As more women and racial minorities are making strides in the boardroom, many businesses are beginning to consider the outcomes of board diversity on the financial performance of firms. Most academic research on board diversity has resulted in complex findings—with some researchers seeing a positive relationship between demographic board diversity and firm performance, while other researchers seeing a negative relationship or no relationship at all. The authors of this study (Miller & Triana, 2009) suggest that there are intervening or “mediating” factors – such as firm innovation and reputation – that need to be examined in order to gain a better understanding of these complex relationships.
EFFECTS OF DIVERSE BOARDROOMS
Board directors act as boundary spanners in the environment, securing resources for the organization and providing strategic advice to improve firm performance. Heterogeneous groups typically bring unique ideas and decision-making processes to an organization due to their varying backgrounds, education, and experiences. Thus, demographically diverse boards should result in increased innovation and unique decision-making. Innovation has become a key strategy for firms to gain a competitive advantage and to increase firm performance. The authors believe that innovation will be related to board diversity and firm performance.
A diverse board signals that the firm is well positioned to meet the needs of a diverse market—thus improving the firm’s reputation. As firms increasingly operate within a global economy, having a diverse board of directors may signal that the board will be able to understand the business environment and advise the firm executives effectively. Thus, the authors propose that firm reputation will also be related to board diversity and firm performance.
Using a sample of Fortune 500 firms, the authors conclude that board demographic diversity drives firm performance through innovation and reputation.
PRACTICAL IMPLICATIONS FOR ORGANIZATIONS
So, what does this mean for organizations? Firms may benefit from the diverse human and social capital associated with diverse boards, which, in turn, supports an innovation strategy. Further, diverse boards will increase firm reputation by signaling that the organization is well prepared to understand the diverse environment in which the firm operates. In order to utilize directors’ diverse skills and abilities, organizations should promote a culture that recognizes the benefits of diversity and encourages differences in experiences, information, and perspectives that emerge from gender and racially diverse boards.
Miller, T. and Triana, M. (2009). Demographic diversity in the boardroom: Mediators of the board diversity–firm performance relationship. Journal of Management Studies, 46(5): 755-786.
Hillman, A. and Dalziel, T. (2003). Board of directors and firm performance: integrating agency and resource dependence perspectives. Academy of Management Review, 28, 383–96.
Morbey, G. K. (1988). ‘R&D: its relationship to company performance’. Journal of Product Innovation Management, 5, 191–200.