There is an increasing awareness of corporate leaders and investors that diverse boards help businesses better serve their customers, consumers employees, communities and employees. Additionally recent debates on gender and racial equity at work have led to state-level legislation to encourage and encourage diversity in corporate boardrooms.
Numerous studies have linked greater board diversity to better company performance. A 2015 McKinsey study found that companies that were in the top quarters of diversification of race were 33 percent more likely than those in the bottom quarter to outperform them. Another 2016 study found that board members with women are associated with lower volatility of earnings and greater stock liquidity as well as higher opinions of investors about the firm’s value.
These findings support that cognitive diversity improves the board’s decision-making process and improves the board’s ability to effectively mentor and supervise management. Moreover the diversity of demographic characteristics such as gender, race and age is a key factor in creating an inclusive and respectful environment in the boardroom, which promotes open discussion and the exchange of ideas.
Another important factor is functional diversity which refers to the diversity of education and experience that board members bring to the table. A variety of functional attributes, such as tenure and education, enhances board abilities to understand the cognitive resources of board members (like the skills and knowledge), which in turn results in better decision-making by the board.
Boards must be proactive in encouraging diversity and should employ different strategies to find new members. The most important thing to do is to make sure that all directors understand the importance of incorporating different perspectives into boardroom discussions. Boards naturally encourage exchange of perspectives if everyone understands the benefits for the company.