NEW YORK (MainStreet) Surrounded by people with opposing views, corporate boards make better decisions. That's the conclusion reached by researchers at Wake Forest University in a study of some 2,000 companies spanning 13 years, published in ScienceDaily. A corporate board that features members of diverse cultures drives higher dividends and takes fewer risks than a boardroom full of "yes men."
"We found strong evidence that board diversity significantly curbs excessive risk taking," says Ya-wen Yang, assistant professor of accounting at the Wake Forest University school of business and lead author of the study.
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Well beyond gender, the study considered a range of dissimilarity, including race, age, experience, tenure and expertise.
Risk was defined by examining a company's capital expenditures, research and development expenses, acquisition spending, the volatility of its stock returns, as well as the variability of accounting results.
"We find that firms with more diverse boards are more risk averse, spending less on capital expenditure, R&D, and acquisitions, and exhibiting lower volatilities of stock returns than those with less diverse boards," says Yang.
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"On the one hand, diverse boards could reduce the level of corporate risk taking, discouraging innovative and risky projects," Yang says. "On the other hand, if firm management is overly aggressive in its use of corporate funds for investing in risky projects, our results suggest that more diverse boards could perform better oversight of corporate risk taking than less diverse boards."
A previous study conducted by MIT found that socially similar groups reach conclusions that are less accurate and consider fewer options than a diverse body of decision makers. In other words, the "social friction" produced by a range of views from people of different backgrounds causes us to become more objective.