Improving Corporate Governance With Functional Diversity On Ftse 350 Boards: Directors’ Perspective

Dr Rita Goyal, Nada Kakabadse, Andrew Kakabadse

Research output: Contribution to journalArticle

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Abstract

Boards presently are considered the most critical component in improving corporate governance. Board diversity is increasingly being recommended as a tool for enhancing firm performance. Academic research and regulatory action regarding board diversity are focussed mainly on gender and ethnic composition of boards. However, the perspective of board members on board diversity and its impact is mostly missing. Moreover, while strategic leadership perspective suggests that a broader set of upper echelon’s characteristics may shape their actions, empirical evidence investigating the impact of less-explored attributes of diversity is almost non-existent. While the research on the input-output relationship between board diversity and firm performance remains equivocal, an intervening relationship between board diversity and board effectiveness needs to be understood. This article addresses all three limitations and explores the subject from board members’ perspective.
The article presents the findings of qualitative, exploratory research conducted by interviewing 42 board members of FTSE 350 companies. The data is analysed thematically.
The findings of the research suggest that board members of FTSE 350 companies consider the diversity of functional experience to be a critical requirement for boards’ role-effectiveness. Functionally diverse boards manage external dependencies more effectively and challenge assumptions of the executive more efficiently, thus improving CG. The findings significantly contribute to the literature on board diversity, as well as to Strategic Leadership theory and other applicable theories. The research is conducted with a relatively small but elite and difficult to approach set of 42 board members of FTSE 350 companies.
The article makes a unique and significant contribution to praxis by presenting the perspective of practitioners of CG – board members. The findings may encourage board nomination committees to seek board diversity beyond the gender and ethnic characteristics of directors. The findings may also be relevant for policy formulation, as they indicate that functionally diverse boards have improved effectiveness in a range of board roles.
Board diversity is about building a board that accurately reflects the make-up of the population and stakeholders of the society where the company operates. The aim of board diversity is to cultivate a broad range of attributes and perspectives that reflects real-world demographics as boards need to continue to earn their ‘licence to operate in society’ as organisations have a responsibility to multiple constituents and stakeholders, including the community and the wider society within which they exist. Building social capital through diversity has value in the wider context of modern society and achieving social justice.
The article makes an original and unique contribution to Strategic leadership theory by strengthening the argument of the theory. The article explores beyond widely researched attributes of gender and ethnicity on boards and explores the impact of a less-researched characteristic of directors - their functional experience. Moreover, the article opens the 'black box' of corporate governance - boards, and present the perspectives of board members. The findings indicate that board members in FTSE 350 boards define diversity more broadly than academics and regulatory agencies often do.
Original languageEnglish
Pages (from-to)113-136
Number of pages24
JournalJournal of Capital Market Studies
Volume3
Issue number2
Early online date24 Oct 2019
DOIs
Publication statusPublished - 2019

Keywords

  • Strategic Leadership theory
  • Corporate Governance
  • Board effectiveness
  • Functional diversity on boards
  • FTSE 350 boards

ASJC Scopus subject areas

  • Strategy and Management

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