Estonia: Studying diversity in Estonian companies

Diversity in company management has been studied for the first time in Estonia, and the results indicate that there is little diversity in company management boards. However, the study also found a positive correlation between healthy profit margins and company boards that have gender and age diversity.

Objectives 

Estonia's first study on diversity in company management (in Estonian) has been carried out by the think tank Praxis. The study’s objectives were to:

  • identify any existing data indicating diversity; 
  • describe the management boards of Estonian companies and calculate their level of diversity;
  • assess the links between diversity in companies' management boards and their economic results.

Methodology

An overview of the literature on how diversity has been measured and how diversity affects companies’ economic results concludes that there is no standardised measurement method. As many authors use their own variations of different methods, it is often difficult or even impossible to compare different studies.

The Praxis study constructed a diversity index that is adjusted for the demographic structure of the Estonian population. It deems boards that consist solely of representatives of a minority group to be lacking in diversity. In addition, as management boards are small and often consist of only two people, a binary diversity indicator was also used as a control mechanism.

The data was gathered from Estonian databases. Data on companies and board members was sourced from the Commercial Register, which includes data on every company operating in Estonia. Data from the latest Population and Housing Census (2011) made it possible to analyse demographic statistics as attributes of diversity. The analysis examined diversity according to:

  • gender;
  • ethnicity (Estonian or other);
  • age (measured as the difference between the ages of the youngest and oldest members of the management board);
  • health (no long-term health problems or having long-term health problems);
  • religiousness (believer or non-believer).

Regression analyses were used to analyse links between diversity in management boards and companies’ economic results. The indicators of economic performance were sales (reflecting a company’s market position), profit (reflecting sustainability) and profit margin (reflecting efficiency). All the calculations were based on the companies’ 2012 economic results.

The sample consisted of companies that were active in 2012 and whose management boards consisted of at least two people. The final sample included 24,447 companies and 77,709 board members. Examining the main characteristics of the companies showed, much as expected, that larger companies are more successful economically and have more board members on average than smaller companies (3.7 in large companies compared to 2.3 in micro-companies).

Main findings

Overview of management board members

The study found that 70% of board members are men, compared with 45% of the general population over the age of 17. Almost two-thirds (61%) of board members are aged 30–49 years. A higher proportion of male board members (34%) are in the the 30–39 years age group than female board members (32%), while a higher proportion of female board members (18%) are aged 50–59 years than male board members (16%).

Considering ethnicity, the study found that 78% of all board members are Estonian, while Estonians make up 68% of the general population. Russians comprise 17% of board members, and 6% represent other ethnicities. The study showed that 23% of men and 31% of women on management boards profess religious faith, closely mirroring the general population (24% and 35%, respectively). As expected, health problems increase with age, both in the population as a whole and among board members. However, among board members, acceleration of health problems occurs later.

Diversity in management boards

The study indicates that most management boards are not ethnically diverse. Most boards (91%) consist of Estonians only or of other ethnicities only. In relation to gender, 45% are gender-diverse; hence 55% are of just one gender, but just 9% are all-female. Regarding health status of members, 30% of boards are diverse, while 23% are diverse in terms of religiousness.

Table 1 shows that for ethnicity, health status and religiousness, the indicators increase as company size increases, indicating that the management boards of large companies are more diverse on these indicators. However, micro-companies are more gender-diverse than large companies. The authors suggest that this could be due to more women being included in the management of small family companies.

Table 1: Diversity indicators by company size

Size of the company

Diversity indicator

 

Gender

Ethnicity

Health status

Religiousness

Micro (0–9 employees)

0.209

0.012

0.062

0.026

Small (10–49 employees)

0.153

0.015

0.078

0.035

Middle (50–249 employees)

0.150

0.028

0.090

0.048

Large (250+ employees)

0.137

0.038

0.093

0.083

Note: A higher indicator shows higher diversity.

Source: Estonian Commercial Register, Population and Housing Census 2011, authors’ calculations.

Links between diversity and economic results

The regression analyses showed that gender and age have most effect on companies’ economic results; health status and religious faith have just a modest effect on sales (Table 2).

Gender-diverse companies have a 22% smaller turnover. However, since women are strongly under-represented in boards of large companies, it is difficult to isolate the effect of diversity on its own. Gender-diverse boards occur mostly in smaller companies, while larger companies have boards consisting mostly of men and, at the same time, the economic results of larger companies are better. Gender diversity also correlates with lower profit, but the effect is not as strong.

Age and gender diversity have positive effects on profit margins, according to the analyses. If there are both men and women on the management board, the profit margin is 1.3 percentage points higher than in companies with homogenous boards. A board that has age diversity is associated with a profit margin that is 2.3 percentage points higher.

Table 2: Results of regression analyses for assessing the relationship between diversity and economic results

Attribute

Dependent variable

Sales

Profit

Profit margin

Age

-0.194***

-0.008

0.023***

Gender

-0.247***

-0.133***

0.013***

Ethnicity

0.018

0.074

0.012

Health

-0.073**

-0.016

0.0001

Religiousness

0.124***

0.012

-0.007

R2

0.61

0.64

0.19

N

10944

7804

7804

*** p<0,01; ** p<0,05 ;* p<0,1

Source: Estonian Commercial Register, Population and Housing Census 2011, authors’ calculations

Conclusions

The study showed that the board members  of Estonian companies are mostly men, Estonian and middle-aged. Diversity occurs in few companies. Although larger companies are usually more diverse, they tend to have few women on their management boards. Overall, the analyses found that gender and age have the strongest effect on companies' economic results, although the effect was negative on sales and profit. On the other hand, diversity has a positive effect on profit margin. This suggests that in the longer term diversity may pay off, given that profit margins reflect the efficiency of a company.

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