Board Diversity: Corporate Boards

The directors’ board is the most essential decision-making organ within an organization. Boards are assigned various vital responsibilities such as authorizing principal strategic along with financial decisions. They are also involved with the signing of mergers along with acquisitions (M & A s). The most crucial responsibility of the board is to recruit and sack top executives. It is not a surprise that a considerable number of researches focus on the corporate boards’ operations. Within the recent years, it has become increasingly essential to conduct research on the impact of board diversity on the organizations’ overall performance.

Diverse researches have revealed that board diversity is quite advantageous and it should be incorporated within all corporate boards. Cultural, societal along with political evolution of the board membership views have in a way necessitated the need of incorporating demographic diversity within corporate boards. Gone are the days when corporate boards used to be comprised of men only. There are various forms of diversity which should be incorporated within all organizational boards (Carter et al 2010, p. 397).These forms can consist of demographic aspects such as ethnicity, gender, nationality along with race. The benefits associated with diversity within boards are such as development of fresh ideas and emergence of improved communication. Board diversity also leads to timely, as well as, effective making of vital corporate decisions.

Analysts have undertaken research on the impact of board diversity in a firm’s profitability along with stock valuation. The results which have been obtained in the research works indicate that board diversity brings about improved performance. Boards made up of individuals who are like minded tend to resolve problems in a slow and ineffective manner unlike those which have incorporated diversity within their boards. A renowned researcher, Catalyst, compared approximately five hundred firms within the United States in the course the years of 2001 to 2004 so as to demonstrate how a firm’s profitability is related to board diversity. Gender diversity has emerged as one of the techniques which can be applied to achieve impressive return benefits (Dobbin & & Jung 2011). Adams and Ferreira (2009) established that firms which have a considerable women population within their workforce realize high investment returns along with return equities unlike those with an insignificant number of women.

On the other hand, Dalton and Dalton (2010) contend that the strategic function of a board is made better by the presence of females within the board. This is mostly due to the fact that their experience is adequately aligned to the firm’s needs. For instance, they note that females have a competitive edge over men in matters regarding strategic planning. In addition, female directors have the potential of assisting the board in fulfilling its strategic goals. Other researchers such as Ferreira (2010) have offered other extra practical explanations why companies should include female employees within their boards. Ferreira alleges that the male employees who are already board members avoid extra responsibilities citing their tight schedules. Besides, most male Chief Executive Officers (CEOs) do not like being part of the board members. This implies that the high dependency of male employees as board members has negatively impacted on the overall performance of the boards. As a result, firms should restructure their procedures of recruiting board members. Moreover, female board members add significant symbolic value both in the firm’s internal and external environments. This in turn links the company with other various constituencies.

Board diversity also eases the firm’s accessibility to resources while at the same time establishing vibrant connections. For instance, boards with members who have a great wealth of experience in the financial industry can assist the firm in sealing deals with certain investors. On the other hand, politically connected board members assist the firm in winning public procurement contracts. Political connections also assist the firm in dealing with the regulators. However, these reasons do not expound on the essence of other various demographic characteristics, for instance; ethnicity, gender or even age. Board diversity also acts as a career incentive. This is due to the fact that junior employees view board diversity as the firm’s commitment to the welfare of minority employees (Dalton & Dalton 2010). The junior employees also get to comprehend that their minority status is not an obstacle to their career development within the firm. Moreover, board diversity is a sign of the firm’s commitment to the equal treatment of employees without any form of discrimination.

Board diversity also makes better the firm’s public relations, legitimacy along with investor relations. Various firms benefit differently by conforming to the expectations of the society. For instance, firms dealing with the manufacturing of consumer goods may desire acquiring a good social responsibility image within the society. Companies whose institutional investors are predominantly the most investors have to satisfy their diversity demands. Those companies have a higher probability of adhering to the demographic aspects of gender along with ethnicity while recruiting board members. For such firms, board diversity is a way of realizing legitimacy within the public, the government and the media view.

Even though the resource dependence along with human capital theories offer no specific predictions on the board diversity relationship with firm’s financial performance; they highly advocate for an affirmative relationship. Furthermore, the genre of diversity is essential in respect to human capital, as well as, resource dependence theories. Women along with ethnic minorities possess diverse human capital along with external connections (Carter et al 2010, p. 402). Therefore, they will not have similar effects to the board functions as men. In addition, the women will have an impact on the firm’s performance which is not similar to their male counterparts. It is apparent that in most scenarios board diversity is instigated by the company’s outside business environment.

On the other side, the agency theory suggests that diverse directors have a higher probability of becoming effective management monitors. However, it is worth noting that strict monitors can either bring about positive or simply negative effects on the company’s performance. Unfortunately, even though the agency theory relates board diversity to company performance, it offers a linkage which is overly unclear. However, social psychology theories tend to suggest that diversity does not necessarily have any impact on the board’s decisions. This is as a result of the boards’ inside group dynamics. Diverse directors can result in delay in decision making processes due to the coming up of various ideas from the members (Erhardt, Werbel & Shrader 2003, p. 105). More time is usually spent in making attempts to reach to a consensus on the various proposals raised by the diverse members.

Board diversity is also associated with other various potential negative impacts even though they are overweighed by the expected positive impacts. The negative impacts are such as emergence of conflicts along with poor cooperation between members. In this perspective, social psychological theories suggest that demographic characteristics which are salient have the potential of splitting groups into inherent subgroups (Erhardt et al 2003, p. 106). Dissimilarities in demographics also impacts negatively on the board’s cohesiveness. Communication breakdowns can also arise in the event that the senior executives segregate the external minority directors. Board effectiveness can also be deteriorated by the executives’ reluctance to make use of the same information as the as the minority external directors.

In the process of implementing board diversity within organizations, it is essential to avoid advocating for diversity at the expense of experience along with qualifications. In the attempt of making their boards diversified, some firms end up recruiting individuals who are both inexperienced, as well as, under qualified. Neglecting other vital recruitment requirements in the pursuit of diversity usually results to disproportionally young as well as inexperienced board committees (Singh, Terjensen, & Vinnicombe 2008, p. 51). Moreover, in case board diversity is left unchecked, it results to disagreements in interests as well as exaggerated agenda pushing. Certain members can get more concerned in fighting for individual group’s agenda while neglecting crucial corporate issues.

The board diversity effects on the firm performance are yet to be fully understood. Although there is voluminous literature which indicates that women behave differently than men in various situations, there is no sufficient evidence that women will not behave as men once they get into the board rooms (Carter et al 2010). Nevertheless, most researches indicate that board diversity and specifically gender diversity leads to transformations in the board’s efficacy, as well as, monitoring capabilities. These transformations are anticipated to have direct impacts on the firm’s profits, and indirectly on the stock performance. Previous cross-sectional researches allege that gender diversity within boards has positive impacts on stock performance along with profits. As a result, gender diversity within boards has become the core theme in most of the organizational bodies worldwide (Ferreira 2010). Globally, various governments are making concerted efforts to ensure that laws advocating for gender diversity are implemented within their state organs. However, the government should not advocate for board diversity on the basis of gender solely but should also insist on the other diversity forms such as racial diversity. Regardless of whether board diversity brings about increased performance or not, it is crucial that it is cultivated in all governmental along with private institutions all over the globe. In rare cases, board diversity can result in appointing unfaithful members into the boards.

Part Two

Within the Cranswick, Carnival along with Ocado group which are FTSE350 companies, corporate governance has undergone various transformations within the previous three years. The Ocado group has always made efforts to establish corporate governance standards which are considerably high. The company’s board is comprised of independent chairperson, several directors assumed to be independent along with board committees. In accordance to the United Kingdom’s corporate regulations, the board is comprised of three sub-committees. These are the nomination committee, audit committee, as well as, remuneration committee. However, within the previous three years the Ocado group has been found not to be complying with the corporate governance guidelines of United Kingdom. This is due to the fact that the number of independent directors within the company’s board is insufficient. The present board members ought to be replaced in accordance to the United Kingdom corporate governance guidelines. The board’s composition does not also satisfy the United Kingdom corporate governance guidelines. The management should therefore undertake changes within the company which will see the board company undergo the required transformation (Adams & Ferreira, 2007). In relation to the board diversity principle, it is also necessary that the board recruits more minority groups’ members within its board.

The Cranswick Company has also undergone various board transformations within the previous three years. The company which mainly deals with pork products has employment policies which advocate for diversity. The company has actually increased its employee population by a significant percentage within the previous three years. The company’s objective is to hire employees who satisfy its daily operations requirements. The company within this period sought the services of approximately 1200 agency employees in order to undertake promotional activities smoothly. In relation to the United Kingdom’s corporate governance laws, the firm’s board’s members made it certain that the company’s financial statements are released to the public every financial year. Within the same period, the board composition experienced some changes. Instead of having two executive directors, the number was increased to three. The board has however realized that it is more economical to have a slim board instead of increasing the board’s member numbers. The board is keen to keep diversity within its agenda so as to conform to the United Kingdom’s corporate governance laws. The company has also formulated various qualifications should be fulfilled by those desiring to become the firm’s non-executive directors. Such individuals are not expected to have served in the company as employees within the previous five years. They should also not have been involved in any business transaction with the company within the previous three years. Besides, they should not be part of the principal shareholders. Moreover, they are not expected to be related to the senior management of the company. These are some of the corporate transformations which the company has initiated within the previous three years. Nevertheless, the company should put into consideration formulating by-laws advocating for board diversity (Erhardt et al 2003). This is because as at present, the board is basically made of men. Upon going through the advantages associated with board diversity, company management will obviously realize that it has been losing a lot.

Regarding the Carnival Company, several corporate governance transformations have also been observed within the previous three years. The company has within the previous three years made it certain that it meets the corporate governance regulations. The company is committed in ensuring that its policies are well aligned to the diversity principals. The company continues to monitor its governance developments in both the U.S, as well as, the U.K. Its corporate governance structure has undergone various transformations which have seen the company establish the best international standards. All its boards’ members should satisfy the requirements set for corporate bodies within both of the countries within which the company operates. Within the cause of 2012, the company reviewed its emergency system as part of its corporate transformations. This was initiated so as to make better its safety record within the cruise sector. However, taking a look at its board’s composition, it is simply made up of men. The management should reconsider applying board diversity at least by absorbing some female experts within the board. This will be a way of ensuring gender diversity which is the key aspect of board diversity. As discussed earlier, gender diversity comes along with a great variety of benefits which the company cannot afford to miss. Generally, it can be concluded that within the previous three years, all the three companies under review have neglected the issue of board diversity.

Reference List

Adams, R. B., & Ferreira, D., 2009. Women in the boardroom and the impact on governance and performance. Journal of Financial Economics, Vol. 94, pp. 291–309

Carter, D. A., D’Souza, F., Simkins, B. J., & Simpson G. W., 2010. The Gender and Ethnic Diversity of US Boards and Board Committees and Firm Financial Performance. Corporate Governance: An International Review, Vol.18, No. 5, pp. 396–414

Dalton, D. R., & Dalton, C. M., 2010. Women and corporate boards of directors: The promise of increased, and substantive, participation in the post Sarbanes-Oxley era. Business Horizons, Vol. 53, pp. 257—268

Dobbin, F., & Jung, J., 2011. Corporate Board Gender Diversity and Stock Performance: The Competence Gap or Institutional Investor Bias? Web.

Erhardt, N. L, Werbel, J. D., & Shrader, C. B., 2003. Board of Director Diversity and Firm Financial Performance. Corporate Governance, Vol. 11, No. 2, pp. 102-111

Ferreira, D., 2010. Board Diversity. Web.

Singh, V., Terjensen, C., & Vinnicombe, S., 2008. Newly appointed directors in the boardroom: How do women and men differ? European Management Journal , Vol. 26 , No. 1 , pp. 48 – 58.

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