Just Diverse Among Themselves: How Does Negative Performance Feedback Affect Boards’ Expertise vs. Ascriptive Diversity?

Abstract

We investigate how negative performance feedback affects board diversity, which is instrumental in shaping a firm’s strategic change. When a firm underperforms compared with its aspiration, its board is motivated to promptly address the underperformance. The board needs to not only help search for strategic alternatives but also quickly build consensus around its strategic reorientation. These two motivations lead the board to value two dimensions of diversity among its members differently. On the one hand, to understand the problem of underperformance and find a solution, the board is motivated to seek new expertise, avoiding redundancy in the pool of expertise already represented in the boardroom. This results in a higher level of diversity in director expertise. On the other hand, the urgent need to build consensus prompts the board to value trust and solidarity and to avoid potential conflict among directors. Because people perceive others with similar ascriptive backgrounds as trustworthy, changes in the board of an underperforming firm are likely to yield a lower level of diversity in its members’ ascriptive backgrounds. These changes in board are affected by the committee chairs of the board whose power and influence are significant in the boardroom. Analyses of the boards of 733 U.S. listed manufacturing firms show that when a firm underperforms compared with its aspirations, it increases the board expertise diversity, but decreases the board ascriptive diversity. When chairs on the board are gender or racial minorities, the negative association between underperformance and the board ascriptive diversity is weakened. Supplemental Material: The e-companion is available at https://doi.org/10.1287/orsc.2022.1595 .