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Faculty Insights

How Diverse Boards Impact Corporate Strategic Change

By Wisconsin School of Business

August 20, 2014

Diverse boards are often viewed as ideal spaces in which to initiate strategic change, a company’s attempts to align itself with its environment to maintain a competitive advantage.
Indeed, that is often the case. However, when a firm’s performance is low, boards can be susceptible to threat-rigidity effects, which means they are less open to new ideas and different perspectives. This may create conflict and impede decision-making, hindering a firm’s ability to adapt.
Maria Triana
My colleagues and I integrated threat-rigidity theory and team diversity research into our examination of how board gender diversity, firm performance, and the power of women directors interact to influence the amount of strategic change a firm is able to enact.
We used a sample of 462 Fortune 500 firms to explore the linkages among board gender diversity, women directors’ power, firm performance, and strategic change.
Our results suggest that diversity is double-edged, because it can propel or impede strategic change, depending on firm performance and the power of women directors.
Consistent with our predictions, we found that the most positive effect of board gender diversity on the amount of strategic change occurs when firm performance and the structural power of women on the board are both high.
In fact, in this situation, increased gender diversity creates above-average change in strategic resource indicators. We believe this is because there is less threat to a firm’s success and therefore less need to constrict ideas, so women on the board have the influence to have their diverse perspectives heard.
The most negative effect of board gender diversity on strategic change occurs when firm performance is low and the power of women is high. In these situations, we believe that the incompatibility between a threatened firm’s need to reach swift consensus to take action and the ability of powerful women to assert influence impedes strategic change.
Given these findings, there may be strategic business reasons not only to appoint women to boards, but to place them in powerful positions, enabling them to be more influential and aid the firm during times of success.
However, companies must also understand the contingencies surrounding the effects of diversity in order to best use directors’ skills and resources. This presents an opportunity for organizations to implement board processes for managing diversity following times of low firm performance, such as proven conflict management techniques or change management teams.
Now that women hold 16.6 percent of board seats, it is possible to examine theoretical linkages between board gender diversity and firm outcomes. We hope to see future research that measures board processes, including cohesion, conflict, and stress, that might explain why board gender diversity influences strategic change. We also hope to see studies examining how diversity and power interact to influence decision-making on boards of directors.
My future research will look at men and women in leadership roles and how they are evaluated by their subordinates, depending upon their leadership styles and their job qualifications relative to those of their subordinates.