How underperforming companies derail diversity in the boardroom

When a company is going through a tough period, they need to change course. But why does this negatively impact diversity at the top of the business world?  

When shares in General Electric fell sharply in 2018 amid some difficult press coverage, the industrial giant declared it would overhaul its board, whittling down numbers but bringing in “new experts with fresh perspectives” to pull the firm out of the doldrums. 

But the knock-on effect was to make the board less diverse – at least in terms of ethnicity and gender. During the revamp, a disproportionate number of women and minority ethnic directors left, including the company’s only female Asian director, Andrea Jung. In other words, new perspectives meant, in practice, a higher proportion of white men on the leadership team. 

Despite years of pressure and numerous initiatives for better inclusivity at the top of large US corporations, progress is patchy and boardrooms remain stubbornly resistant to diversity. Inclusivity apparently goes out of the window – in the boardroom at least – during tough times. 

What affects diversity in corporate governance? 

To find out more, we examined the performance and subsequent boardroom decisions over a 15-year period by 727 major US-listed companies. We wondered if there was a pattern in leaders’ reactions when company performance dipped or if rival firms enjoyed more success. 

When the chips are down, companies look to their bottom line. Prior research shows bosses feel pressure to appease shareholders by making swift strategic changes in a bid to better their companies’ performance. But few studies have examined what goes on among the leadership team itself. Poor performance, we found, provokes the board to question its own contribution and make changes. 

“When there is an extreme downturn, you need to set a new direction,” one director told us. “Everything is possible: you can be a completely new company, or you can think of merging, or you can change the board.” 

Boardrooms remain stubbornly resistant to diversity

We discovered that boards deliberately seek out new expertise among a variety of industries and backgrounds in the belief that fresh insights and new networks might rescue their companies’ performance. This is an intuitive and natural response under pressure. 

But while these fresh perspectives came from a range of sectors, that was as far as diversity went. New arrivals in the boardroom resembled the key individuals who were already there – usually white and male. In other words, a board’s makeup became more homogenous, even if their combined experience became more diverse. 

In no way does this exclusion appear deliberate. From individual interviews, we found directors instinctively sought executives they felt they could communicate with easily and trust. This, they felt, would enable them to build consensus swiftly around new proposals and strategies, and get things done without conflict.  

Diversity just among themselves 

In times of crisis, improving the financial performance for shareholders trumped any other priorities. Racial and gender diversity – which indeed are perceived as the most powerful differences among us and can thus effectively bring the breadth of experience to the board – are often ignored. Instead, expertise diversity, valued as a solution to mend the performance problem, is achieved among white-male directors.  

But we did make some more hopeful discoveries for inclusion. When a female or racial minority director  was chair of a board, then other directors, usually white and male, were less prone to hiring people who looked like them in times of crisis.  

This might be because the chairperson is trying to retain their power and influence among the board and resisting homogeneity that might exclude them. Or it may be that other board members avoid highlighting their differences to protect their own positions. This finding only holds if a female or racial minority leads a board – it’s not enough simply to have a more inclusive team without diversity at the very top. 

We’ve been able to shed light on some of the hidden but powerful barriers to greater inclusivity at the top of major US corporations despite enormous pressure to improve. We haven’t established whether directors’ drive to hire people they identify with is deliberate or unconscious – indeed, no directors we spoke to were overtly aware of it. But leadership teams and diversity champions must note that this tendency toward homogeneity – which is not even a straightforward solution to the crisis – is quietly but firmly sitting on their mindset, especially during the performance downturn, which any firm can experience at any time. 

This article draws on findings from "Just Diverse Among Themselves: How Does Negative Performance Feedback Affect Boards' Expertise vs. Ascriptive Diversity?" by HeeJung Jung (Imperial College London), Yonghoon G. Lee (Hong Kong University of Science & Technology) and Sun Hyun Park (Seoul National University).