Changes in board demographic diversity: a performance feedback perspective

Official URL: https://www.xcdsystem.com/aom/program/A5p5d1k/index.cfm?pgid=891&sid=30542&abid=82210

This paper analyzes how negative performance feedback affects firms’ decisions to change the demographic diversity of their board of directors. In line with behavioral theory, we argue that only the firms deviating below from their performance aspirations are expected to embrace changes in their boards’ demographic diversity. Our main argument is that firms will increase their board demographic diversity in terms of age, tenure, gender, and nationality when faced with negative performance feedback to improve the effectiveness of their boards while they are performing their monitoring and service tasks with the expectation of improved performance in return. We find large support for our predictions based on data from Standard & Poor firms from 2007 to 2018. The findings of our study present important contributions to the corporate governance, board leadership literatures, and to the behavioral theory of the firm.