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102 CORPORATE GOVERNANCE

Volume 11 Number 2 April 2003

Introduction

A s women and minorities are continuingto become a larger proportion of the

workforce in comparison to white males, cor-porations are beginning to experience signifi-cant changes in pools of potential candidatesas high-ranking officer positions (Holton,1995; Burke, 1997; Conyon and Mallin, 1997; Burke and Nelson, 2002). The diversificationof these resource pools may impact the composition of boards of directors and subsequently corporate governance (Shraderet al. 1997). While diversity within boards ofdirectors may be a highly visible effort todemonstrate an absence of discrimination, it is unclear if diversity within boards of directors has an impact on organisational performance. The diversity literature suggestsdiversity adversely impacts group dynamics,but improves group decision-making.However, this research has not been con-ducted with boards of directors nor has itinvestigated the impact of board of directordiversity on organisational performance. Ourresearch is designed to investigate the impact

of diversity within boards of directors on firmperformance.

To examine the relationship between boardof director diversity and firm performance, wefirst discuss the concept of diversity and thenrelate diversity to group and organisation performance. Ultimately, we examine specificrelationships between board diversity andfirm performance.

Demographic diversityPrevious research on diversity typicallyfollows two general distinctions: the observ-able (demographic) and the non-observable(cognitive). Examples of observable diversityare generally gender, age, race and ethnicityand examples of non-observable diversity are knowledge, education, values, perception,affection and personality characteristics(Maznevski, 1994; Milliken and Martins, 1996;Pelled, 1996; Boeker, 1997; Watson et al., 1998;Kilduff, et al., 2000; Petersen, 2000; Timmerman, 2000). However, most researchon diversity and its effects on performancefocus on observable or demographic diversity.

Board of Director Diversity and FirmFinancial Performance

Niclas L. Erhardt,* James D. Werbel and Charles B. Shrader

This study examines the relationship between demographic diversity on boards of directorswith firm financial performance. This relationship is examined using 1993 and 1998 financialperformance data (return on asset and investment) and the percentage of women and minori-ties on boards of directors for 127 large US companies. Correlation and regression analysesindicate board diversity is positively associated with these financial indicators of firm per-formance. Implications for both strategic human resource management and future researchare discussed.

Keywords: Firm organisation, diversity, performance, heterogeneity

* Address for correspondence:School of Management andLabor Relations, Rutgers Uni-versity, 94 Rockefeller Road,Piscataway, NJ 08854, USA. Tel:609-497-0985

© Blackwell Publishing Ltd 2003. 9600 Garsington Road, Oxford, OX42DQ, UK and 350 Main Street, Malden, MA 02148, USA.

BOARD OF DIRECTOR DIVERSITY AND FIRM FINANCIAL PERFORMANCE 103

Thus, we define diversity as the representationof both ethnic and gender differences onboards of directors.

This study considers demographic diversityas it directly reflects the increasing numbers ofwomen, Hispanic, Black and Asian Americansentering into the management labour market(Conyon and Mallin, 1997). There is researchthat suggests that diversity is increasing –especially by gender. Daily et al. (1999) conclude, for a study of Fortune 500 firms, that women have made significant progress in terms of assuming seats on boards of directors, but have not in terms of taking CEO positions. Bilimoria (2000) reports thateven though the number of female boardmembers is increasing slightly, few companiesactively recruit females and there is still sexbias, stereotyping and tokenism on boardswhere women serve. Mattis (2000) concludesthat women board members are increasing innumbers but the changes are small and incre-mental. While this research focuses more ongender rather than racial diversity, the evi-dence suggests that the composition of boardsof directors in American corporations is begin-ning to increasingly reflect the changes inworkforce diversity (Burke, 1995).

Diversity and group performanceThe extant literature offers at least two generalconflicting perspectives regarding the rela-tionship between diversity and group per-formance. Some researchers suggest thatdiversity leads to a greater knowledge base,creativity and innovation, and thereforebecomes a competitive advantage (Watson etal., 1993). Bantel (1993) investigated the rela-tionship between the demographic nature ofhigh-level management groups and strategicclarity in retail banks. Bantel’s findings also demonstrated that greater education andfunctional background diversity in top management teams led to better strategic decision-making.

Simons and Pelled (1999) reported similarresults in their study on executive diversity.Their findings suggested that both educationallevel and cognitive diversity were associatedwith positive effects on organisational perfor-mance. However, they argued that experiencediversity had a negative impact on return oninvestment and overall organisational perfor-mance. Simons and Pelled argued that thenegative relationship of experience diversityand performance was due to informal com-munication among top teams.

Elron (1996) examined the relationships ofcultural heterogeneity and member diversitywith group cohesion and found no relation-

ship. However, the results indicated a positiverelationship between cultural heterogeneityand levels of issue-based conflict. In terms ofperformance, both issue-based conflict andcohesion were positively related to team per-formance, which was also tied to organisa-tional performance.

Others have investigated board diversityand performance and found positive results.For example, Siciliano (1996) used data from240 YMCA organisations to construct andcompare multiple measures of board memberdiversity. The findings revealed higher levelsof social performance and fundraising whenboard members exhibited greater occupationaldiversity. The results also demonstrated thatgender diversity played a role in organisa-tion’s level of social performance.

Maznevski (1994) examined the literatureon group diversity and challenged previousresearch findings that homogeneous decision-making groups perform better than diverseones. She argued that diversity has the poten-tial to considerably benefit group decision-making. The keys to improved performanceare integration and communication. Accord-ing to her conclusions from this literaturereview, enhanced integration and communica-tion help determine the performance of adiverse group.

In contrast, other researchers suggested thatdiversity can potentially be a disadvantage interms of group performance. For example,Hambrick et al. (1996) conducted a longitudi-nal study on the effects of diversity on topmanagement team performance in 32 majorUS airlines. Diversity was measured by functional, educational and tenure hetero-geneity. Their findings indicated that homo-geneous top-management teams actuallyoutperformed heterogeneous ones. They alsoreported that heterogeneous teams wereslower in their actions and responses and lesslikely than homogenous teams to respond tocompetitors’ initiatives. The explanation theyoffered was that in a heterogeneous groupindividuals were more likely to disagree,thereby weakening the team consensus.

Knight et al. (1999) also found that demo-graphic diversity was negatively related toconsensus. They further suggested that greatertime and effort was necessary for heteroge-neous teams to reach decisions, ultimatelyreducing team performance. Treichler (1995)came to a conclusion similar to Knight et al.and Hambrick et al. Treichler concludes thatworkforce diversity requires higher expendi-tures due to increased initiatives and co-ordination to accommodate the needs of different types of employees, and has the poten-tial to increase work group conflict and commu-

© Blackwell Publishing Ltd 2003 Volume 11 Number 2 April 2003


nication difficulties. In sum, these authors pointto the potential negative effects of diversity dueto the difficulty of integrating these resourcesinto an effective harmonised group or team.

In sum, it appears that there is equivocalevidence about the effects of diversity ongroup performance. Diversity both enhancesperformance by increasing decision-makingcapacity, but detracts from group performanceby increasing conflict. However, none of this research addresses diversity within boardsof directors. Consequently, an importantresearch question becomes – to what extent dothese issues impact the relationship between diver-sity on boards of directors and firm performance.

Diversity and firm performance

Most studies addressing diversity and firmperformance use workforce diversity asopposed to diversity within boards of direc-tors. One study addressing diversity at organ-isational levels was conducted by Murray(1989). Murray used 84 Fortune 500 food andoil companies to investigate heterogeneousversus homogeneous groups and their effecton organisational performance. Diversity wasmeasured as a composite of age, educationaldegree, average tenure and occupationalhistory. Findings showed that performanceand diversity is related to the type of marketthe organisation is operating in. Specifically,homogenous groups were more effective thanheterogeneous groups during intense marketcompetition. Heterogeneous groups weremore effective in dealing with organisationalchange, suggesting that these groups maybetter respond to rapid dynamic changes inthe market. A limitation with Murray’s (1989)study was that diversity was measured via the surrogates’ age, educational degree andtenure. While these are undoubtedly impor-tant, it may be that racial and ethnical diver-sity are more informative and relevant to the demographic make-up of the currentworkforce.

Shrader et al. (1997) examined firm financialperformance with gender diversity at themiddle- and upper-management, and at theboard of director levels for large firms. Theyfound general organisational effects, but fewtop-level diversity effects on performance and,in general, reported a positive link betweenwomen (diversity) in management positionswith firm financial performance. Shrader et al.explain the positive performance relationshipby suggesting that these companies wererecruiting from a relatively larger talent pool,and subsequently recruited more qualifiedapplicants regardless of gender.

In a more recent study conducted byRichard (2000), the relationship betweenorganisation-wide diversity, business strategyand firm performance was examined in thecontext of the banking industry. Performancewas measured by productivity return onequity, and market performance measuredfrom 64 banks in three states. Study resultsshowed that diversity added value and wasperceived as a relative competitive advantagefor banks.

Focusing specifically on boards of directors,Catalyst (1995) reported that of the top 100 UScompanies in terms of revenue, 97 had at leastone woman board member. In an earlier studyby Catalyst (1993), 82 per cent of the 50 mostvaluable Fortune 500 firms were found toinclude at least one woman director on theboard.

In another recent work, Burke (2000a) foundsignificant correlation coefficients between the number of women directors and revenue,assets, number of employees and profitmargins for Canadian firms. Therefore, thefindings of the section above indicate thatprofitable firms may be amenable to diversedirector appointments.

In summary, the existing literature suggeststhat workforce diversity impacts firm perfor-mance. However, few studies have investi-gated the possible connections diverse boardsmight have with firm performance. Moreover,most previous studies are focused exclusivelyon gender diversity rather than both genderand racial diversity.

Board diversity and firm performanceGiven the current literature suggesting thatdiversity tends to generate higher creativity,innovation and quality decision-making atindividual and group levels, this study positsthat similar findings may be found at the executive board of director level, where thesecharacteristics are most critical. As board functioning is highly related to organisationalperformance (Zahra and Pearce, 1989), thequestion becomes whether increased demo-graphic diversity on boards affects overallcompany performance. In this vein, Finkelstein and Hambrick (1996) outlined twokey functions for boards that are highlyrelated to the performance of the organisation.First, boards are commonly the most influen-tial actors determining strategy direction anddecision-making inherent in their structuralposition. Second, boards fulfil a monitoringrole that may include: representing sharehold-ers, monitoring proper use of organisations’wealth, response to takeover threats and

Volume 11 Number 2 April 2003 © Blackwell Publishing Ltd 2003


hiring, compensating and monitoring topmanagement work.

In light of Finkelstein and Hambrick’s work,Fondas (2000) argues that the presence ofwomen directors helps a board execute itsstrategic function because their experience isoften closely aligned with company needs. Forexample, she notes that women may have aslight edge over men in terms of impactingstrategic planning. Consequently, women canpotentially help the board fulfil its strategicrole.

Burke (2000b) offers some additional practi-cal reasons why firms should consider addingqualified women to the board. He notes thatin general there are not currently enough tal-ented directors to go around. CEOs are reject-ing invitations to join boards at increasingrates. And men currently serving on boards donot have the time to take on additional respon-sibilities. This makes the continuing relianceon male CEOs for board members less practi-cal and potentially dilutes quality. Therefore,firms should expand their searches beyond thetraditional talent pools. He also notes thatwomen can add important symbolic valueboth inside and outside the organisation,linking the firm with other constituencies.

Similarly, Selby (2000) interviewed womenboard members from top US firms andobserved that by including gender diversityon their boards firms concomitantly includeddiversity in other experiences and values. Shenotes that the “questioning culture” of a boardcan be influenced, in a positive respect, byhaving women board members. Bilimoria andWheeler (2000) and Mattis (2000) are sup-portive of the above, stating that women directors help foster competitive advantage bydealing effectively with diversity in labourand product markets. Bilimoria and Wheelersee women directors as champions for changebecause they tend to be younger than theirmale counterparts and are open to relativelynewer ideas and approaches to doing busi-ness. Mattis indicates the board should reflectthe diversity of the firm’s customer base andlabour pool. These arguments may well applyto racial diversity as well as gender diversity.

HypothesisBilimoria (2000) recommends that the corpo-rate bottom-line impact of demographicallydiverse directors be examined specifically.Additionally, Bilimoria and Wheeler (2000)call for research empirically examining therelationship between the presence of womenon boards and firm outcomes. Burke andMattis (2000) recommend research examiningthe differences in various types of perfor-

mance for firms achieving diversity in themanagement ranks. And Davidson (2002) asksfor research examining both racial and gendereffects on work outcomes.

Zahra and Pearce (1989) in their review ofboards of directors and the relationship withperformance did not identify a single study of demographic diversity at the board level.However, because strategic decision-makingis crucial for boards of directors, it seemslogical to expect that organisations withhigher levels of board of director diversity willdemonstrate higher levels of performancethan organisations with less diverse executiveboards. Thus, the following general hypothe-sis is proposed: Greater demographic diversityamong board members increases organisationalperformance.

Method

SampleData for this study were gathered from 112large public companies in various industries.An article appearing in Fortune magazine(Robinson and Hickman, 1999) influenced theinitial data-gathering effort. The Fortune articlepresented information regarding the bestcompany work environments for minorities inAmerica. With the help of the Council on Eco-nomic Priorities (CEP), a non-profit researchfirm, Fortune sent surveys to the Fortune 1,000 and 200 other large firms collectinginformation regarding diversity employmentand programmes. 137 firms responded to thesurvey. Fortune used these data to presenttables chronicling the number and percentagesof minorities in management positions.

We contacted Fortune and were grantedaccess to these data, as well as information onthe Equal Employment Opportunity Commis-sion compliance information for the publiccompanies surveyed. Twenty of the originalcompanies had to be excluded from furtherstudy because they were private firms andfinancial data would not be publicly available.Of the 117 remaining companies, the largestnumber came from manufacturing (34 per cent consumer non-durable and 23 per centdurable goods). Other industries included thefinancial services sector (17 per cent), andtransportation/utilities (8 per cent).

Three companies had to be eliminated fromanalysis due to missing data, and two compa-nies were excluded as outliers because theirresults were 20 standard deviations away fromthe mean on the ROA and ROI measures. Con-sequently, 112 companies with complete datawere included in the analysis. The average



number of employees was 20,202 and theaverage amount of total assets was US$10,864million. The median for the executive board ofdirector diversity was 24 per cent, rangingfrom 0.6 to 72 per cent.

Measures

Independent variablesIn this study, demographic diversity was mea-sured in terms of ethnic and gender represen-tation on boards. The diversity representationwas obtained from company self-reports com-piled by Fortune magazine. These self-reportednumbers were based on the Equal Employ-ment Opportunity Commission (EEOC) cate-gories and were measured at two points intime (1997 and 1998) by the representationpercentage of women and minorities (African,Hispanic, Asian and Native Americans) towhite Anglo-Saxons for executive board ofdirectors.

The percentage of minorities and femalesfor executive board of directors was deter-mined by dividing the number of nonwhitesand white females by the total number of exec-utive board of directors for both 1997 and1998. A mean average was calculated for theseyears. The purpose for using an average overtwo years was to better control for potentialchanges in the diversity ratio and to increasereliability.

Dependent variablesOrganisational performance has been mea-sured in numerous ways (e.g. market share,number of patented products and total assets)and researchers have commonly used finan-cial data such as the ratios of the stock pricesto earnings, and stock prices to book values(Murray, 1989). This study used two financialratios: return on assets (net income divided bytotal assets or ROA) and return on investment(net income divided by invested capital orROI). These measures are consistent withother studies on organisational performanceand are frequently used by market and finan-cial analysts in assessing a company’s perfor-mance (e.g. Shrader et al., 1997).

What appears to be a concern in moststudies on performance is controlling forchanges in the market as it may impact levelsof diversity within organisations (Richard,2000). We chose performance indicators fromtwo different points in time in order to controlfor these potential changes. Thus, the two per-formance measures were gathered from theCompact Disclosure database at two different

times (1993 and 1998). The five-year intervalserved two reasons. First, measuring perfor-mance at two different times better controls formarket fluctuations and indicate more consis-tent results (Katz et al., 2000). Second, theimpact of strategic decision-making on organisational performance typically requiresseveral years to observe. Thus, a five-yearinterval accounts for diverse candidates’potential contributions on strategic decision-making.

Control variablesIn addition to the independent and dependentvariables, we used three organisation andindustry control variables. Based on SICcodes, we grouped industries into production(SIC less than 4000) or service (SIC greaterthan 4000). Firms in production were coded as1 and firms in service were coded as 2. We alsocollected information about total assets fromcompact disclosure and collected informa-tion about the size of the board of directorsthat was self reported from the Fortunedatabase.

Analysis

The data were examined by correlation (seeTable 1) and regression analysis (see Table 2).First, correlation analysis was used to examinethe relationships among variables (boarddiversity, ROI98, ROI93, ROA98 and ROA93).Second, hierarchical regression analysis wasused to demonstrate specific effects of theindependent variable on the dependent vari-able while controlling for ROI93 and ROA93and other control variables. Control variableswere entered in the first step and then theindependent variable was added. A change inthe explained variance was used to determinelevels of significance. Cohen and Cohen (1980)suggest this technique as an appropriate way to examine changes in the dependentvariables.

Results

The means, standard deviations, reliabilitiesand correlation coefficients are reported inTable 1. Based on Table 1, board diversity hada relative high mean (m = 0.25). As expected,ROI time 2 and ROA time 2 were highly cor-related (r = 0.88). ROI time 2 was positivelycorrelated with board diversity (r = 0.21). ROAtime 2 was only marginally correlated withboard diversity. Board diversity was corre-



lated with industry (r = 0.20) with servicesector being more diverse than production.

The general hypothesis was tested by conducting a hierarchical regression analysis(Cohen and Cohen, 1975, see Table 2). Theresults indicated that only industry has a sig-nificant impact on ROI at time 2 in the firststep of the regression analysis (t = -4.37; p <0.01). This suggested that the production firmswere able to get better ROI than service firmsduring this time period. In the second step,board diversity had a significant impact onROI at time 2 when controlling for ROI at time1 (F = 13.46; p < 0.01).

Similar results were found with ROA, withsome changes in regards to the control vari-ables. Both ROA time 1 and industry had a sig-nificant impact on ROA at time 2 (t = 2.76 andt = -3.52, respectively). Board diversity had asignificant impact on ROA at time 2 (F = 8.59;p < 0.01). The results of this study supported

the original hypothesis stating that relativelyhigher levels of board diversity would lead tohigher organisational performance.

Discussion

This study investigated the relationshipbetween demographic diversity and organisa-tional performance, specifically for executiveboard of directors at aggregate organisationallevels. As expected, the results supported thehypothesis stating that executive board ofdirector diversity was positively associatedwith both return on investment and return onassets. Thus, diversity with boards of directorsappeared to have an impact on overall organ-isational performance.

The findings in this study were consistentwith other attempts at addressing diversity atorganisational levels (Murray, 1989; Richard,


Table 1: Mean standard deviations correlation matrix

M SD 1 2 3 4 5 6 7 8

1 ROI98 0.11 0.15 –2 ROI93 0.02 0.36 0.08 –3 ROA98 0.05 0.07 0.88** 0.15 –4 ROA93 0.02 0.07 0.24* 0.54** 0.33** –5 Industry 1.44 0.50 -0.35** 0.04 -0.38 -0.22* –6 Total assets 39a 7.5a 0.03 -0.25* -0.15 -0.17 0.27** –7 Board size 12.52 2.93 0.10 -0.04 0.01 -0.03 0.14 0.39** –8 Board diversity 0.25 0.11 0.21* 0.03 0.18 0.02 0.20* -0.08 -0.01 –

a In millions.* p < 0.05.** p < 0.01.

Table 2: Regression results for predicting ROI and ROA

ROI 1998 ROA 1998

b DR2 F b DR2 F

Control variables 0.17 5.30** 0.21 6.98**ROI 93 0.13 –ROA 93 – 0.25**Industry -0.40** -0.32**Total assets 0.13 -0.06Bound size 0.11 0.09Independent variableBoard diversity 0.32 0.09 13.46** 0.25 0.06 8.59**

* p < 0.05.** p < 0.01.


2000). While most past research has addressedthe impact of workforce diversity on firm per-formance, this research clearly supports thenotion that board of director diversity may beimportant above and beyond the effects ofworkforce diversity. The results also extendBurke’s research (2000) to an American sampleand includes racial diversity in addition togender diversity.

LimitationsThere are important limitations in this studythat need to be addressed. First, the sample isdrawn from large US corporations and theresults may not generalise to smaller compa-nies. Future research is needed to addressdiversity at board of director levels and itsimpact on organisational performance forsmaller companies. However, there are noapparent reasons why the results would differfor smaller companies; it is possible that diver-sity may actually show larger effects onsmaller organisations, as individual efforts aremore noticeable.

Second, given the research approach used inthe present study, it is impossible to determinewhether the diverse members actually do sig-nificantly differ in their behaviour comparedto non-diverse members. The results onlysuggest that diversity is positively related toorganisational performance. In order tounderstand behavioural differences otherapproaches, such as participant observationand ethnography of executive boards of direc-tors and corporate officers are needed.

Third, the regression analysis in this studysuggests that there is a linear relationshipbetween diversity and performance. However,it was impossible to determine how diversityactually affected organisational performanceas diversity representation increased, due tothe inherent range restriction in the represen-tation of women and minorities in these com-panies. One may speculate that if more datawere available the linear relationship betweendiversity and performance would probablychange to a more curvilinear relationship; thatis, the benefits gained from diversity wouldincrease with a decreasing rate, or flatten outas the number of women and minoritiesincreases.

Related to this is the fact that we have onlygiven temporal precedence to board diver-sity based on our premises about the betterdecision-making and enhanced creativity ofdiverse boards. However, the results could bethe converse. That is, the eventual higher levelof board diversity could be a result of higherlevels of ROA and ROI as company managers

feel more secure and hence open to morediverse board appointments.1

The study is also limited in terms of ourselection of variables and the assumptions wemake relative to the temporal effects of thosevariables on each other. Our diversity statisticis a two-year average reflecting firms’ experi-ence from the Fortune data. And the perfor-mance measures were taken concurrently andfive years prior to the diversity measures. Thegoal was not to establish causality but tocapture possible trends. This is obviously notideal, but does offer a fair amount of rigour.And even though our method and samplewere based somewhat on convenience, therehave been other studies that have contributedto our understanding of diversity and per-formance that have been based on similarFortune magazine samples (e.g. Murray, 1989;Catalyst, 1993; Daily et al., 1999).

Conclusions

But even with these limitations, this study hascontributed important information relating todiversity effects on performance. Accordingly,this research has significant theoretical, practi-cal and empirical implications. Theoretically,the results suggest that diversity may be asso-ciated with effectiveness in the oversight func-tion of boards of directors. The oversightfunction may be more effective if conflictemerges which allows for a broader range ofopinions to be considered. One of the centralissues of corporate governance is the degree towhich a CEO may have influence on the boardof directors. Agency theory (Schleifer andVishny, 1997) suggests that CEOs may needindependent oversight. If so, then diversity ofthe board of directors and the subsequent con-flict that is considered to commonly occurwith diverse group dynamics is likely to havea positive impact on the controlling functionand could be one of several tools used to minimise potential agency issues.

A case in point is the failing of the Enronboard of directors to provide control and over-sight for the company’s vast off-balance sheetactivities. In 1998, Enron’s2 annual report indi-cated 17 board members, only one of whichwas a woman. Compared with the 25 per centmean for our sample firms, Enron’s board wasnot diverse. Today it has become known thatthis board failed in its oversight function. Andthough not one of our sample firms, it seemsthat Enron’s board may typify some of theproblems associated with a lack of diversity;namely, lack of conflict and lack of breadth ofperspectives. It is not possible with the currentstudy to causally establish this connection, but



the conditions appear to be consistent withour findings.

Moreover, from a practical perspective,Burke’s (2000b) contention that there are notenough talented male directors to go aroundmight indeed be true. It may also be that thecontinuing reliance on male CEOs for boardmembers is growing increasingly less pra-ctical. In addition, the claims of Bilimoria andWheeler (2000), Mattis (2000) and Selby (2000)appear to be plausible in that women directorsmay be better reflecting the diversity of thefirm’s customer base and labour pool, andthereby may be enhancing firm performance.Therefore, our results support the contentionthat firms should expand their searchesbeyond traditional talent pools.

From an empirical perspective, the resultsreported herein shed some light on the rela-tionship between diversity and organisationalperformance, but also raise future researchquestions. First, there is a need to develop asolid theoretical framework to better under-stand diversity and its advantages in the busi-ness arena. This study provides alternativesuggestions as to the positive results betweendiversity and organisational performance.One aspect that needs further attention is generating theoretical models aimed at howdiversity improves the oversight function ofboards of directors. Perhaps women andminorities who serve on boards of directorsmay be more effective decision-makers. Thereis a common argument that women andminorities experience work disadvantagescompared to their white male counterparts(Davidson, 2002). Under this assumption,women and minorities must outperform manyof their white male counterparts in order tobecome promoted, which would suggest thatperformance is generated from higher expec-tations and qualification standards. Perhaps itminimises CEO influence on board of directoroversight. Perhaps people of the same raceand gender are less critical of each other’sideas. Or it could be that a broader informa-tion base is considered providing more effec-tive input into the decision-making process. Inany event, research is needed to address howdiverse boards operate differently from lessdiverse boards.

In conclusion, this paper has begun toaddress, at the firm level, what Burke andMattis (2000) term the outcomes “associatedwith increased representation of women at thetop”. In a business climate where much isdemanded from boards of directors and wherefirm performance is being subject to ever-increasing due diligence, the logic of diversi-fying boards becomes even more compelling.Our findings are that diverse boards are found

in conjunction with increased firm financialperformance. And regardless of whether it isthe cause or result of performance, it doesappear that firms should seriously considerthe potential for the enhanced representationand perspective diversity might create.

Acknowledgements

An earlier version of this paper was presentedat the Academy of Management annualmeeting in Denver, Colorado, August, 2002.The authors express appreciation to the twoanonymous reviewers whose suggestionsresulted in substantial improvements in thearticle.

Notes

1. We thank the anonymous reviewer for bringingthis possible explanation to our attention.

2. Source: http://www.enron.com/corp/investors/annuals/annual98/board.html.

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Niclas L. Erhardt is a doctoral student at theSchool of Management and Labor Relations atRutgers University. His research interests arediversity, social networks and knowledgemanagement and their relationship with performance at multiple levels.



James D. Werbel (Ph.D. Northwestern University) is a professor of management atIowa State University. His research interestsinclude organisational entry, work and family,and business ethics. He has published articlesin Administrative Science Quarterly, Journal ofApplied Psychology, Journal of OrganizationalBehavior, Personnel Psychology and Journal ofVocational Behavior. He currently serves on theeditorial review board for Human ResourceManagement.

Charles B. Shrader (Ph.D. Indiana University)is a professor of management at Iowa StateUniversity. His primary research interest is therelationship of formal strategic planning withorganisational performance. His researchappears in the Journal of Management, HumanRelations, Entrepreneurship: Theory and Practice,Journal of Business Ethics and Journal of BusinessResearch. He serves on the editorial boards ofthe Journal of Managerial Issues and DecisionSciences Journal of Innovative Education.


“The current high rate of CEO turnover indicates that executives simply are not ready forthe job when they get it. Companies must institute programmes and policies that developexecutives’ skills so that, when the time comes, they are ready for leadership roles.” FromTurnover at the Top, www.dbm.com

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