The Impact of Board Diversity

Corporate leaders and investors are becoming more aware that diverse boards can help companies better serve their clients, employees as well as their communities. Additionally recent debates about gender and racial equity in the workplace have led to state-level legislation to promote and encourage diversity in corporate boardrooms.

Numerous studies have demonstrated that greater board diversity is associated with better company performance. The most notable of these studies is a 2015 McKinsey study that found that companies that were in the top quarter of diversity in racial groups were 33 percent more likely to perform better than those in the bottom quartile; and a study in 2016 that found women on boards are associated with lower volatility of earnings and higher liquidity of stock, as well as higher investor perceptions of company value.

These findings support the idea that cognitive diversity enhances board decision-making and improves the ability of the board to effectively supervise and monitor management. The diversity of demographic characteristics such as age and race, and gender, helps create an inclusive and respectful culture within the boardroom. This helps to promote healthy debates and open exchange of ideas.

Another factor to consider is functional diversity, which refers to the range of knowledge and experience board members bring to the table. The diversity of functional attributes such as tenure and education background boosts the ability of the board to comprehend the cognitive resources of the group members (such as knowledge and talents) and can lead to better decisions by the board.

Boards must be proactive in promoting diversity and should use various methods to find new members. The most important thing to do is make sure that all directors comprehend the importance of incorporating diverse viewpoints into boardroom discussions. Boards naturally encourage the discussion of different perspectives in the event that everyone is aware of the benefits for the company.


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