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The Impact of Board Diversity

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There’s been lots of publicity about the issue of diversity in the boardrooms. Companies are being pressured from shareholders and institutional investors to increase their diversity. They are also being pressured to make this change because an inclusive board can show that a company is advancing and has a positive impact on the image of the brand. It can also enhance company culture by creating a more welcoming, equal atmosphere.

The evidence is inconsistent on the impact of diversity on board members. Many studies have shown positive effects, however others have found that different forms of diversity can have different effects. Gender diversity, for example is associated with the performance of a company in terms of the accounting return, but not the 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.

It has also been discovered that those who are considered tokens or minorities in a group tend to share their opinions and beliefs when they are in conflict with the majority. This can hinder cognitive variety from reaping its full benefits. In addition the age of a director may affect their decisions in the boardroom. Older managers are less likely to adopt new ideas and changes than younger managers. This has been described as the « selection bias » effect. This is why it’s vital to include young directors on a board and not just concentrate on gender diversity.

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