The Impact of Board Diversity

Corporate leaders and investors are becoming more aware that diversifying boards can help companies better serve their employees, customers and communities. Recent debates regarding gender and race equality in the workplace have been a catalyst for state-level legislation to promote and encourage diversity on corporate boards.

A number of studies have linked greater board diversity with better performance. The most notable of these studies is the 2015 McKinsey report that revealed companies that were in the top quartile of diversity of race were 33 percent more likely to beat those in the bottom quartile; and a study in 2016 which found that women on boards are associated with lower volatility in earnings and higher liquidity of stock, as well as higher perceptions by investors of the firm’s value.

These findings confirm the notion that cognitive diversity enhances board decision-making and improves the ability of the board to effectively mentor and monitor management. Moreover the diversity of demographic traits such as gender, race, and age is a key factor in creating an welcoming and respectful culture in the boardroom, which promotes healthy debate and a free exchange of ideas.

Another crucial aspect is functional diversity that refers to the range of education and experience that board members bring to the table. Having diverse functional characteristics, like tenure and education, increases the ability of boards to appreciate the cognitive resources of members (like skills and knowledge) which in turn can lead to better board decision-making.

Boards should be proactive in encouraging diversity and should employ various methods to find new members. The most important thing to do is to make sure that all directors understand the importance of incorporating different perspectives into boardroom discussions. If everyone knows why and how this benefits the company boards will naturally facilitate the exchange of views from different perspectives.

Leave a Comment

Your email address will not be published. Required fields are marked *