Professor Walid Ben-Amar Provides a Closer Look at Board Diversity and Firm Performance

How is firm performance affected by board composition? For family firms, board diversity tends to improve the quality of board strategic decisions, but only at low levels, says a new study based on 289 M & A decisions by Canadian firms from 2000-2007.

“Strategic decision-making may be adversely affected when board diversity is too high and the advantages of close-knit governance – coherence, trust and long-term orientation – are lost,” says the Telfer School’s Walid Ben-Amar, who published the findings in the British Journal of Management. “On the other hand, introducing diversity on the board at low levels may bring new ideas and perspectives to the controlling family without threatening their coherence.”

Professor Ben-Amar and his co-authors from HEC Montreal conclude that diversity on the board of directors is generally a good thing, adding to openness and decision-making analytical quality. But they found that each company has to find its optimal governance design based on its own ownership structure, industry, risks, and business model.

“The general picture that emerges is that a balance should be struck between control and freedom when the time comes to select board members. Good governance is probably more about the building of such a balance than the simple implementation of pre-specific rules.”

Measures of “demographic diversity” (DD) and “statutory diversity” (SD) were used in the study. DD refers to the culture, nationality, gender and experience of directors. SD refers to laws and best practices designed to promote their independence from management.

The findings confirmed that a higher level of diversity in general is not a panacea for all types of firms in board strategic decision-making. Also, DD has a clear and non-linear effect on M&A performance while SD has a limited influence.

Explains Dr. Ben-Amar: “Our research shows that rather than providing strict rules, regulatory authorities should encourage companies to design the composition of the board according to their organization and financial character and reach an optimal level of diversity.”