Just Diverse among Themselves: Negative Performance Feedback and Board Diversity

Abstract

This paper studies how negative performance feedback changes the composition of the board of directors, who are instrumental in shaping major strategic changes. When a firm experiences a performance shortfall below its aspirational level, it is motivated to not only search for alternative strategic options but also seek efficiency in its decision-making process. We theorize that these motivations lead the board to adapt differently along two dimensions of diversity. On one hand, the board of an underperforming firm increases expertise diversity based on directors’ job-specific experiences, which broadens the scope of knowledge in exploring multiple possible remedies to the current performance problem. On the other hand, the board of an underperforming firm decreases ascriptive diversity based on directors’ inherent and impermeable social categories that creates rigid intergroup boundaries for quick consensus building and efficient implementation of the strategic alternative. We further theorize that these tendencies are moderated by having minorities as chairs, either in terms of expertise or ascriptive backgrounds. Based on the boards of 727 U.S. public firms in manufacturing industries, we find that boards of underperforming firms diversify in their expertise pool (e.g., industry experiences, board experience, and functional background) but homogenize in their ascriptive backgrounds (e.g., gender and ethnicity). When the chair of the board is an ascriptive minority (e.g., female or non-white), the effect of negative performance feedback on ascriptive diversity is weakened. Theoretical and practical implications are discussed.