📺 Stream EntrepreneurTV for Free 📺

More Diverse Corporate Boards Leads to Less Risk Taking Research shows that businesses of all sizes would be wise to include leadership from all walks of life.

By Ya-wen Yang Edited by Dan Bova

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

Corporations with more diverse boards of directors are less prone to take risks and more likely to pay dividends to stockholders than firms whose boards are more homogenous.

That's what my two colleagues and I found in a soon-to-be-published study of more than 2,000 publically-traded companies over a 13-year span. There was clear and convincing evidence that board diversity significantly curbs excessive risk taking.

Firms need to take risks to run business. However, excessive risk taking may endanger their survival. Therefore, investors and regulators have broadened the board's role to include corporate risk oversight, especially since the wake of the financial crisis in the late 2000s.

Related: When Company Culture Becomes Discrimination

Most research on board diversity has focused only on gender diversity. We used a broader-than-normal definition of diversity, encompassing gender, race, age, experience, tenure and expertise. We looked at company records and employed five variables to measure risk: capital expenditures, research and development expenses, acquisition spending, the volatility of stock returns and the volatility of accounting returns.

The first three variables are direct measures of corporate risk as firms can adjust risk by directly altering their investment policies and spending. The last two variables measure corporate risk taking using the volatility of firms' market and accounting performances.

We found that firms with more diverse boards spend less on capital expenditure, R&D and acquisitions, and exhibit lower volatilities of stock returns than those with less diverse boards.

Additional analysis showed that companies with more diverse boards were more likely to pay dividends and to pay a greater amount of dividend per share than corporations with less diverse boards. In general, risk-averse firms are more likely to avoid investment projects with uncertain outcomes and return cash to shareholders in the form of dividends.

Since firms with more diverse boards are more risk averse, we expect these firms to have a more generous dividend policy than those with less diverse boards. Results from our additional analysis confirm our expectation.

Related: An Executive's Tale of Persistence in Hiring a Diverse Workforce for a Scrappy Startup

Because our study only focused on publicly-traded companies, the effect of diversity on small- and medium-sized businesses is not known. Of course, diversity tends to help individuals see things from different perspectives. Having this insight can help avoid costly cultural mistakes at both large corporations and small businesses.

The study, which covered 1998 to 2011, showed that most corporate boards are relatively homogenous in gender and race -- being mostly white and male. There was, however, considerably more diversity when we factored in characteristics such as age, experience, tenure and expertise.

Measuring diversity based only on gender misrepresents the actual diversity in corporate boardrooms. We think that our work provides insights that company nominating and governance committees should consider when evaluating director candidates. Our work may also be of interest to regulators in determining the required disclosures of board composition for public companies.

On the one hand, diverse boards could reduce the level of corporate risk taking, discouraging innovative and risky projects. On the other hand, if firm management is overly aggressive in its use of corporate funds for investing in risky projects, our results suggest that more diverse boards could perform better oversight of corporate risk taking than less diverse boards.

Rini Laksmana, associate professor of accounting at Kent State University, and Agus Harjoto, associate professor of finance at Pepperdine University, collaborated on the research for the project.

Related: Getting Diversity and Inclusion Right in Your Company

Ya-wen Yang

Professor of Accounting at Wake Forest University School of Business

Ya-wen Yang is an assistant professor of accounting at Wake Forest University School of Business.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Side Hustle

These Coworkers-Turned-Friends Started a Side Hustle on Amazon — Now It's a 'Full Hustle' Earning Over $20 Million a Year: 'Jump in With Both Feet'

Achal Patel and Russell Gong met at a large consulting firm and "bonded over a shared vision to create a mission-led company."

Science & Technology

Brand New GPT-4o Revealed: 3 Mind Blowing Updates and 3 Unexpected Challenges for Entrepreneurs

Unveiling OpenAI's GPT-4.0: The latest AI with vision, auditory, and emotional intelligence abilities is revolutionizing industries. How will it affect your business?

Business Ideas

63 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.

Social Media

How To Start a Youtube Channel: Step-by-Step Guide

YouTube can be a valuable way to grow your audience. If you're ready to create content, read more about starting a business YouTube Channel.

Business Culture

Hybrid Work Is Failing Your Employees — Here's Why (and What You Can Do About It)

Business leaders are trying to choose between in-person and remote work. This leads to hybrid, which just isn't effective. Here's why.


Want to Be More Productive? Here's How Google Executives Structure Their Schedules

These five tactics from inside Google will help you focus and protect your time.