A Positive Impact of Diversity amongst the Board Members on the Organizational Performance - Case Study Example

Board diversity and firm performance Table of Contents Corporate governance and the role of boards 3 Theoretical perspectives on board diversity 4 Effects of gender diversity 6 Conclusion 8 Reference List 11 Corporate governance and the role of boards The board of directors is appointed on behalf of the shareholders for handing day to day operations of a company. The board of directors remains accountable to the shareholders and other interest groups who are associated in respect of functions of the business. During the annual general meeting, the board of directors is required to provide detailed reports to shareholders regarding performance of the company and specify the strategic plans of action for the future. The board of directors is also subject to re-election during the annual general meetings. The roles and responsibilities of board members are specified in the articles of association and memorandum of association. The primary responsibility of the board of directors is to ensure that a company continues to earn profits and experiences prosperity in long run. The board needs to direct the business affairs in a manner such that interests of all the stakeholders are met. The board of directors is required to oversee the issues associated with corporate governance, ethics and corporate social responsibility (Erhardt, Werbel and Shrader, 2003). It is essential for a company to hold board meetings periodically for discussing important business issues. In such meetings, the members are required to discuss important matters related to the company and assign responsibilities accordingly. Such meetings also facilitate analysis of the duties performed by individual directors and verification of efficiency in their performances. Every meeting requires having a chairperson who is elected at the beginning. One of the duties of the chairperson is to ensure that all matters mentioned in the agenda of the meeting have been discussed and decisions regarding important matters have been taken. The chairperson of the board is also spokesperson of the company and the board (Rose, 2007). The rights held by individual directors are delegated on the basis of collective decisions taken by the board members. The authority held by each director must be put in writing. The board is required to make sure that the executive authority is only given to those who can rightfully carry them out. There must be appropriate reporting systems so that the board is able to monitor the work being that is carried out by the directors. The primary role of directors is to set the mission and vision of a company and appropriate rules relating to business operations. The board is also responsible for values and culture existing within an organization. The board members also have to review the company policies and modify them, as and when required (Carter, Simkins and Simpson, 2003). The financial crisis of 2008 brought into light that capabilities and composition of the board members are of superior importance in order to make important decisions. Corporate firms are not isolated entities and form an integral part of the society. Hence, the actions and strategic policies of a company impact a wide number of stakeholders and the society as a whole. During the recent financial crisis, economists had pointed out that the strategic capabilities of board members in large organizations influence the financial markets. Board members are required to promote transparency and accountability so that good corporate governance can be implemented. Members must also prioritize enhancing the innovative abilities of an organization so as to create greater value in the long run. Studies have revealed that corporate governance strategies vary extensively between firms. Growth-oriented companies are found to alter members of the board occasionally, considering that such changes can influence overall organisational productivity (Miller and Triana, 2009). Theoretical perspectives on board diversity Diversity in board composition is considered as one of the most significant issues of corporate governance systems. Firms in the U.S have begun to epitomize that incorporation of a diversified board helps to improve overall functions of the same. Experts have, therefore, considered conducting research upon the relationship existing between board diversification and organisational productivity. Many nations across the world have established obligatory quota for appointing female directors as board members. Board diversity is mainly seen to exist in terms of gender and age composition. Organisational choices, decisions and behaviour are highly impacted by experience and background of the board members. The high level of uncertainty prevailing in the external environment makes it necessary for board members to have adequate amount of knowledge and experience. Experienced and skilled directors are capable of making right decisions and foresee the implications (N. Smith, V. Smith and Verner, 2006). Diversity may exist in composition of the board from numerous perspectives. Board diversity is largely seen to exist from the perspective of experience and expertise in most companies. The occupational diversity present amongst the board members plays a significant role in the process of strategic decision making and outcome achieved by a firm as a whole. A diversified board in terms of knowledge and understanding may help an organization to manage many critical issues with ease. Usually, it is seen that organizations prefer including diversified members with adequate knowledge in the fields of corporate law, finance and banking, strategy and operations (Roberson and Park, 2007). A certain number of board members are also preferred to have appropriate capabilities of managing relationships with the stakeholders, government and the community. The diversified knowledge and abilities of members leads to the development of functional differentiation. Such differentiation may enhance innovative abilities and enable the top level management to oversee a range of organisational departments. The social capital of a firm is enhanced when the board comprises diversified members in terms of occupation and knowledge (Adams and Ferreira, 2009). The social capital enables firms to develop organizational ties and gain greater access to information and financial markets. When the network of a business expands, it becomes easier for organizations to respond to the external environment changes. Firms operate in a dynamic and constantly changing environment. As a result, there is a necessity of extensive knowledge and capabilities in the management structure. The resource based view of management theory states that incorporating a diversified board has a positive impact upon a company’s management (Campbell and Mínguez-Vera, 2008). Diversity in board may also exist from the perspective of age. Experts are of the opinion that when existing directors retire from the board, they must consider appointing young members. Successful organizations usually desire to have a balanced board comprising both experienced and young members. Young members possess fresh and advanced knowledge regarding different aspects. Modern and updated skills of young members may help an organization to innovate new ideas and concepts of functioning. Studies conducted upon different firms in the U.S have revealed that age diversity amongst board members largely arises out of the fact that certain members serve for a longer period than the others. Furthermore, directors are usually appointed from the same level of administration, which mostly consists of members belonging to the same age group (Carter, et al., 2010). Studies conducted in respect of ethnic diversity reflect that boards appear to perform better with presence of ethnic differences. Boards of successful organizations consider appointing individuals who belong to a minority community of the society. The purpose of including individuals from diverse backgrounds is to induce the feeling amongst stakeholders that firms are not biased towards any particular group (Fields and Keys, 2003). In many nations, the government has established specific rules in respect of appointing representatives from different groups on the board (Jackling and Johl, 2009). Employee unions also at times demand the top level managers to appoint their representatives as board members, thereby enabling different employee groups to present ideas and participate in important decisions making process that affect their functioning. Having representatives from different groups and ethnic backgrounds provides with the opportunity to obtain diverse points of thinking and decision making (Nguyen and Faff, 2007). A diverse board also helps in promoting unity amongst employees of an organization. Most organizations operating in the current globalized environment are seen to operate in different parts of the world. As a result, it is essential to have individuals from different nationalities as representatives in multinational firms. Representatives from different nationalities as the members facilitate the board to have an international viewpoint of thought on various issues. If board members solely constitute members of the home nation, then management in the host nations will be unable to put forward their needs and recommendations (Bear, Rahman and Post, 2010). CEO duality is also an aspect that is considered by scholars while studying diversification amongst the board members. Duality arises when the CEO is also chairperson of the board. Experts believe that such duality helps in establishing more concrete leadership virtues in an organization. However, CEO duality makes firms rigid and less adaptable to changes of the external environment. Hence, firms appear to perform poorly and often fail to meet the objectives. In respect of the CEO duality, experts have established the theories of agency and stewardship. The agency theory prefers appointing different individuals as chairperson and CEO. The stewardship concept, on the other hand, supports CEO duality. In terms of strategic implementation, CEO duality allows firms to have straight leadership and implement strategies that are able to protect the stakeholders’ interests. CEO duality is also preferred by many organizations as it prevents rivalry between CEO and the chairperson. Although CEO duality is preferred by most shareholders, other interest groups are seen to resist the concept. When the chairperson is also CEO of the firm, there are high chances that decisions taken by the board will be biased (Sampson, 2007). Effects of gender diversity Research shows that boards with a balanced gender are able to perform well. Gender diversity refers to presence of both male and female directors as members of the board. In certain companies, the memorandum of association and the articles of association specifically state a minimum number of female directors that must be appointed as board members. Usually, most firms adhere to appointing one-third of the total number of board members as females. Gender diversity is seen to improve financial performance of most organizations. Gender diversified boards appear more efficient in terms of communication and information dissemination compared to non-gender diversified firms. Experts are also of the opinion that women directors on the board increase the firms’ efforts towards corporate social responsibilities (CSR). Women are considered to be more inclined and efficient towards making decisions, which can benefit the social environment. It was observed that by changing the experience and age ratio existing in the board, there was no considerable impact upon CSR activities (McIntyre, Murphy and Mitchell, 2007). Investing in CSR activities helps in increasing goodwill of an organization. It has also been identified that presence of gender diversity enhances the team performance. Women are inclined towards thinking more sensitively and from the long-term perspective. Men appear to concentrate mostly on short-term results and on technical aspects of various matters. Women also portray a tendency to perceive from the financial perspective. As a result, gender diverse boards are regarded as more conscious about costs (Marinova, Plantenga and Remery, 2010). Large firms must have a gender diverse board so as to maintain their public image. Boards of the U.K. firms are seen to be less gender diverse as compared to those in the U.S. Many Asian nations also stress upon including a quota of female directors on the board. Gender diversity largely exists in family owned business concerns, where female employees participate as members of the board through family ties. In the European nations, even though the proportion of family businesses is considerably high, yet the number of female directors as board members is lower compared to that of other developed nations. Researchers have stated that gender diversity is mainly suitable for those firms, which operate with scarce resources. Studies have also revealed that gender diversity mainly exists in the developed nations. Emerging countries are still struggling to incorporate more number of women as board members. This is largely due to the aspect that most emerging nations are bounded with traditional norms, which restrict women from playing an active role in the corporate scenario. Although women are given adequate employment opportunities as managers, they are not considered suitable for administrative positions (Kim, 2005). Organizations feel that women employees mainly concentrate upon demands of their families. The organisational needs are of secondary importance for most female employees. Hence, appointing female employees as board members may be considered as a risky aspect as other members can feel that the dedication on behalf of female employees is low. Such discriminatory approach may lower organisational goodwill. It may also hamper a firm’s ability to recruit female employees at lower levels. In order to maintain a high degree of goodwill and avoid gender discrimination, firms must employ adequate number of female employees as board members. Research has shown that companies with at least one female member on the board are most likely to perform better in terms of share prices in comparison with those who do not have any female as board members. As a result, balanced boards are expected to perform efficiently and garner greater goodwill. Corporate boards are an essential part of the knowledge pool that a firm possesses. It, thus, becomes essential that composition, size, characteristics and demography of the board are selected as per objectives and needs of an organization. Also, while incorporating diversity amongst board members, the stakeholders’ interests must be taken into account (Bonn, Yoshikawa and Phan, 2004). Conclusion Diversity existing amongst the board members is seen to have a positive impact upon the organisational performance at large. Diversity in terms of gender, experience, education, age and ethnicity appear to have a positive impact upon an organization. Experts are of the opinion that when skills and potentials of the board members are diverse, they are able to effectively understand various organizational issues and contribute towards the development of strategies. Diversity among the board members also induces the sense amongst managers and employees that the top level authorities have adequate knowledge regarding organizational matters. Hence, the managers and employees would remain cautious of their actions and avoid indulging in fraudulent activities. Directors can easily monitor activities of the lower level managers and ensure that the organization functions effectively. Usually, the board members appear to have an occupational background in finance, banking or corporate law. Preference is also given to members who have served as high level managers and administrators in other or same firms. Most organizations elect members of the board from within as they are seen to have more familiarity with operations and objectives of the business. Appointing external members is also commonly practiced when there is a shortage in the number of internal directors as board members. The board of directors is primarily envisaged with the task of monitoring activities of an organization and ensuring that its strategies and plans are aligned with the objectives set. The board is given the duty of overseeing that interests of all organisational members are met. Hence, while selecting the members, the board must ensure that they are adequately competent in fulfilling all requirements of the stakeholders. Having a diverse board enables a firm to have members with a variety of competencies. Board diversity is mainly observed from the perspectives of gender, age and occupation. Although diversity in the form of age and occupation has remained quite common, the last five years have witnessed an increasing trend of incorporating diverse gender on the board. On an average, boards with gender diversification appear to perform better than ones that are not. Gender diverse boards have a greater ability of tracking errors in operations of an organization. Gender diverse boards also exhibit easy adaptability with external environment conditions. The progression of female directors as board members had particularly increased in the U.S. The adaptation of policies for promoting gender diversity has mainly risen out of legal requirements. The changes in society have induced corporate legal regulators to form policies, which provide women with equal number of opportunities. The percentage of female members on board is found to be highest in the EMEA nations (European, Middle East and Africa), followed by the U.S. Asian countries have the lowest percentage of gender diverse boards. Sectors wise analysis reveals that firms operating in the banking, I.T and non-cyclical consumer goods sectors have the most diverse gender boards. Studies conducted reveal that healthcare companies have the least gender diverse boards. Considering potential advantages that gender diverse boards entail, it is recommended for most firms to consider improving gender diversity of boards. Globalization, technological advancement and access to better quality of life have rendered female employees equally capable of making important decisions and managing companies as the male ones. Thus, women with high potentials who have served an organization for a considerably long period must be considered for being recruited as members of the board. In terms of having gender diverse boards, there is still a long way to go for most companies. Firms operating in the healthcare sector are also required to enhance gender diversity so as to develop overall goodwill. Gender diverse boards appear to perform well in terms of costs. Appointing women as board members has benefitted several firms by stimulating a rise in their value. Changes in the governance environment have led towards gender diverse boards in many nations of the U.S. and Europe. Asian nations must also consider adopting diverse boards in terms of gender, keeping aside traditional norms and beliefs. Asian nations must concentrate upon the benefits of incorporating gender diversity upon return on equity, return on sales and capital invested. Reference List Adams, R. B. and Ferreira, D., 2009. Women in the boardroom and their impact on governance and performance. Journal of financial economics, 94(2), pp. 291-309. Bear, S., Rahman, N. and Post, C., 2010. 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