There is a growing awareness of corporate leaders and investors that diverse boards help businesses better serve consumers, customers employees, and communities. In addition recent debates over gender and racial equity at work have led to state-level legislation to encourage and encourage diversity in corporate boardrooms.
Numerous studies have shown that greater board diversity is associated with better company performance. A 2015 McKinsey study found that companies in the top quarter of diversity in racial groups were 33 percent more likely than those in the bottom quarter to perform better than them. Another study in 2016 revealed that board members with women are associated with lower earnings volatility and a better stock liquidity as well as improved investor perceptions about firm value.
These findings support the theory that cognitive diversity can improve board decision-making and increases the ability of the board to effectively guide and supervise management. The diversity of demographic traits, such as race, age, and gender, also contributes to a more inclusive and respectful culture within the boardroom. This helps to promote healthy discussions and open exchanges of ideas.
Another factor to consider is functional diversity that refers to the wide range of experience and education that board members bring to the table. The diversity of functional attributes such as tenure and educational background enhances the board’s ability to understand the cognitive capacities of the group members (such as talents and knowledge), leading to better decisions for the board.
Boards must be proactive in encouraging diversity and should employ various methods to attract new members. The most important thing to do is to make sure that directors are aware of the importance of incorporating diverse viewpoints into boardroom discussions. Boards naturally encourage discussion of different perspectives in the event that everyone is aware of the benefits to the company.
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