sample size, studies regarding the impact of a CEO from racial minority background are severely lacking, particularly when it comes to Black CEOs, given their miniscule representation in the group. One limited study by a team of four authors was the only notable one that came out last year. The research article in question focused specifically on the risks incurred to a company’s market value when it appoints a Black person to a position on the top management team (TMT) or as a CEO. The study purported to spark a conversation about the enduring legacy of racial biases in financial markets, but could also discourage innovative companies from taking the bold step for fear of a fall in shareholder trust.
This year, the previous study was thoroughly scrutinized and its findings criticized by a much more detailed empirical analysis. Both studies were published in ‘Strategic Management Journal’, and the debate will likely continue in the future. Unlike the fall in market value found by the 2021 article, the new study demonstrates that the overall effects of the appointment of a minority candidate were positive, to the tone of 2.0-3.1%.
The latest research relies on a larger sample size, much more robust analysis and adjustment techniques to reach its conclusions. It does not actually deny that racial stereotypes and biases have a concrete impact on the markets, but argues that these results are more than compensated for by the higher competency of Black CEOs. Due to higher entry barriers, Black CEOs are – on average – more educated and experienced than their White counterparts.
This might explain part of the reason behind the positive reactions of markets to the appointment of minority candidates. The study does not consider the possible public relations (PR) value of such a move.