Do Business Decisions Differ When Racial Minorities Make the Decisions in the Boardroom?

Empty seats surrounding large meeting table in wood-paneled room
Presumably, who occupies these seats affects the decisions made. New research looking at credit union lending decisions back that up. (Photo: Carol M. Highsmith/Library of Congress)

The answer may seem obvious, yet empirical evidence is often mixed as to whether the racial composition of a firm’s board of directors influences corporate decisions. Part of the challenge to identifying this relation is the need to study high-level decisions that are proximal to a firm’s main economic activities, and which are of particular interest to directors who are racial minorities. Further complicating matters, is the need for a critical mass of like-minded directors to shape the firm’s strategic decisions. 

In my research, I demonstrate, in the context of credit unions’ lending decisions, that lenders governed by boards where a majority of directors are racial minorities (i.e. a majority-minority board) are more likely to promote equal access to mortgage credit among minority households than boards where a majority of directors are white. This relation is influenced by minority directors’ greater sensitivity towards discrimination and the strong attraction (i.e. homophily) that forms trust between individuals along racial lines. The implication of which I show is that credit unions governed by a majority-minority board are 16 percent less likely to reject a minority applicant, relative to those with a majority-white board.  A majority-minority board is shown to reduce the effects of discrimination in lending by more than one-third. 

Further analysis indicates that this relationship is even stronger for loan applications on homes in minority neighborhoods. In addition, the strongest relationship is observed among homophilous pairings of Hispanics, as credit unions governed by Hispanic boards reduce the effects of discrimination on lending to Hispanic applicants by nearly two-thirds.

One might question whether the more lenient lending policies applied to minority applicants by credit unions with majority-minority boards result in poorer performing loans. There is no evidence to suggest credit unions with majority-minority boards perform any differently than those with majority-white boards, as a comparison of the average return on assets and delinquency rate of mortgage loan portfolios are not statistically different across the two board types. This suggests homophily may allow for the transfer of information between lenders and applicants that reduces risk in the lender’s judgment. 

The takeaway from these findings is that a strong business case can be made for increasing the representation of minority directors among lenders, as it promotes social justice by providing greater access to mortgage credit to minority households without negatively affecting performance. This is important in order to reduce the systemic inequality in homeownership rates across racial and ethnic groups, where according to US Census data 76 percent of white households are homeowners as compared to 51 percent of Hispanic and 47 percent of Black households.

DRAWN FROM
This post is based on research published as “Majority-Minority Boards of Directors and Decision Making: The Effects of Homophily on Lending Decisions” in the journal Business & Society..
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Cullen Goenner

Cullen F. Goenner is a professor in the Department of Economics & Finance at the Nistler College of Business and Public Administration at the University of North Dakota. Goenner is a macroeconomist and applied econometrician whose current research interests are primarily in the area of credit markets and banking.

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