There’s been lots of publicity about the issue of diversity in the boardrooms. Companies are being pressured from shareholders and institutional investors to improve their diversity. They are also under pressure to do this because a diverse board can demonstrate that a company is progressive, which is good for the image of the brand. It can also improve company culture by creating more open, equal and inclusive environment.
However, the evidence regarding impact of board diversity is mixed. Numerous studies have proven positive effects, however others have shown that different forms of diversity may have different effects. Diversity in gender is, for example, related to firm performance when it comes to accounting returns, but not 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 found that people who are considered tokens or minorities in a particular group are less likely to share their opinions or opinions if they do not align with those of the majority. This could prevent cognitive diversity from reaping its full benefits. The age of a director will also impact the way they make decisions in the boardroom. Senior managers are less likely to embrace new ideas and change than younger managers. This is known as the “selection biased” effect. It is important to have young directors on a board and not to focus solely on gender diversity.