The Impact of Board Diversity

Investors and corporate leaders are becoming more aware that diversifying boards can help companies better serve their clients, employees as well as their communities. Recent debates over gender and race-based equality in the workplace have also led to state-level laws that encourage and promote corporate boardroom diversity.

Numerous studies have demonstrated that more diversity on boards is linked to better company performance. A 2015 McKinsey study found that companies in the top quarters of diversity of race were 33 percent more likely than those in the bottom quarter to perform better than them. Another study in 2016 revealed that women on boards are correlated with lower earnings volatility and greater stock liquidity as well as higher investor perceptions about firm value.

These findings support the theory that cognitive diversity enhances board decision-making and improves the ability of the board to effectively mentor and monitor management. The diversity of demographic characteristics such as age and race, and gender, contributes to an inclusive and respectful environment within the boardroom. This fosters healthy debates and open exchange of ideas.

Another important factor is functional diversity that refers to the range of education and experience board members bring to the table. The variety of functional attributes like tenure and educational background enhances the ability of the board to recognize the cognitive capabilities of group members (such as talents and knowledge) and can lead to better board decisions.

Boards need to be proactive in addressing diversity and use a range of techniques to seek out new members. But the most important thing is to ensure that all directors buy into the importance of considering diverse perspectives when discussing boardroom issues. Boards will naturally encourage the discussion of different perspectives in the event that everyone is aware of the benefits to the company.

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