Companies With Diverse Boards Take Fewer Reckless Risks

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There’s recent evidence that diverse groups act in a more intelligent manner than homogeneous ones, and a new study from researchers at Wake Forest, Kent State, and Pepperdine takes that idea a bit further, testing whether diverse corporate boards are less likely to make the sorts of risky decisions that can take down a company (or an economy). In short: yes. And it probably has to do with the awkwardness and initial lack of cohesiveness that diversity can bring with it.

For the study, the researchers analyzed a bunch of data pertaining to more than 2,000 companies’ boards’ diversity (not just ethnic diversity, but also age, gender, areas of expertise, and other categories), as well as how they ranked with regard to some established measures of corporate risk-taking over a 13-year span. They found that the more diverse a company’s board was, the less likely it was to engage in risky behaviors, the more likely it was to issue dividends, and the larger those dividends were likely to be.

Why? Basically, the researchers think, because diverse groups have a bit more social friction, and this friction can be good if you’re trying to throw up roadblocks between a board and hasty, ill-conceived decisions. “Compared to diverse boards, homogeneous boards form consensus more easily and quickly, and thus are more likely to experience diffusion of responsibility, reach the ‘let’s try it’ mentality, and exhibit risk taking behavior,” they write. Diverse boards, on the other hand, “face greater challenges in communicating and accepting one shared decision.”

This, combined with previous research showing that “diversity can lead to increased group creativity and information sharing,” can help explain these results. When it’s naturally assumed that everyone’s on the same page, it’s easier to make thoughtless, risky decisions.

Companies With Diverse Boards Take Fewer Risks