The Impact of Board Diversity

Diversity in boardrooms is home the talk of the town. Companies are being pressured from institutional investors and shareholders to increase their diversity. A diverse board can also show that a business is growing, which can aid in improving the reputation of the brand. It also helps improve the company’s culture by creating a more open, equal and inclusive environment.

However, the evidence regarding impact of diversity on boards is mixed. Numerous studies have proven positive results, but other studies have demonstrated that different types of diversity could have distinct impacts. Gender diversity is, for instance, associated with firm performance when it comes to accounting returns however not the 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 discovered that those who are considered tokens or minorities in a group tend to voice their opinions and beliefs when they are in conflict with those of the majority. This can hinder the full benefits of cognitive diversity from being realized. The age of a director can also affect how they make decisions in the boardroom. Older managers tend to be less willing to alter their thinking and implement new ideas than younger managers. This is known as the “selection biased” effect. This is why it’s vital to include young directors on a board and not simply pay attention to gender diversity.

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