Why Board Diversity (or Lack of It) Matters to CEOs
A new study suggests the diversity of the board at a CEO’s prior gig can impact present performance.
When we talk about diverse boards, we usually talk about the present and the future. How diverse is your board now? What can you do to improve the diversity of your board in the future?
But the past matters as well. We’re all products of our experiences, after all, and the breadth of experiences CEOs have with people can influence how well-equipped they are to handle those future challenges.
A new study from a pair of researchers at Arizona State University, puts some hard numbers and research behind that notion. In their paper “Why Do Some Outside Successions Fare Better than Others? The Role of Outside CEOs’ Prior Experience With Board Diversity,” management scholars David H. Zhu and Wei Shen looked at 188 executives who joined Fortune 500 firms between 1994 and 2007, with an eye toward the differences in the boards they left and the boards they joined.
The two measured diversity through seven characteristics: age, gender, ethnicity, education level, Ivy League background, functional area of expertise, and industry background. They conclude that the more diverse past boards are, the more likely a CEO is to succeed. “As many new CEOs struggle to survive the first few years of their tenure,” they write, “our study emphasizes that outside CEOs’ prior experience with highly diverse boards can be a very relevant type of human capital that helps them better manage their relationship with the board and improve firm performance.”
More specifically, they write that a CEO whose board is more than one standard deviation (i.e., substantially) more diverse than at the previous job is 3.6 percent more likely to leave the job within three years. The board is impacted by this as well: Zhu and Shen report that directors are 6.9 percent more likely to leave post-succession if the new executive comes from a company with a less diverse board. And the bottom line feels it too: return on assets at firms in that situation was 7.2 percent lower than the industry average.
These are relatively marginal shifts: The lesson here isn’t that the CEO who arrives from a stereotypically pale/male/state environment will fail in a more diverse one. But the shifts are substantial enough to reinforce much of what we already understand about board-CEO disconnects. We know, for instance, that women and minority CEOs typically have a harder time at organizations, in part because they’re more likely to be hired in more challenging environments. And we know that, in addition to having board-diversity issues, associations rarely have diversity requirements for board seats.
“Because boards of directors play a critical role in influencing and evaluating a new outside CEO’s performance, we propose that a new outside CEO who can develop a more positive relationship with the board is more likely to succeed,” Zhu and Shen write. This is true as far as it goes. But that “more positive relationship” doesn’t occur in a vacuum, and a CEO coming from a less-diverse environment is less likely to see a problem.
So the challenge for the board members who are charged to manage the CEO hiring process—and to work with that CEO, once hired—is to understand what his or her background has been. What defines your current board? What defines the boards of your top candidates? The gaps in that definition—not just in terms of diversity but in a range of other issues—will have an impact on how effective a new CEO is in those first months on the job.
If you’re not eager to fine-tune diversity measures the way Zhu and Shen have, there’s another suggestion in their paper that can signal a potential CEO’s readiness for the gig: The candidate’s own history of board service.
“A seasoned CEO’s exposures to different corporate governance mechanisms at other organizations are also likely to influence the CEO’s view toward the focal firm’s corporate governance mechanisms, potentially influencing the firm’s relationship with various stakeholders,” they write. In other words, the more a CEO knows about governance, the better equipped that CEO will be to manage the differences that make leadership complicated—and motivating.
How has working with more- or less-diverse boards influenced your leadership? Share your experiences in the comments.