Voices from our academic community - Peeling back the layers: A deeper look at women and racial minorities on corporate boards

The push for greater representation of women and racial minorities on corporate boards is often based on the business case for diversity. However, academic research suggests that the impact of diversity on board effectiveness—and ultimately firm performance—is far more complex than simply adding women or minorities to the roster. Research by Prof. Esha Mendiratta and Prof. Sabina Tasheva, based on data from S&P 500 companies over a period of fourteen years, uncovers these complexities and offers insights for boards seeking to unlock the true value of diversity.

We are happy to share the external research of Esha Mendiratta (Professor, Vlerick Business School), and Sabina Tasheva (Professor, University of Sydney Business School) and is available here.

The diversity dilemma

The drive for board diversity stems from the belief that it enhances decision-making and improves firm performance because minority directors bring unique perspectives. This belief assumes that demographic minorities can fully participate in board activities, and that their skills and expertise are used by boards. However, as recent entrants to boards, often due to stakeholder pressures, women and racial minorities may face challenges post-appointment, leading to unintended negative consequences both for these directors and companies. The key lies in understanding and strategically leveraging these nuanced dynamics.

The faultline factor

Many companies focus on meeting diversity quotas and targets, overlooking the multidimensional nature of diversity and its impact on board dynamics. Minority directors bring more than just gender or race; they are multidimensional individuals with diverse human capital that is valuable to board work.

We use the concept of "faultlines" to capture this multidimensionality. The alignment of demographic characteristics and human capital at the board level critically influences director interactions and duties. Our research shows that when demographic minorities share similar functional backgrounds that differ from the majority, their atypical presence becomes more visible, hindering collaboration and marginalising their views. Consequently, board effectiveness and firm performance suffer.

For example, consider two hypothetical boards:

BOARD A	Gender	Racial background	Functional expertise	Education
Director 1	F	Asian	STEM	Science
Director 2	F	Asian	STEM	Science
Director 3	M	White	HR	MBA
Director 4	M	White	Marketing	MBA

BOARD B	Gender	Racial background	Functional expertise	Education
Director 1	F	Asian	HR	MBA
Director 2	F	White	STEM	Science
Director 3	M	Asian	STEM	Science
Director 4	M	White	Marketing	MBA

In Board A, where functional expertise and education is more aligned along gender and racial background lines, faultlines are stronger, potentially leading to less effective collaboration compared to Board B, where characteristics are more evenly distributed.

CEO's role in bridging divides

Our research reveals that the CEO's intra-personal diversity of functional careers compared to demographic minority directors can mitigate negative effects of board faultlines on firm performance. Selecting minority directors with overlapping career functional experiences or shared tenure with the CEO can bridge faultline-created divides. When CEOs and minority directors share similar professional histories, CEOs are more likely to support and amplify minority perspectives, fostering inclusivity, and attenuating the negative effects of subgroups created by faultlines.

Actions for boards and policymakers:

Set women and racial minorities on your board up for success by looking beyond demographics: Consider how the full range of attributes—gender, racial background, functional expertise, and industry experience—will complement or potentially divide the existing board. Limited alignments along both demographic and human capital characteristics can help avoid faultlines, create cohesion, and improve performance.

If faultlines are inevitable, focus on overlapping experiences between minority directors and the CEO/chair: Shared experiences can provide psychological safety to demographic minorities, helping integrate their views when faultlines are high. Create opportunities for shared experiences through board retreats, paired projects, or mentorship programs.

Reshape board culture if needed: Encourage practices promoting open dialogue and ensuring all voices are heard. Implement structured debate techniques, rotate leadership roles within committees, or provide inclusive decision-making training.

The bottom line

Board diversity is not just about meeting quotas or appeasing stakeholders. When used effectively, it can be a powerful tool for enhancing company performance. By taking a more sophisticated approach to board composition and dynamics, boards and policymakers can turn diversity from a checkbox item into a true strategic asset. In the world of corporate governance, it's not just about who's at the table—it's about how they work together. By mastering the complex interplay of board diversity and finding an optimal combination of differences and commonalities among members, companies can create a governance structure that's both representative and highly effective.