Diverse Boards, Divided Outcomes: Ethnic Minority Independent Directors in Focus

Research Question/Issue: This study examines the relationship between the representation of ethnic minority independent directors (hereafter, minority directors) on corporate boards, CEO–employee pay disparity, and workforce diversity. It addresses a critical gap in understanding the effectiveness of minority directors as corporate monitors, particularly amidst growing pressure on leading US firms to improve minority representation at both board and organizational levels. Research Findings/Insights: Using data from S&P 1500 firms (2017–2022), we find that minority directors on corporate boards are linked to higher CEO–employee pay disparity, driven by increased CEO compensation and reduced employee pay. On a positive note, minority directors are associated with initiatives like employee resource groups and greater ethnic minority representation among staff and managers. These findings remain consistent across analyses addressing endogeneity concerns like difference-in-differences and entropy balancing. Theoretical/Academic Implications: The study contributes to the literature by investigating the role of minority directors in corporate governance, particularly in relation to pay disparities and workforce diversity. It offers new insights into the potential benefits and complexities of minority representation on corporate boards. Practitioner/Policy Implications: The inclusion of minority directors enhances diversity initiatives like employee resource groups and increasing minority representation across the workforce but may shift board focus away from rigorous oversight. This can lead to unintended outcomes, such as greater pay disparities and weaker pay–performance alignment. Balancing diversity efforts with robust governance is essential to ensure both inclusion and effective oversight.