Just Diverse Among Themselves: How Does Negative Performance Feedback Affect Boards’ Expertise vs. Ascriptive Diversity?

Abstract

We investigate how negative performance feedback affects board diversity, which is instrumental in shaping a firm’s strategic change. When a firm underperforms compared with its aspiration, its board is motivated to promptly address the underperformance. The board needs to not only help search for strategic alternatives but also quickly build consensus around its strategic reorientation. These two motivations lead the board to value two dimensions of diversity among its members differently. On the one hand, to understand the problem of underperformance and find a solution, the board is motivated to seek new expertise, avoiding redundancy in the pool of expertise already represented in the boardroom. This results in a higher level of diversity in director expertise. On the other hand, the urgent need to build consensus prompts the board to value trust and solidarity and to avoid potential conflict among directors. Because people perceive others with similar ascriptive backgrounds as trustworthy, changes in the board of an underperforming firm are likely to yield a lower level of diversity in its members’ ascriptive backgrounds. These changes in board are affected by the committee chairs of the board whose power and influence are significant in the boardroom. Analyses of the boards of 733 U.S. listed manufacturing firms show that when a firm underperforms compared with its aspirations, it increases the board expertise diversity, but decreases the board ascriptive diversity. When chairs on the board are gender or racial minorities, the negative association between underperformance and the board ascriptive diversity is weakened.

Financial performance feedback, institutional ownership and green innovation: evidence from China

“…It has been long shown that firms change their strategies after performance changes. For example, Jung et al (2022) find that low-performing firms are more likely to increase board expertise diversity. Vidal and Mitchell (2015) argue that high-performing firms tend to use divestures to slack resources.…”

Why embrace a double-edged sword? A behavioral theory of board political capital building

“…Meanwhile, the desire to seek solutions encourages decision-makers to initiate certain changes and to undertake potentially higher risks associated with the search or change (Bromiley, 1991; Lant et al, 1992). Indeed, the search will inevitably require changes in certain issues identified as potential sources of the performance shortfalls and introduce the risk of failing to fulfill the desired benefits or even engendering additional losses (Jung et al, 2022; Posen et al, 2018).…”

“…decisions with both potential benefits and downsides), including board diversity (e.g. Jung et al, 2022), corporate social responsibility (e.g. Smulowitz et al, 2020; Wang et al, 2021), financial misconduct (e.g.…”

“…More generally, selecting new directors with PBs also exhibits firms’ greater attention or resource allocation to the political domain, thereby representing changes in strategic orientation. Jung et al (2022) demonstrate that given the deep involvement of board directors in a firm’s strategic reorientation, “negative performance feedback affects board diversity, which is instrumental in shaping a firm’s strategic change” (p. 1). Similarly, selecting a director connected with a government agency may reflect a firm’s new orientation to cultivate the connection with that agency to obtain favorable treatment.…”

“…This logic has been used to explain an increasingly broad scope of decisions that create the potential for both gain and loss outcomes (i.e. risk-taking, Kotiloglu et al, 2021; Posen et al, 2018), including firm political activities (Rudy and Johnson, 2016; Xu et al, 2019) and board diversity (Jung et al, 2022). Thus, problemistic search logic offers an appropriate and fine-grained explanation for board political capital building.…”