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Diversity On Boards Is Sacrificed When Firms Underperform

cartoon image of a highly diverse crowd of people
Businesses sacrifice the diversity of their boards when faced with fixing underperformance research shows  
  • Business are more likely to sacrifice gender and racial diversity on boards when firms underperform
  • But, chairs of company boards from under-represented groups are less likely to reduce the diversity to fix their performance problem
  • Underperforming firms should change their perspectives, and appoint directors with new, differing expertise to those already on the board

Firms enduring periods of lacklustre performance understandably want solutions – whether pragmatic or radical – and they want them fast. After all, in a market full of competitors, the race to the bottom is not one they want to be seen winning.

Finding those solutions often requires new thinking, fresh approaches and embracing new skillsets. With this in mind, the values that diversity, inclusion and equality can bring to the workplace would be, you’d expect, a key priority in the minds of those leaders looking to steady the ship or bounce back…

… But, disappointingly, the opposite is often the case.

Trading off diversity for better performance seems to have become an unofficially accepted business strategy in the face of negative feedback, according to a recent study from the Imperial College Business School, which found a pattern of changes bring made to both the expertise and ascriptive diversity of boards when firms underperform.

The research, led by Dr. HeeJung Jung, Assistant Professor of Entrepreneurship at Imperial College Business School London, alongside colleagues from Hong Kong University of Science and Technology and Seoul National University, explored the performance and board make-up of 733 U.S. listed firms in the manufacturing industries, over a period of 15 years, resulting in a total of 6,672 firm observations. 

Dr Jung sets out that when firms are underperforming, whilst the diversity of experts on the board increases, the “ascriptive diversity” of board members decreases instead. But what does this mean? The key distinction between these nuanced types of diversity is that “ascriptive” diversity refers to minority background groups such as Black, Ethnic and Minority Ethnic (BAME), whereas diversity of experts refers only to their respective fields of knowledge and expertise. 

The research also found that chairs of company boards from under-represented groups were less likely to reduce the diversity of a board as a means to fixing their performance problem. However, whilst this sounds positive on the surface, it becomes a much less rosy prospect for boosting diversity when paired with the fact that 88.96% of the directors in the 733 firms Dr Jung’s team observed were white. 

A reason for this, according to Dr Jung, is that boards characterised with ascriptive similarity helps directors to build trust with one another and, as a result, helps them to coordinate and build consensus quickly. This yields the rationale that they will subsequently operate more smoothly and perform better. “The study helps to understand the difficulties in achieving gender and racial diversity inside the boardroom of U.S corporations, even with growing calls for improvement,” Dr Jung said. “A performance downfall is obviously a threat to a firm and to its board. The the firm will then search for expertise – for a prompt fix – bringing in people with new knowledge and someone to trust. Business then perhaps doesn’t see scrapping diversity as a sure fire way to success, rather, the alluring failsafe of expertise is.” 

Nonetheless, such actions are not a just cause for undermining progressive values in a business – especially when research shows that prioritising diversity at all levels of an organisation, and taking actions such as instilling effective LGBT policies can result in boosting company performance. When reflecting on the actions of the organisations observed in the study, Dr Jung commented, “as profit-oriented organisations, firms would prioritise their performance aspiration when they underperform and may overlook improving or even keeping the representation of female and racial minorities”. 

With diversity on boards already recognised as being something difficult to achieve, even despite greater demand from a more progressive society to back such ideas, Dr Jung says that making diversity the sacrificial lamb for performance is, in principle, a regressive oversight.

The findings of Dr Jung’s study indicate that sacrificing ascriptive diversity in favour of diversity of expertise is seen as a prompt problem solving action by firms to improve their performance. However, if gaining greater expertise on boards truly is the aim of those at the helm of our organisations, there should, logically, be no reason as to why a broader skillset cannot be sought whilst also maintaining a board of ascriptive diversity. The real challenge, it seems, is overcoming the tendency for managers to hire in their own image. A greater shift needs to occur.

It simply depends on the values and culture of the business. Commitment to building a board rich in diversity must be actioned by building effective diversity-focused initiatives or it is doomed to failure. Mealy mouthed and short-term commitments will not cut it. The most straightforward way of ensuring true board diversity would be to start with ensuring the recruitment of talent at every level of an organisation is truly open to all, so that high performing diverse talent can rise up the ranks.

There is perhaps a natural inclination to trust a homogenised and familiar group we have hitherto found hard to shake but for those who trust in a diverse board may have the future to thank them for.

By, James Dugdale

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