Director Heterogeneity and its Impact on Board Effectiveness

Abstract

In the first section of the dissertation, I examine whether boards that are heterogeneous along six dimensions--age, gender, race, tenure, rank, and function--perform their most critical tasks better than boards that are more homogeneous. Using director information obtained from multiple sources and supplemented by extensive hand-collection, I estimate board heterogeneity along each of the dimensions and two aggregate measures of board heterogeneity: demographic and occupational. I find that occupationally diverse boards exhibit significantly higher CEO performance-turnover sensitivity, greater likelihood of significantly improved performance following CEO replacement, and lower excess compensation. The findings are mainly driven by tenure and rank heterogeneity. There is no evidence that any dimension of the demographic heterogeneity impacts board effectiveness in a statistically meaningful way.

In the second section of the dissertation, I explore why certain dimensions of heterogeneity seem to impact board effectiveness more than others. Focusing on gender, I show that director heterogeneity improves board effectiveness for the subset of firms that committed to diversity prior to regulatory pressures, but not for the subset of firms that changed the director mix in response to external calls for diversity. This finding points to tokenism as the likely explanation for lack of impact of demographic heterogeneity on boards' ability to act effectively. Consequently, it suggests that imposing regulatory pressures on firms to increase the level of diversity may not make boards more effective: although director heterogeneity can improve board effectiveness, such improvement may not be achieved if heterogeneity is adopted in response to regulatory pressures rather than voluntarily.