Risk assessment: How a diverse board can help you balance corporate risk

The Brief
What goes for organizations holds for boards too: Diversity breeds success.
Anyone who’s ever been in a position of power knows leadership is a game of nerve, a balancing act of high- and low-risk decisions. Stay on the safe side of the street a little too long, and your company misses out on opportunities for growth (we’ve talked before of the dreaded CEO complacency syndrome). But live on the edge for too long, and you can run an organization into the ground. This is why CEOs fill boards with experienced advisers and stakeholders, who know how to keep things on an even keel.

There are lots of different kinds of experience, of course. If you want to optimize a board’s utility, treat it like a portfolio, and diversify. A new study from Wake Forest University shows that what works at the organizational level holds true for boards as well. Researchers examined more than 2,000 companies over 13 years, and found that corporations with greater board-member diversity took fewer dumb risks. These same companies were also more likely to pay dividends to shareholders. And those dividends paid out more per share than those offered by companies with less-diverse boards.

“Corporations with greater board-member diversity were more likely to pay dividends to shareholders, and those dividends paid out more per share than those offered by companies with less-diverse boards.” tweet this


In building a diverse group, execs should think beyond gender and ethnicity. The Wake Forest researchers looked at age, expertise and tenure in their evaluation and found that even for corporate boards that are predominantly white and male, differences in experience and age lead to “social friction,” which prevents hasty and selfish decision-making. The communication challenges endemic to a more diverse board actually encourage “increased group creativity and information sharing.”

Or, as MIT professor and Big Data savant Alex Pentland told us, “a more diverse network makes for better decisions, and better decisions make more money. … Shaking up your network makes you smarter.”

“If you want to optimize a board’s utility, treat it like a portfolio, and diversify.” tweet this


The Takeaway: Firms should focus on building diversity into their boards, and they shouldn’t limit themselves to traditional differentiating categories. Engaging with contacts from other fields, backgrounds and even ages helps keep leaders in check.

Tzipora Nissan is a New York-based writer. She is a frequent contributor to the RelSci blog. 

RelSci is a technology solutions company that helps create competitive advantage through a crucial yet vastly underutilized asset: relationship capital with influential decision makers. 

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