Corporate Board Diversity and Performance: Nonlinear Dynamics

Abstract

In 2018, California became the first state in the US to require gender diversity on public corporate boards in the state, and since then board gender diversity is a hot debate in the US. To provide timely evidence on this issue, we investigate the relation between corporate board diversity and financial performance and how shareholders' board gender diversity proposal impacts firm performance in the US. Consistent with the resource dependence theory and social identity theory, our findings show that the overall relation between board gender diversity and firm performance presents an inverted U-shaped nonlinear form. That is, when the corporate board becomes more gender-diverse, the gender-diverse board could incorporate different knowledge and non-redundant information in the decision-making process and gain a competitive advantage due to a better firm image of diversity. This indicates a positive effect of board diversity on corporate performance. However, while board diversity level reaches a turning point, the dysfunctional group processes (conflicts, miscommunication, and loss of trust caused by distinctiveness among different gender groups) outweigh the positive influences from gender diversity on firm performance through the deterioration of the quality of board decisions, showing that a negative relation between board diversity and firm performance emerges and becomes dominant. In addition, investors' active engagements through proxy proposals enhance the positive effect of diversity and alleviate the negative effect of diversity. Our study provides a different conceptual lens to evaluate the impact of board gender diversity on firm performance and provides insights for regulators to make proper decisions in increasing board diversity in the US.