Corporate Boards’ Political Ideology Diversity and Firm Performance
46 Pages Posted: 11 May 2012 Last revised: 24 Aug 2015
Date Written: May 10, 2012
We investigate whether diversity in points of view in corporate boards, as captured by the diversity in political ideology of board members, can affect a firm’s performance. We employ personal political contributions’ data to measure political ideology distance among groups of inside, outside directors and the CEO. Our empirical evidence strongly supports the notion that outside directors’ monitoring effectiveness is more likely to be enhanced when their viewpoints are distinct from those of management. We find that ideologically diverse boards are associated with better firm performance, lower agency costs and less insiders’ discretionary power over the firm’s Political Action Committee (PAC) spending. Taken together, our results lead us to conclude that multiplicity of standpoints in corporate boardrooms is imperative for board effectiveness.
Keywords: Corporate board’s diversity, corporate governance, firm performance
JEL Classification: G34, L25
Suggested Citation: Suggested Citation