How Board Diversity Boosts Organisational Performance

Many organisations invest heavily in fostering board diversity, yet not all forms of diversity yield the same impact on performance. Research shows that cultural and gender diversity within top management teams (TMTs) significantly enhances decision-making and drives firm success.

Diversity

There is a blanket rhetoric that ‘diversity’ improves organisational performance. However, there are many forms of diversity at play in organisations, such as:

• Demographic diversity – Includes age, gender, ethnicity, and race.
• Cultural diversity – Encompasses national, regional and religious cultures.
• Educational diversity – Pertains to varying educational backgrounds and academic disciplines.
• Cognitive diversity – Relates to different thinking styles and problem-solving approaches.
• Socioeconomic diversity – Involves differences in social class and economic background.
• Neurodiversity – Refers to variations in the human brain regarding sociability, learning, attention, mood and other mental functions.
• Physical diversity – Concerns physical abilities and disabilities.
• Sexual orientation diversity – Includes diversity in sexual orientation, such as heterosexual, homosexual, bisexual and others.
• Professional diversity – Encompasses varied professional backgrounds and experiences.
• Ideological diversity – Pertains to differing political, ethical and personal beliefs.
• Personality diversity – Involves differences in personality types and traits.
• Linguistic diversity – Relates to different languages spoken and communication styles.

The issue of diversity is not straightforward. Both too little (where there is homogeneity, group think and a lack of critical thinking) and too much (where people are so diverse, they find it difficult to communicate and lack almost any common ground) are both problematical.

A new study

A new study looking at the impact of different forms of diversity of top management teams (TMTs or boards) has just been published by researchers from the School of Business and the Department of International Business, at Feng Chia University in Taiwan.

Findings

The study found that:

1. Both cultural and gender diversity within a board or top management team positively affects firm performance.
2. The following board member factors also were found to promote firm performance.

1. The network of the individuals and, in particular, overlapping networks.
2. The scale of the board. Larger boards tend to have a more positive impact on firm performance. The optimal size of the TMT varies depending on the specific context and needs of each firm.
3. The age of board members also positively influences firm performance, in that the higher average age of the top management team members within the board correlates positively with firm performance. This is attributed to the notion that more experienced and mature team members contribute to better decision-making and outcomes. The emphasis is on the benefits of experience and wisdom that come with age, rather than the diversity of ages within the team.

3. There is a positive effect on firm performance when considering the interplay between TMT diversity (cultural and gender) and conventional compositions (network, scale, and age). In other words, higher cultural and gender diversity coupled with network, scale and age effects, increases firm performance significantly more than any of the factors on their own.

4. The following combinations of factors were found to be particularly powerful in improving team and firm performance:

1. High performance comes from a board where there is a history between the members and they have known each other for more than ten years and they share ideas and experience but each has fewer than seven years’ tenure on the board.
2. Additionally, a TMT made up of people with overlapping interests and more than ten years’ experience (but with a tenure of fewer than seven years on the board) with a good gender mix produces high levels of board and firm performance.
3. Top management teams with more than nine board members and with good female representation also produce high levels of both team and firm performance
4. Teams from a variety of different countries with overlapping interests and networks and more than ten years’ experience together and in teams of nine or more are also high performers.
5. If there is no female representation, smaller teams (under nine) who have known each other for fewer than ten years and have fewer than seven years’ tenure on the management team is another high performance combination.
6. Where the board tends to be from the same country then smaller boards of fewer than nine people and fewer than ten years’ experience together with a diversity of networks and preferably with female representation also tends to produce good results.

Primary reference

Pham, T.-D. T., & Lo, F.-Y. (2023). How does top management team diversity influence firm performance? A causal complexity analysis. Technological Forecasting and Social Change, 186, 122162. https://doi.org/10.1016/j.techfore.2022.122162

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