Abstract
Are shareholders better off hiring directors with in-depth specialties in the company’s core business or hiring directors with broader perspectives? This study addresses the question by investigating the relationship between directors’ career diversity and firm performance. It employs Tobin’s Q, total shareholder return, and return on equity as measures of firm performance. Accordingly, board career diversity has a significant and positive effect on firm performance. Moreover, we find that board directors with diverse industry experiences create value for firms via advisory (e.g., R&D and capital expenditures) and monitoring (e.g., equity compensation) roles. Given that diversity in career matters, corporations can seriously consider board composition and promote career diversity among board members.
Highlights
Are shareholders better off hiring directors with in-depth specialties in the company’s core business or hiring directors with broader perspectives? This study addresses the question by investigating the relationship between directors’ career diversity and firm performance
The results suggest that directors having same-industry experience positively affects firm performance, albeit from a somewhat different angle than industry-diversified directors
Once we identify which board directors of a firm-year have diverse industry experience, we calculate the proportion of these directors among all directors for each firm-year and designate the variable as industry-diversified directors (IDD), which is our main proxy for within-director career diversity on the board
Summary
This study addresses the question by investigating the relationship between directors’ career diversity and firm performance. Are shareholders better off hiring directors with in-depth specialties in the company’s core business or hiring directors with broader perspectives? Directors with diverse backgrounds can contribute to firm performance by providing valuable advice from diverse perspectives and representing the interests of different stakeholders. This study introduces and examines board diversity from a new perspective: the career diversity of board directors. The following question emerges: are shareholders better off hiring directors with in-depth specialties in the company’s core business or hiring directors with broader perspectives?
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