Diversity as an Organizational Capability: A Multilevel Examination of Board Composition and Firm Effectiveness

Michigan State University, East Lansing MI

Investigators

Abstract

In the midst of increasing legislation to diversify the boards of publicly held organizations, insight into why such diversity matters has remained relatively stagnant. Several states have instituted requirements that the boards of public companies become more diverse in terms gender, race, and sexual orientation or provide evidence of the company’s broader commitment to developing and maintaining board diversity. Yet, while researchers have explored the performance impacts of board demographic composition, the findings remain equivocal given little attention to the mechanisms through which such relationships occur. This project endeavors to fill this gap within the diversity and strategy literatures to advance insight into the value of and for diversity in corporate governance. With a central hypothesis that board demographic diversity impacts organizational performance through experience-based diversity, this project will examine the effects of director demographic and experienced-based characteristics on organizational strategic actions and financial performance. The project will utilize data on director and board characteristics across approximately 1,500 publicly traded firms in the U.S. over a ten-year period from 2007-2017. These data along with data on firm governance quality, strategic choices and firm performance will be obtained from several databases, including BoardEx, CompuStat, the Institutional Shareholder Services (ISS), RavenPack News Analytics, and Morgan Stanley Capital International (MSCI). Director data will be aggregated and combined with firm-level data to estimate the effects of board diversity variables on firm organizational actions and performance. Overall, this project offers an integrative, process-based perspective for understanding value creation and capture as it pertains to board diversity. By encouraging and establishing a future research agenda for a more systemic approach to the study of board diversity and firm performance, this project has the potential for enhancing the explanatory power and practical usefulness of future firm-level diversity research. More broadly, project has the potential for building diversity-related partnerships between academia and industry and transforming the ways in which organizations approach diversity. This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.