A Diverse View on Board Diversity

Corporate governance centers on the board of directors, a critical group responsible for guiding an organization’s strategic direction and overseeing its operations. In recent years, research on board diversity has significantly increased, with most studies indicating that it brings positive effects, ranging from enhanced economic performance to broader societal benefits. The concept of “board diversity” itself is multifaceted, covering demographics such as gender, race, and ethnicity, professional backgrounds like work experience and industry expertise, and even social values and political stances. Despite this complexity, research has predominantly focused on gender and race/ethnicity, primarily because organizations are committed to addressing historical disparities.

In this study, we aim to explore the high-dimensional board diversity, starting with the expected benefits of diversity and underlying mechanisms.  The most important economic reasoning supporting board diversity is its contribution to sound and robust decision-making. Diverse boards bring together a broad range of perspectives, experiences, and skills, leading to more comprehensive discussions, fostering innovative solutions, and exposing blind spots that might be overlooked in more homogenous groups. This aligns with classic economic models, which suggest that when individual signals are less correlated, the combined signal becomes more informative and reliable for decision-making. Indeed, an event study in our research demonstrates that boards with higher levels of experience and skill diversity performed better during crises of the COVID-19 market crash.

Furthermore, diversity enhances a board’s ability to understand and respond to the needs and preferences of a broader range of stakeholders, from customers to employees. By cultivating trust and alignment, diverse boards facilitate business opportunities, access to various market segments and a wider pool of talent.

Beyond the economic rationale and at the societal level, board diversity helps correct historical imbalances in group representation. Since board positions are highly influential and sought-after, increasing demographic diversity allows more individuals to see themselves represented in these roles, providing a wider array of role models and senses of participation. Unlike diversity aimed at improving decision-making, demographic diversity for societal benefits doesn’t need to be achieved within each individual board. Instead, it can be effective at a macro level—across the economy, a region, or a specific sector—that the overall composition of board members mirrors broader societal diversity.

Our study is based on a comprehensive database of directors and boards of U.S. public firms from 2000 to 2021, covering 5,453 unique firms and 52,284 unique directors. By applying machine-learning and AI techniques to process individual directors’ biographies and images, we developed eight diversity measures at the board level using NLP similarity scores and Herfindahl indices, offering a more accurate and comprehensive assessment of individual directors than previous studies.

The findings show that U.S. public firm boards have made significant progress in demographic diversity over the past two decades, particularly in female and minority representation. However, experience and skill diversity have slightly declined, indicating that directors are not being selected from more varied professional backgrounds and skill domains. When comparing diversity at the “micro” (individual board) and “macro” (all directors pooled each year) levels, we found no gap for race and gender diversity.  However, a notable gap exists for non-demographic diversity, such as experience and viewpoints, which are crucial at individual boards, the unit of decision-making.

Is there a potential complementarity or trade-off among different dimensions of diversity, particularly between demographic diversity and other forms of diversity? At a correlational level, we find that female and Black directors often contribute diverse experiences, skills, and institutional knowledge to boards, yet they tend to come from more similar educational backgrounds. Leveraging the 2018 California board gender quota and the George Floyd’s murder in 2020 as positive shocks to board gender and racial diversity, we demonstrate that both events led to an increase in female and Black directors across all boards. However, the effects were significantly stronger for boards that had no female or Black directors prior to the events. The exogenous addition of these directors to the most impacted boards did not move other measures of diversity, except that the new presence of Black directors also enhanced skill diversity.

Perhaps the most striking findings is the divergent trends in political diversity between Republican-leaning and Democratic-leaning boards, based on directors’ contributions to partisan campaigns and federal committees. Republican-majority boards tend to appoint minority directors with opposing political views, while Democratic-majority boards recruit directors who align with their existing political stance. This asymmetry cannot be explained by a shortage of conservative-leaning minority candidates, once we processed and learnt about the political stances of corporate executives, who make up about three-quarters of board members.  Female and minority senior executives are roughly equally split between liberal- and conservative-leaning, refuting the supply constraint hypothesis especially for large firms which tend to run national searches for board members.

An alternative hypothesis is that political minority directors may feel out of place in a board dominated by opposing ideologies, particularly in today’s polarized environment. This could deter gender and racial minority candidates from joining boards also as political minority. However, our findings do not support this concern. We found that female and Black directors are more likely to leave boards for “greener pastures,” i.e., board membership at larger firms; and are less likely to experience other types of departures. Directors who are political minorities on either Democratic- or Republican-leaning boards do not have a higher probability of non-promotional departures compared to directors with conforming political views.

Overall, the evidence suggests that while boards are becoming more demographically diverse, they are also becoming “bluer,” or more politically aligned with liberal views, as both Republican- and Democratic-leaning boards recruit Democratic-leaning directors when they try to achieve a higher demographic diversity.  This trend contributes to the much discussed “political realignment of corporate America” during the last decade, where businesses are increasingly aligning with progressive policies and ideologies.