CHAPTER 12 Board Diversity

The board of directors is the most important decision-making body in a corporation. Boards are responsible for approving major strategic and financial decisions, such as mergers and acquisitions (M&As) and changes in capital structure, and also for the most important task of all, which is to hire and fire top executives. Not surprisingly, substantial research focuses on the workings of corporate boards. But researchers focus on varying aspects of boards. Some view boards as groups of diverse individuals who have different biases and prejudices and whose behavior is affected by social constraints and power relations. This perspective suggests that director heterogeneity plays a key role in how boards function. In contrast, most researchers in economics consider the board as a single entity. The only heterogeneity considered is whether directors are independent from managers. All other director characteristics are usually deemed unimportant unless they are somehow related to (formal or real) independence. More recently, an increasing amount of economic research on board diversity can be found in the academic pipelines. This chapter discusses current board diversity literature. The chapter mainly focuses on the recent contribution of economists to this topic but also provides some discussion of the noneconomic literature. Specifically, the chapter attempts to provide partial answers to three questions: What can be learned about diversity by studying boards? What can be learned about corporate governance from studies of board diversity? Is research on board diversity useful for policy discussions? Directors may differ in many important characteristics, such as educational and functional background, industry experience, social connectedness, insider status, gender, and race. The goal of this chapter is not to discuss each of these characteristics in isolation but to use some examples to illustrate what can be learned from this research area. These examples are predominantly taken from the literature on demographic characteristics of directors. In particular, this chapter focuses mainly on gender and only briefly discusses other characteristics. The chapter starts by discussing how economics and management scholars differ in their theoretical analyses of boards and board diversity more specifically. It then discusses a more practical issue: the costs and benefits of board diversity. After a brief overview of the literature on board diversity, the chapter examines