Diversity in boardrooms has become the talk of the town. Companies are under increasing pressure from institutional investors and shareholders to increase their diversity. A diverse board can also prove that a company is progressive, which will aid in improving the brand’s reputation. It can also benefit company culture, by fostering an open and equitable environment.
The evidence is inconsistent on the impact of diversity on board members. Numerous studies have found positive effects, while others have found different effects. Gender diversity, for instance is associated with firm performance in terms of accounting returns, but not to market returns. 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.
In addition it has been discovered that minorities or tokens of a group tend to self-censor by not communicating their beliefs and opinions if they contradict those of the majority of the group. This can hinder cognitive variety from bringing its full benefits. Furthermore, the age of directors can affect their decisions in the boardroom. Managers who are older tend to be less willing to alter their thinking and adopt new ideas than younger managers. This is referred to as the “selection biased” effect. This is the reason why it’s important to include young directors on the board and not only focus on gender diversity.
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