Missing seats at the table: How board demographics can influence firm performance
The demographic makeup of most corporate boards is wildly off balance, with women and minorities glaringly absent from the table.
That’s according to a 2018 multiyear study conducted by the Alliance for Board Diversity in collaboration with Deloitte, which found that across Fortune 500 companies, 77.5% of board seats where held by men and 22.5% of board seats were held by women. Of those seats, 16.1% were held by minorities, with only 4.6% of all seats being held by minority women.
“As demographics and buying power in the United States become increasingly more diverse, forward-thinking boards are determining ways to gain more diversity of background, experience, and thought in the boardroom,” the study reads.
Marquette Business professor Dr. Kalin Kolev agrees — his own research shows these changes in board demographics also play an important role for strategic decision making and firm performance.
Kolev, an associate professor of management, focused specifically on this subject in his recent research published in the academic journal Long Range Planning. Kolev and Dr. Gerry McNamara of Michigan State University teamed up to explore the impact gender and racial diversity in the boardroom had in critical strategic decision making, looking specifically at divestitures.
Kolev and McNamara were interested in exploring how the dynamic of female and minority directors, interacting with predominately white male directors, shaped the strategic profile and performance of a firm. Kolev notes that “demographically diverse directors possess different perspectives, ideas and experiences, which leads them to exhibit differences in how they sense the environment, process information, and develop choice preferences.”
These differences can generate complex interactions and dynamics, which in turn can have a critical impact on the firm’s outcomes.
Their findings further indicated that more diversity in the boardroom could lead to more debate, disagreement and an inability to reach consensus. Diverse boards were less likely to pursue divestitures, and when they did, the completion time was longer. However, these changes in divestiture behavior were reflective of a change in the decision-making dynamics of the board, a change that ultimately garnered greater confidence in the market and better firm performance.
According to Kolev, “The integration of different ideas and perspectives allows a demographically-diverse board to more thoroughly evaluate potential divestitures and selectively pursue those with the highest potential for value generation. As a result, the market has greater confidence in the decision-making process of the board and reacts positively to divestiture announcements when there is gender diversity complemented by racial diversity in the boardroom.”
As the calls for greater minority representation on boards increase, it is important to know how changes in the demographic makeup of boards impacts critical decision making and performance implications. Kolev says there are several practical managerial implications stemming from his findings.
First, he suggests that firms understand that although a diverse board may be more beneficial for a firm interested in having the market react positively to their divestitures, diversity may also unintentionally limit the speed at which those boards can pursue quick-deal completion and limit the amount of divestitures a firm can accomplish in a given time frame.
He also suggests that firms promote diversity training and work to communicate not only board diversity but also how they integrate more diverse board members into the boardroom dynamic. “Firms need to focus on creating a climate of inclusion and tolerance towards minorities in the upper echelons of the firm through diversity training and leadership intervention,” Kolev says. “It is also important that firms proactively communicate to external constituents not only the presence of female and racial minority directors but also the existing practices for effective integration of those individuals into the boardroom. Educating financial analysts who follow the firm on the potential benefits of gender and racial diversity could also serve as an important tool for affecting how the market reacts to the announcement of different firm strategic actions.”
Kolev and McNamara’s research contributes to a body of knowledge that explores how top executives make decisions and pursue strategic choices.
“As executives’ beliefs, values and perceptions determine their choices, it is important to understand why two equally capable executives will make very different decisions and ultimately affect firm performance differently,” Kolev adds. “Studying the individual at the apex of the firm can help outline certain ‘recipes and prescriptions’ of what should and should not be done in a given context to enhance the firm’s chances of success.”
You can read Drs. Kolev and McNamara’s full article in Long Range Planning.
The Alliance for Board Diversity and Deloitte Missing Pieces Report is also available online.
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