The Impact of Board Diversity

There is a growing awareness among investors and corporate leaders that diverse boards help companies better serve their customers, consumers employees, communities and employees. Recent debates on gender and race equality in the workplace has also prompted state-level laws to promote and encourage diversity in the corporate boardroom.

Numerous studies have demonstrated that more diversity on boards is associated with higher company performance. A 2015 McKinsey study found that companies that were in the top quarter of diversity in racial groups were 33 percent more likely than those in the bottom quarters to outperform them. A study from 2016 also found that women on boards are associated with lower earnings volatility and higher stock liquidity, as well as better opinions of investors about the firm’s value.

These findings support the theory that cognitive diversity can improve board decision-making and increases the capacity of the board to effectively guide and supervise management. The diversity of demographic traits, such as race, age and gender, helps to create a welcoming and respectful culture within the boardroom. This encourages healthy discussions and open exchange of ideas.

Functional diversity is a crucial factor. This is referring to the various types of experience and education that are brought to the board by members. The variety of functional attributes such as tenure and educational background enhances the ability of the board to recognize the cognitive resources of group members (such as their talents and knowledge) and can lead to better decisions for the board.

Boards must be proactive about diversity and employ a variety of methods to search for new members. The most important thing to do is to make sure that all directors understand the importance of incorporating diverse perspectives into boardroom discussions. Boards will naturally encourage exchange of views in the event that everyone is aware of the benefits to the company.