Changes in Board Demographic Diversity: A Performance Feedback Perspective

Abstract

Prior research on board demographic diversity has mainly focused on its performance consequences, with limited attention given to its antecedents. In this study, we develop a model for board composition by integrating the different elements of board demographic diversity with behavioral theory of the firm. Accordingly, we investigate how performance below aspirations influences board demographic diversity in terms of age, tenure, gender, and nationality. Our main argument is that firms will increase their board demographic diversity when faced with negative performance feedback to improve their monitoring processes, gain access to different resources, and enhance various processes of their boards with the expectation of improved performance. Our results show that when a firm’s performance falls below its aspirations, its board gender and nationality diversity rise, but its board age and tenure diversity decrease. These findings present important contributions to the fields of corporate governance, and to behavioral theory of the firm.

Keywords: Board of Directors, Demographic Diversity, agency theory, Resource Dependency Theory, Behavioral Theory of Board Governance, behavioral theory of the firm