According to a study conducted by the Indiana University Kelley School of Business, diversity in terms of gender, race, and ethnicity has proven to be beneficial for companies operating in the United States.
However, the research also highlights the significance of diverse educational, industrial, and organizational backgrounds among managers and board members in fostering innovation in research and development (R&D), thereby generating both economic and social value.
“We looked at their experiences and not just their demographic background—the more functional aspect of diversity. We looked at outcomes and found radical innovation when directors had more diverse experience, helping to guide firms toward more cutting-edge exploration and success,” the researchers explain.
Broad experience
A broader range of educational backgrounds within corporate leadership can offer valuable perspectives and a more expansive outlook when confronted with uncertain circumstances.
Numerous companies are now addressing market and regulatory demands by actively seeking to enhance the demographic diversity of their corporate boards. The reliance on a narrow set of qualifications and traditional pedigrees for directorship roles restricts the pool of potential candidates, resulting in scarcity for individuals who are women or belong to racial and ethnic minority groups.
“Noting the benefits of diverse experiences in the board room, corporate executives can search beyond the tradition director pedigree (e.g. Ivy League-educated financiers), where female and minority individuals remain underrepresented,” the researchers explain. “In doing so, the firm can find more qualified candidates to assemble a demographically and intellectually diverse board, thus cultivating an inclusive corporate culture conducive to shareholder and stakeholder value creation.”
Limited supply
For instance, the researchers found that the relatively limited supply of women in the boardroom rendered them a scarce commodity, so if you have a single woman sitting on the boards of 20 companies, she’s likely to be spread extremely thinly and not as useful in her contributions.
The study encompassed an extensive dataset comprising over 11,000 observations of 971 firms that had filed one or more patent applications during the period spanning 1996 to 2014.
One notable case highlighted in the research paper exemplifies a highly innovative company that prioritizes diverse experiences and a collective range of expertise within its boardroom. Moderna, a prominent pharmaceutical and biotechnology firm, adopted an unconventional approach utilizing RNA technology to develop one of the COVID-19 vaccines.
Their advisory board consists of individuals with educational backgrounds in fields such as medical sciences, economics, journalism, and finance. Similarly, other companies may include board members who bring their expertise from areas like computer science and political science.
Supporting innovation
“From leadership’s perspective, critical thinking is very important in terms of guiding companies to take higher risks and evaluating the trajectory of their R&D efforts,” the researchers explain. “If some of the people in the board room aren’t trained in the more pragmatic disciplines—such as someone trained in journalism—it helps them to think between the lines and beyond the face value of a decision.”
This is crucial, as radical innovation is inherently riskier, so it’s important that directors are able to have an open and long-term mindset to help firms navigate this uncertainty.
“While there can be tension between short- and long-term value creation, it is not irreconcilable,” the researchers conclude. “Firms can potentially achieve the best of both worlds by recruiting female and minority directors with non-traditional experiences, who are likely mindful of both current shareholder value and future growth opportunities.”
