Diversity in Rutte’s fourth cabinet; good news or bad?
Rutte’s fourth cabinet is the ‘most diverse cabinet yet,’ according to NRC headlines on the occasion of its swearing in by King Willem-Alexander on January 10. Diverse leadership can impact the decision-making process positively. However, it can also have negative consequences. This is what empirical economic and financial research on the effects of board diversity has revealed. That makes it a worthwhile exercise to examine the positive and negative implications of this cabinet’s diversity in more detail.
Comparing Rutte IV to a board of directors
While it isn’t possible to make a straight comparison between a board and a national government, there are certain similarities. It’s not unusual to treat the Netherlands as a business for purposes of discussion, after all.
Diversity in two dimensions
For diversity to prove an asset in the boardroom, it is important for it to apply in a broader sense, not just for a single factor. At first sight, Rutte IV’s diversity is apparent in its equal proportions of men and women, as well as the presence of two ministers with non-Western backgrounds.
If we use the definition of diversity employed by the economic and financial research, there are two dimensions to be considered:
1. Demographic traits: gender, ethnicity, age, etc.
2.Cognitive traits: education, financial expertise, executive experience
Rutte IV’s overall diversity
If we take this approach to the measurement of Rutte IV’s diversity, the demographic aspect appears to be in order. The ministers’ educational backgrounds are also quite diverse, ranging from law, history and economics to medicine and mathematics. The extent of their financial expertise and executive experience is unclear. The Ministers of Finance and Foreign Affairs switched places from Rutte III to IV, which may prove advantageous in this respect.
Benefits of board diversity
If we apply the findings from empirical economic and financial research on the effects of board diversity to this cabinet, what practical advantages do we see? Benefits of greater board diversity:
- Better discussions and a stronger problem-solving capacity for improved decision-making
- Greater investment in research & development and an increased innovative capacity
- More consistent decision-making
- Lower financial risk and a more stable performance
Good news for Rutte IV
The stated benefits of diversity would appear to be good news for Rutte IV. The Dutch are currently facing a stagnating housing market, a big nitrogen problem and issues with natural gas extraction that leave residents of the northern Netherlands literally shaking in their beds, making innovative solutions and attention to R&D more than welcome. If this government can also deliver predictable, stable performance, all the better!
Diversity in turbulent times
As previously noted, a board of above-average diversity comes with its own specific problems as well. Diversity’s advantages can be less apparent in turbulent times, for example. In fact, when chaotic conditions require rapid decision-making and fast responses, greater diversity can even be a disadvantage. What does that mean for the ‘most diverse cabinet yet’ as it deals with the aftereffects of the Covid pandemic and the side effects of the current war, both of which are making daily life much more expensive for Dutch citizens?
Diversity and conflict
When a team is more diverse, this also reduces cohesion within the group. That can lead to more conflict. In compensation, diverse teams often prefer to avoid risky decisions and play it safe.
Net effect of board diversity
The good news is that empirical research shows that with everything taken into account, the net effect of greater board diversity is still positive. Such a company’s value is greater (Tobin’s Q). While determining Tobin’s Q for the Netherlands is no simple matter, it’s still reasonable to expect that Rutte IV’s diversity can help this cabinet make a positive contribution to the country.
This article originally appeared as a column by Prof. dr. Frans de Roon
in CFO Magazine Belgium, February 2022.
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