The Impact of Board Diversity

There has been a lot of attention given to the issue of diversity in the boardrooms. Companies are under increasing pressure from institutional investors and shareholders to increase their diversity. A diverse board can also show that a business is forward-thinking, which will aid in improving the reputation of the brand. It also helps improve the culture of the company by creating a more welcoming, equal atmosphere.

The evidence is inconsistent on the impact of diversity on board members. Many studies have demonstrated positive effects, however some studies have found different effects. Gender diversity, for example can affect firm performance in terms of accounting returns, but not to market returns. It has also been found that functional diversity, such as a mix of educational, industry/sector-specific and role-specific experience, improves board effectiveness by better managing external dependencies and challenging managerial assumptions.

In addition it has been observed that those who are considered minorities or tokens within an organization tend to self-censor by not sharing their beliefs and opinions when they are in conflict with the majority of the group. This may prevent the full benefits of cognitive diversity from being realized. The age of directors will also impact the way they make decisions in a boardroom. Managers who are older are less likely to adopt new ideas and make changes than younger managers. This has been referred to as the “selection bias” effect. It is important to include young directors on the board and not focus solely on gender diversity.

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