Age diversity improves corporate resilience

25/01/23

Optimal distribution of generations on boards increases solvency ratio

Greater age diversity in boardrooms contributes to corporate resilience. Research by PwC shows that an optimal distribution of different generations on a board of directors contributes to a higher solvency ratio and thus a more resilient organization. In the report, PwC calls on boards to engage in discussions about the added value of a different age perspective.

Age diversity creates value

A higher solvency ratio indicates a company's ability to meet its long-term financial obligations. It contributes to resilience and reduces exposure to risk, which ultimately creates more value: the same returns can be realized with less risk. 'How a company is financed, or solvency, is largely a choice. It is a reflection of the 'risk appetite of boards of management.

Our research suggests that age-diverse boards finance more prudently and thereby create significantly more value for the company,' explains PwC’s chief economist Jan Willem Velthuijsen’.

If the Dutch companies in our sample achieved the optimal level of age diversity on their boards, they could gain up to 51.8 bn euros in total value, or 1.8% of their current book value. Velthuijsen: ‘In terms of the domestic market capitalization of Euronext Amsterdam, that works out to 21.2 bn euros. That's roughly the value of a company like DSM.'

Too little or too much age diversity

The maximum added value can be potentially reached, when age diversity is at its optimal level, where the relation between age diversity and solvency ratio is strongest. Velthuijsen: ‘It turns out that you can have too little, but also too much age diversity. Imagine this relationship as a hill: you can gain value through more age diversity until you get to the optimal level, the top of the hill. After the hill the value decreases.’

A lot of room to improve age diversity

Optimal age diversity would imply the balance of different generations on boards that would create most value. If you translate this into practice, we see that a lot of companies still have room to gain value through more age diversity. Most companies don’t come even close to the top of the hill: only one in fifteen Dutch companies do. That is because the average age of board members is relatively high and boards are still quite homogenous. Boards with too much age diversity are rare in practice.

More age diversity adds another perspective

Governance expert Jacobina Brinkman of PwC thinks ‘It's interesting to see that this connection is actually there. We solidify our conclusions with data from thousands of companies and give numerical estimates of the potential value creation that optimal age diversity could bring.'

Brinkman points out that we live in an era of unprecedented diversity in gender, cultural background, sexual orientation and religion. At most companies, however, age diversity is not part of the diversity and inclusion agenda. When appointing new board members, the main consideration is still the years of experience someone brings. ‘That an executive has made a number of flight hours is also important, but does not have to be the only criterion. This research suggests that age diversity is at some point even more important than flight hours. I believe in the power of diversity and different perspectives. The way things are viewed and judged is changing. What used to be normal doesn't have to be so now. Therefore, I think adding a younger and newer perspective can be valuable. I would urge boards to think about that and start the conversation about it.’

Explanation average age and optimal age

Age diversity is about the qualitative aspects of the presence of different generations on a board.Age diversity is not the same as average age: boards with low average age do not necessarily have low age diversity, and vice versa.

We illustrate this using an example: the five following boards have approximately the same average age (50), but totally different compositions. That different composition leads to different age diversity indicators.

To indicate that age diversity, we use the so-called coefficient of variation, the ratio of the standard deviation to the mean. The higher the coefficient of variation, the greater the dispersion around the mean. A coefficient of variation (age diversity indicator) of 0 means that all board members are the same age. For this study, 43 is the most optimal age diversity level; then the relationship between age diversity and solvency ratio is strongest (the "top of the mountain"). But beware: this is not the average age, but the most optimal value of age diversity.

The appendix of the study shows how we made these calculations.