Diversity on boards is sacrificed when firms face difficulties

Businesses still prioritise performance aspirations over DEI

Discrimination and bias persist even when you are at the top of the game! Companies are more likely to sacrifice gender and racial diversity on their boards when underperforming or in times of rising productivity. 

These are the findings of a study by Imperial College Business School, published in the journal Organization Science, led by Dr HeeJung Jung, Assistant Professor of Entrepreneurship at Imperial College Business School, alongside colleagues from Hong Kong University of Science and Technology and Seoul National University. 

Reduce diversity 

The researchers sought to understand whether underperforming companies change the diversity of their boards in terms of director expertise, gender and race.

They examined data collected on the boards of 733 publicly traded US manufacturing companies over 15 years for a total of 6,672 company observations. The researchers were able to identify both the expertise and ascriptive diversity of the board of directors and the changes made when these companies were underperforming.

The researchers found that underperforming companies are motivated to broaden their perspectives and strive to have directors with different skills than the incumbent directors. However, this often leads to a reduction in gender or racial diversity in the boardroom.

That urgent need to reach consensus leads the board to focus on ease of communication, trust and solidarity and to avoid potential conflicts between directors. 

Since people perceive people with similar backgrounds as trustworthy, changes to the board of a poorly performing company are likely to decrease the gender or racial diversity of its members.

The study also found that when a company’s chairperson is from underrepresented female or Black, ethnic or minority (BAME) groups, they are less likely to reduce board diversity to address performance issues.

Dr HeeJung Jung said: “A decline in performance is obviously a threat to a company and its board. The company will then look for skills to find a quick solution, bringing in people with new knowledge while looking for a trusted person.

“In doing so, incumbent directors look for people who are similar to them demographically, overlooking women and racial minorities. Ultimately, we find that companies become less inclusive as performance declines.”

The study helps to understand the difficulties in achieving gender and racial diversity on US corporate boards, even as calls for improvement grow. This research shows that this could be because companies are trying to rectify their underperformance. As profit-driven organisations, companies prioritise their performance aspirations when underperforming and may neglect to improve, or even maintain, the representation of women and racial minorities.

Dr HeeJung Jung added: “This research shows the difficulties faced by women and racial minorities in being represented on the board, despite the persistent call to address this. Companies choose people with a similar demographic profile, which often means white directors, and women or racial minorities tend to be excluded from boards and not replaced by people with a similar demographic profile.”

However, research has shown that companies with female or racial minority chairpersons are more likely to maintain and improve their boards’ gender and racial diversity, even in times of crisis. Overall, these findings draw the attention of practitioners and policymakers to the internal workings of the decision-making process that can be a barrier to improving gender and racial diversity.

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