The Impact of Board Diversity
Diversity in boardrooms has become an ongoing topic. Shareholders and institutional investors are putting the pressure on companies to improve their diversity. They are also being pressured to improve their diversity because a diverse board can demonstrate that a board of directors business is innovative and has a positive impact on brand reputation. It can also improve company culture by creating more open, equal and inclusive environment.
However, evidence on the impact of diversity on boards is mixed. Many studies have shown positive effects, however some studies have shown different effects. Gender diversity is, for example, related to firm performance in accounting returns, but not returns on markets. 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.
It has also been observed that people who are tokens or minorities within a group are less likely to express their opinions and opinions when they don’t align with those of the majority. This can hinder the full benefits of cognitive variety from being realised. In addition the age of directors can affect how they make decisions in the boardroom. Managers of older age are less likely to embrace innovative ideas and innovations than younger managers. This has been described as the “selection bias” effect. This is the reason it’s crucial to include young directors in a board and not simply pay attention to gender diversity.