I. Corporate Governance, Diversity, and Racism
Diversity has increasingly gained prominence in debates over corporate governance for the last few decades. Diversity was one of the Millennium Goals and, for that reason, it was incorporated into the social dimension of environmental social governance (ESG) programs. Also, diversity issues have always been stressed in business and human rights policies. After the year 2020, with public attention on the Black Lives Matter movement following the shocking murder of George Floyd in Minneapolis, debates centered on diversity and corporate governance gained a sense of urgency. At the same time, large companies started to employ diversity practices that are different from the typical ESG and business and human rights policies, which are characterized by a focus on metrics in the first case and dealing with violations in the second. The change is the focus on the adoption of affirmative actions to increase diversity in corporate governance.
Racial inequality in Brazil is closely linked to the development of commercial law in general and corporate law in particular. The Eusébio de Queiroz Law, the Land Registration Law, and the Commercial Code of 1850 were elements of the same social and legislative process as a result of the pressure from the British government to end the slave trade in Brazil. Both the reactive character of the reforms and the relatively weak commitment to the liberal principles that inspired equivalent legislation in Great Britain and continental Europe at the time led to very selective implementation in Brazil. This method of implementation effectuated (i) the “whitening” of the industrial workforce through prolonging legal slavery, (ii) the gradual transition of capital from the acquisition of slaves to commercial and industrial activity, and (iii) the preservation of agrarian concentration all possible at the same time.
The current Brazilian corporate governance system may, to a large extent, have its roots in that process of reaction against the pressure from the British government to abolish the slave trade, one whose main objective was to preserve the existing class structure in the face of international pressure to change it. Thus, the deficits in the implementation of the corporate model that prevented the Financial Revolution effects identified in the central economies of capitalism from taking place in Brazil in the 19th Century remain embedded to the present day in Brazilian social reality, preventing the country’s economic model from advancing. Given this situation, understanding the relationship between corporate governance and racial issues in Brazil is essential to overcome these centuries-old limitations.
From the perspective of what is called structural racism, the exclusion of minority groups from spaces of power takes place systematically due to a project of discrimination and social domination. In this sense, the exclusion of black people from the central management structures of Brazilian companies is not just a reflection of other forms of exclusion but is part of such a system of maintenance of structural racism. Pursuant to Adilson Moreira, the social systems operate from the interests of “majoritarian” individuals—men and whites, for example, in Brazil’s case—in order to maintain social hierarchies. The corporate environment is part of these social systems and is regulated not only by the market’s economic logic, but also by cultural and political relations. From this observation, according to which companies are not in a market vacuum, it is inferred that the social system of exclusion of minorities—women and non-whites—is also reproduced within the companies’ own structures. Also, according to Moreira, companies, as social subjects, “act as agents of reproduction of oppression systems in their daily practices,” and the business environment should be seen as a “racialized system.”
Studying the composition of boards of directors in Canada, Aaron Dhir called it a culture of widespread homogeneity of its members and highlighted two possible reasons for this: (i) the pool problem; and (ii) the implicit cognitive biases. The pool problem is presented as an explanation for the lack of qualified and diversified candidates to occupy positions on the boards of directors, which would generate a lack of diversity. Dhir understands that the perpetuation of board homogeneity can best be explained by psychological science through the impact of implicit biases.
In the Canadian case, companies explained the low levels of representation on their boards of directors and in management positions as the product of “a shortage of qualified women” and “the lack qualified visible minority candidates.” In other words, the reasons given by the companies for the preservation of inequalities were, systematically, linked to the argument of the pool problem. At the time of the survey, in 2010, it was found that less than half of minority people who were qualified for management positions held those positions. Thus, despite their availability in the market, minority candidates were prevented from occupying such positions, thus constituting a matter of perception rather than reality.
Such impediments or barriers to entry into the highest echelons of the labor market can be explained by “implicit social cognitions,” understood as moral judgments that occur automatically in an instinctive and unintentional way, which give rise to prejudiced conduct. One example pointed out by Dhir was that being white was seen as a leadership trait. Consequently, white people are considered to have the greatest leadership potential and decision makers are more likely to prefer selecting white people as leaders. On the other hand, racial minorities are perceived in an implicitly negative way by most people, which would explain, in part, stereotypes and prejudices.
Such findings are reflected in studies that show favoritism in the business environment. Thus, members of the board of directors who are male and white tend to perpetuate predominantly male and white boards, resulting in the continued disenfranchisement of racial minorities in the business sphere. Considering that there is a human tendency to favor similar identities within any group, the prospects of this homogeneity changing organically are small. Furthermore, the legal culture and practice that shape business activity facilitate board homogeneity, undermining diversification efforts. In the fight against discrimination and for inclusion, companies can, despite their structures, “play an essential role.” Such participation can take place through affirmative actions, such as the establishment of quotas or the employees’ co-participation in boards of directors.
Affirmative actions contribute to “promoting the diversification of spaces of power” and aim to create a reality in which the body of institutions, also private, represents and reflects social pluralism. According to Flávia Piovesan, affirmative actions work as special and temporary measures that seek to remedy past discriminatory acts and aim to “accelerate the process with the achievement of substantive equality on the part of vulnerable groups, such as ethnic and racial minorities, and women, among other groups.” For Cynthia Estlund, concern for social justice also plays a role in the commitment to increase minority representation within organizations. More than repairing the mistakes of the historical past, the objective is “to build a society in which people from different social groups are adequately represented in positions of power.”
The change in the logic of affirmative action began with “the perception that the performance of private companies depends on their ability to respond to the demands of pluralism at the national and international level.” Diversity came to be seen as a “strategy that can bring considerable gains to the institutions that employ it.” The benefits for companies arising from diversity can be considered a competitive advantage, which is expressed in a company’s ability to “increase creativity and the ability to solve problems that arise from the obstacles present in a capitalist economy based on competitiveness.”
But in this quest to make diversity “an aspect of a company’s institutional identity,” an issue to which attention should be paid is symbolic representation. This means that the presence of representatives of minority groups in decision-making spaces of the company could reinforce an idea of “tokenism,” where they would symbolically represent a group that differs from the “superior,” male, white, and dominant. The idea of “tokenism” comes from the criticism first presented by Martin Luther King when he identified that, in the case of racial inclusion policies, the practice in the United States of America had been to create some symbolic situations of integration, which, instead of representing structural changes, preserved the discriminatory process. Companies that seek leaders of other races only at a symbolic level will not produce performance gains or greater protection against reputational damage or market overshoot, as it is necessary to reach a critical mass so that the added value by these individuals is realized.
The argument that diversity would have positive economic consequences is attractive and, in the case of racial diversity, is in line with the theory of convergence of interests. According to such a theory, it is necessary to align the interests of the racially oppressed with those who have the power to reform for meaningful change to occur. Steven Ramirez further argues that, in the context of corporate governance, the pursuit of race-based reform must embrace the favorable openings that exist in political capitalism and coordinate its agendas with the agendas of the dominant power.
In this sense, the movement for inclusion and integration of diversity places companies as “agents of social transformation,” as they include socially vulnerable groups. For Moreira, this process would create the “objective conditions of parity of participation: instruments for individuals to have the material means to be recognized as competent social actors.” The challenges to be faced by promoting diversity in companies are not few, but questioning implicit cognitive associations will have implications for corporate governance. For Dhir, the cognitive biases of the predominantly white and male class of board members can be mitigated as they become familiar with candidates who fall outside this “pattern.”
In addition to the effects on the boards of directors, those that occur in the economic and financial performance of companies cannot be ignored. Additionally, it is the increasingly growing impacts on the companies’ performance that have made the financial sector finally align itself to demand greater adherence from publicly held companies to diversity policies. At the same time, the misalignment of society and, consequently, of Brazilian companies with such movements can reinforce, in the long term, the peripheral character of the national productive system.
In this sense, the increase in heterogeneity in companies is combined with multiple potential benefits, and it is currently possible to identify a set of data that can both explain and prove whether there is a cause and effect relationship between such factors. The correlation between profitability and diversity in the leadership of companies has been studied for years, and there is a growing literature indicating evidence that the increase in diversity generates an increase in the economic performance of companies.
Two aspects of performance surveys reinforce the concept of an empathic ethics: the diversity of the board of directors can make the company more sensitive to the interests of consumers and employees—increasingly diverse groups—and reduce the cost of non-diversity by improving institutional image, reducing social and economic costs of discrimination, and enabling the boards to identify broader market opportunities.
In this sense, as the McKinsey & Company 2020 report shows, the greater the representation, the greater the likelihood that the company will outperform its less diverse peers. The survey, which considered a dataset of fifteen countries and more than 1,000 companies, showed in its results a twenty-five percent probability that companies with greater gender diversity in executive leadership have above-average profitability than those with less diversity. The performance gap between the most gender-diverse companies (thirty percent or more) and the least diverse (less than ten percent) companies is forty-eight percent. In the case of ethnic and cultural diversity, the data also points to outperformance for the most diverse companies compared to the least diverse, surpassing them in profitability by thirty-six percent. It is noteworthy that the probability of superior performance is greater for diversity in ethnicity than for gender.
A study examining venture capital funds exposes a new view on the issue. Venture capitalism is an area that presents fewer institutional barriers since every investor is a decision maker and the choices have clear commercial consequences. According to Paul Gompers and Silpa Kovvali, it is clear that diversity significantly improves the financial performance of venture capital funds on measures such as profitable investments at the company’s portfolio level and overall fund returns.
Such studies make it possible to concretely verify the existence of a causal relationship between the degree of diversity in the leadership of companies and their financial profitability. As investors are increasingly including diversity among their decision-making criteria regardless of whether investee companies have good diversity practices, and as concrete data on these practices becomes available, the natural tendency is for the cost of capital to decrease to companies that adopt diversity policies and therefore produce good results and increase for companies that do not. In other words, it is a self-fulfilling prophecy. Companies with best practices will have better financial performance, as their cost of capital will be lower, necessarily increasing the investment or profit margin. In the opposite direction, the less diverse companies will be less and less competitive and relegated to secondary and low profitability markets. Again, there is no guarantee that such favorable conditions will last. The increasing data demonstrating that more diversity increases the financial performance of corporations presents more of an opportunity than a justification for diversity policies.
This transformation has an impact even on development theory itself. Originally, development theory focused only on capital formation, later migrating to attention to technological investment and, more recently, to human capital. The contemporary trend is towards an in-depth analysis of the behavior of companies. Such a tendency to analyze social behavior as a predictor of economic performance is something that Gunnar Myrdal had already highlighted as being a determining factor for development, which is the overcoming of retrograde values that impede the operation of the economic system.
A concrete example that corroborates this thesis is the case of the Federal Reserve System of the United States of America. In research conducted by Brian D. Feinstein, Peter Conti-Brown, and Kaleb Nygaard, it was shown that the increased diversity in the composition of the boards of directors of the twelve banks that make up the Federal Reserve System, entities responsible for evaluating commercial bank loans to disadvantaged and historically marginalized communities, is associated with the approval of larger loans to these communities. According to the results, the analyzed institutions whose corporate governance bodies had Hispanic or Black members in their composition were linked to higher scores of their member banks in the performance evaluation of the Community Reinvestment Act of 1977, a statute created to require that the agencies’ federal financial system regulators encourage financial institutions to meet the credit needs of the local communities in which they are chartered.
This experience with companies focused on financing minorities makes it possible to identify the correlation between the implementation of diversity policies within the scope of the institutions’ corporate governance and the promotion of the social development of the affected communities. This demonstrates that the benefits of diversity policies in the corporate governance of companies cannot be measured only through their financial performance. There are other more profound benefits, such as increasing the perception of fairness and justice in society, which have the capacity of strengthening support for the operation of democratic systems.
II. The Corporate Governance and Racial Diversity Survey in Brazil
The main feature of Brazilian economic inequality is the overlapping of racial and gender issues. According to the Institute for Applied Economic Research (IPEA), in 2009 the black population represented only twenty-four percent of the richest ten percent in the country, but a total of seventy-two percent of the poorest ten percent, reflecting the fact that the average income of Brazilian white men was R$1,491.00 in the period, compared to an average income of black women of R$544.40. In the same year, the unemployment rate for white men was 5.3 percent, while for black women the rate was 12.5 percent. Recent studies have already shown a process of worsening the situation and widening of inequalities as we approach higher income levels. As an Oxfam report found, based on an analysis of data from the National Household Sample Survey (PNAD), among the richest ten percent, whites earned BRL 11,026.36 a month in 2016 while blacks earned BRL 5,384.0073, that is, less than half (or about forty-nine percent of their income). In 2017, this proportion regressed even further, with whites earning BRL 13,753.63 compared to BRL 6,186.01 per month on average, in the case of blacks, which is equivalent to forty-five percent of what the white population in this decile earned. Between 2016 and 2017, blacks from the richest decile increased their incomes by 8.10 percent, less than half of the gains of the white population, which were 17.35 percent.
Considering this situation, an important step is to measure the capacity of Brazilian companies to implement an empathic corporate ethics system, that is, one capable of maximizing the efficiency of economic activity in order to reach a maximum number of potential customers. To measure such capacity, the most appropriate concept seems to us to be the one prevalent in the socio-environmental governance methodology, both for environmental policy issues and for human rights, anti-corruption, and diversity issues, which sets the tone at the top—with the tone referring to the sense of adherence to such policies, at the highest levels of the corporate governance structure.
In view of this, it seems appropriate to identify the racial profile in the main positions of Brazilian public companies, namely, the positions of member of the board of directors, executive director (chief executive officer—CEO), and financial director (chief financial officer—CFO). Surprisingly, we did not identify any research on the topic, on the initiative of public and private organizations, both in Brazil and internationally. This fact alone reveals the depth of the problem. In the multiple decades in which corporate governance has been the object of studies by academics, associations, specialized consultancies, regulatory bodies, international organizations, and other agents, it has not been possible to identify, so far, a survey of the racial profile of the management of companies.
To fill this gap, the author carried out a survey on racial diversity in Brazilian public companies, the main results of which are presented below.
Between January and May 2021, a survey was carried out with all Brazilian publicly traded corporations registered with the Securities and Exchange Commission (CVM) and listed on B3 to identify the racial profile of their executive directors, financial directors, and members of the board of directors. management. The final objective was to compare the statistical data found with the general indices of the Brazilian population, in order to verify whether the degree of racial diversity within the scope of the analyzed corporate governance bodies would be in accordance with the proportional distribution followed by the total population of the country, and if it was not proportional, to determine the degree of mismatch between society and publicly-held companies.
The data examined were collected by consulting company documents made available to the market through the stock exchange portals, the CVM and their own websites, in which it was possible to identify the names of the directors corresponding to each position. The analysis methodology for defining the racial profile of administrators was based on the method of heteroidentification based on their phenotypic characteristics, and was carried out through photos found publicly on the Internet. It is noteworthy that this classification method is the same used to verify the self-declaration in selective processes and public contests with reservation of vacancies or similar affirmative actions for candidates belonging to ethnic-racial minorities.
In all, 442 companies and 3,561 positions were surveyed, including 449 executive directors, 407 financial directors, and 2,705 effective members of the board of directors.
The data collected in this first moment of the research were submitted for validation by the companies themselves, in order to guarantee the predominance of the self-declaration of those evaluated—as is done in the demographic surveys carried out by the Brazilian Institute of Geography and Statistics (IBGE), whose data are computed based on the self-declaration criterion. For the results, only the data confirmed by the companies were taken into account, because they consider not only the criterion of phenotypic heteroidentification, which may present flaws, but also the criterion of self-declaration given by the individuals occupying the positions surveyed.
Thus, of the 442 companies contacted, confirmation of racial data was received from sixty-nine of them, or 15.61 percent of the total, allowing a robust analysis from a statistical point of view. As a result, of the 727 confirmed positions, 712 white people, nine Asian/indigenous people, six brown, and zero black people were identified.
The data extracted from the racial profile of the management of publicly held companies were then compared with data from the 2019 National Household Sample Survey (PNAD) in order to identify the difference between the profile of the management of companies and the Brazilian social reality. Considering that the PNAD is a survey that seeks to identify demographic trends in a statistical way in periods shorter than those of the national censuses, the choice of the most recent Brazilian demographic data for such comparison seems appropriate. According to the aforementioned survey, the data on ethnic-rational diversity found at the national level are as follows:
