The board of directors is the most important body in a company primarily because it is involved in making decisions. In essence, boards have the responsibility of approving major corporate financial and strategic decisions, including changes in capital structure, hiring and firing top executives, and also mergers and acquisitions (M&As). The UK Corporate Governance Code is a set of principles that instil good corporate governance for companies that have been listed on the London Stock Exchange, and in June 2010, the revised version of the Code came into effect. It featured the principle that recognises the value of diversity in a boardroom, and clearly articulates that the search for board candidates should be conducted, and appointments made, on merit, and against instances of objective criteria, as well as the recognition of diversity benefits on the board. According to the Financial Reporting Council (2014), diversity is essential for the effective functioning of any board. In addition, the organization also points out that incorporating the various forms of diversity is a dialogue that is challenging and constructive. Importantly, some problems that arise from groupthink of boards, which were exposed particularly by the financial crisis. However, as the Financial Reporting Council (2014) articulates, one way of ensuring that there is a constructive debate on a board, is by having sufficient diversity, which includes but not limited to race and gender. In essence, it is important to note that diversity is much more about the differences of experience and approach, and is significantly important in ensuring that there is an effective engagement of the board members and the key stakeholders, as well as delivering the business strategy.
Diverse individuals with different prejudices usually characterize board diversity, as well as their biases. Besides, power relations and social constraints significantly affect their behaviour. In a study conducted by Nielsen and Nielsen (2013), in 146 Swiss firms across 32 industries revealed that diversity that comes from board members and top management teams from different nationalities is positively and significantly associated with firm performance. In essence, this is attributed to the fact that the managers and board members are inclusive of people who have significantly spent their years in different nations from one another and have different and better capacities of solving complex tasks, as well as outperforming homogenous groups in offering the various perspectives and alternatives. Coupled together, this improves aspects of strategic decision-making, thereby impacting positively on firm performance.
Gender diversity when incorporated in boards, as Adams and Ferreira (2009) point out, is also connected to better board oversight, corporate governance, and also contributes to less unethical behaviours. The researchers analysed Standard & Poors firms and revealed that gender diversity in boards also contributed to high levels of corporate oversight and boardroom involvement. As such, it influenced a positive behaviour in the board, and thus affecting better firm performance. In essence, the boards with women, as Adams and Ferreira (2009) articulate, influenced time consciousness in the board, and consequently, better attendance records were achieved. In essence, as the researchers highlight, women have higher attendance, and this in turn also influences the male board members, thus achieving an overall improved attendance is inevitable. Importantly, the attendance of board members in their meetings is critical for good governance because it is the main avenue via which they acquire information that is used in helping them perform their set of fiduciary duties. In addition, Adams and Ferreira (2009) also found out that women directors influenced a positive board behaviour primarily because they are tougher monitors compared to their male counterparts, and thus, they are more likely to be assigned to committees that are primarily involved in monitoring-related activities. The committees that are likelier to be positively impacted by female board member are audit, compensation, corporate governance, and nominating. By ensuring that ethical behaviour is not compromised in these committees, boards with women will offer more visibility, thus ensuring that vices in the company ae kept at bay, such as corrupt officials and unreasonable pay to the CEOs. In another study by Jia and Zhang (2013), having a critical mass of women on the board, and in particular, at least three women directors, is associated with significantly positive response to natural disasters. The researchers conducted the study by measuring corporate philanthropic disaster response (CPDR) of firms owned by Chinese after two earthquakes. The credit of the improved response was attributed to the enhanced ethical behaviour that women boardroom members brought to the board of directors.
In addition, gender diversity in a firm also influences an innovative behaviour. In essence, having women in the board is correlated to an innovative culture, and thus, the company is set to have new ideas and behaviours, which are critical factors when it comes to adopting the right strategies, and contributes to increased profitability and firm performance. Also, having women in the board also contributes to increased knowledge formation and patenting, which reveals that having both women and men work as board of governors is important for firms as it increases knowledge pertaining to how the business will operate better. In essence, having a diverse board increases knowledge of how to adopt better strategies, and as a result, the board will be in a better position to ensure that the business is successful.
In addition, having board members with different education backgrounds is important as it positively affects the board. In essence, this form of diversity will enable the firm to comprehend different market dynamics, and with the diverse knowledge, better decisions will be made. However, there may be pitfalls due to conflicts of interest. For instance, Kroszner and Strahan discussed the potential conflicts of interest associated with bankers being part of the board. They found that there is a probability of conflict of interests. In essence, directors from the financial industry tend to borrow too much from investment options and opportunities, as well as frequently engaging in value-destroying mergers and acquisitions. According to Guner, Malmendier, and Tate (2008), directors that have financial expertise may significantly distort their advice towards excessive borrowing, as well as activities involving mergers and acquisitions to subsequently benefit investment and commercial banks.
Additionally, board diversity impacts positively on board behaviour, especially when the diversity covers aspects of race, gender, nationality, cultural backgrounds, demographic characteristics, as well as education. There is a high probability that the resulting board will be highly creative and encompass different perspectives. In essence, people from various backgrounds and life experiences will tend to approach similar problems in a variety of ways, and this, when included in the board, will result in creativity as the board will brainstorm on the different perspectives and choose the best one based on the prevailing circumstances. Also, they can acquire information from a diverse set of sources. The greater range of perspectives will provide greater insight, which will offer probable solutions to firm problems. In addition, diversity in the board deters the board of directors from suffering from groupthink.
With the diverse board members having access to connections and resources, the firms are set to experience tremendous growth due to increased connections. In essence, the diversity enhances the behaviour by securing better deals and government procurement contracts, thereby bringing together a great set of knowledge that can be of benefit to the company. It also facilitates mentoring among board members, which makes them better in the long-term. It also ensures that the other employees are properly mentored, thereby instilling the right atmosphere in the company. Also, because mentoring is an important factor for career advancement, it is beneficial for top executives, allowing them to have a greater insight and offer the company with better strategies and information pertaining to how the company will move forward. This is handy especially in instances when the firm is in a crisis, as the mentoring will come handy when the company needs strategic decisions. In essence, the board members become more proactive in taking decisions, and performing their duties.
Board diversity, however, contributes to various negative effects to the organization. In some instances, it can lead to conflicts. For instance, in occasions when the board members are from different education settings and diverse professionalism, there can be conflict based on what decisions the firm should take. For instance, board members of a marketing background can conflict with the other board members from the financial background, for example, on fund allocation to market the companys products or services. In effect, it leads to less productivity. In addition, the conflict can also lead to underperformance, which is detrimental to growth.
Another potential behaviour coming from diversity is ineffective communication, for example, when the members come from different countries as people from diverse backgrounds tend to communicate with each other differently. In effect, if there are communication problems, it may foster lack of cooperation because the managers may not be interested in what others are saying, or due to miscommunication, that may lead to poor decision-making. In addition, lack of cooperation may also be a barrier if the board has diversity in ages, as young and the old tend to disagree on some issues, which may hamper a positive atmosphere at board meetings. Also, board diversity, in some instances may be accompanied by discrimination, where some member opinions may be disregarded, which in consequence may negatively affect their morale, and in these occasions it hinders productivity.
Therefore, it can be concluded that board diversity can impact on the board behaviour positively or negatively. However, considering the positive nature of diversity, the benefits of adopting diversity far outweigh the cons, and thus, organizations should always adopt diversity, and find ways to control or mitigate the negative behaviour that may be associated with it.
Adams, R.B. and Ferreira, D., 2009. Women in the boardroom and their impact on governance and performance. Journal of financial economics,94(2), pp.291-309.
Financial Reporting Council (2014, September). The UK Corporate Governance Code. [Online]. Accessed https://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-2014.pdf on 19th Sep, 2016.
Guner, A.B., Malmendier, U. and Tate, G., 2008. Financial expertise of directors. Journal of Financial Economics, 88(2), pp.323-354.
Jia, M. and Zhang, Z., 2013. Critical mass of women on BODs, multiple identities, and corporate philanthropic disaster response: Evidence from privately owned Chinese firms. Journal of business ethics, 118(2), pp.303-317.
Kroszner, R.S. and Strahan, P.E., 2001. Bankers on boards:: monitoring, conflicts of interest, and lender liability. Journal of Financial Economics,62(3), pp.415-452.
Nielsen, B.B. and Nielsen, S., 2013. Top management team nationality diversity and firm performance: A multilevel study. Strategic Management Journal, 34(3), pp.373-382.
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