Board diversity and corporate innovation: Regional demographics and industry context

• Published date: 01 May 2021
• Author: Douglas Cumming,Tak Yan Leung
• Date: 01 May 2021
• DOI: http://doi.org/10.1111/corg.12365

ORIGINAL ARTICLE

Board diversity and corporate innovation: Regional

demographics and industry context

Douglas Cumming

1,2

| Tak Yan Leung

3

1

DeSantis Distinguished Professor of Finance

and Entrepreneurship, College of Business,

Florida Atlantic University, Boca Raton,

Florida, USA

2

Birmingham Business School, University of

Birmingham, University House, Birmingham,

UK

3

Open University of Hong Kong, Ho Man Tin,

Hong Kong

Correspondence

Douglas Cumming, DeSantis Distinguished

Professor of Finance and Entrepreneurship,

College of Business, Florida Atlantic

University, 777 Glades Road, Boca Raton,

Florida, 33431 USA.

Email: cummingd@fau.edu

Abstract

Research Question/Issue: What are the causes and consequences of board diversity

on innovation across a broad array of different types of diversity (education level,

gender, and age), while controlling for director expertise in science and business?

How do these different types of diversity affect innovation in different industry

contexts?

Research Findings/Insights: We use regional demographics in China (e.g., there are

in fact differences in the proportion of females by region) to instrument board

characteristics. We find that gender diversity is more pertinent in facilitating inno-

vation in male-dominated industries, not female-dominated industries. In low-tech

and nonpatent intensive industries, all types of diversity facilitate innovation,

whereas in high-tech and patent intensive industries, scientific experience matters

more than types of diversity. We find some evidence that age diversity results in

lower-quality patents, while boards with science expertise have higher-quality

patents.

Theoretical/Academic Implications: We develop unique tests to control for endo-

geneity of diversity in innovation by exploiting regional differences in demographics.

The theory and evidence suggest that specific types of diversity matter for innova-

tion to the greatest degree where the industry is characterized by the absence of that

characteristic.

Practitioner/Policy Implications: We examine the broad context of diversity in

organizations and examine whether there is a gap in firm's diversity insofar as we can

infer that diversity explains innovative activity within organizations. By identifying

which types of diversity matter for organizations, appropriate policy responses can

be identified to enhance innovation.

KEYWORDS

corporate governance, boards, diversity, innovation, policy

“Google CEO slams memo on gender; fired employee

files a labor complaint”L.A. Times, August 8, 2017

1

“Inefficient equilibrium …Women and economics …

The profession's problem with women could be a prob-

lem with economics itself.”The Economist, December

19, 2017

2

“…business leaders need to take “courageous”

actions to make sure their companies are more

diverse and inclusive in order to remain

competitive amid demographic and technological

changes in the workplace. …”CBC News, November

22, 2017

3

Received: 1 September 2019 Revised: 31 December 2020 Accepted: 6 January 2021

DOI: 10.1111/corg.12365

Corp Govern Int Rev. 2021;29:277–296. wileyonlinelibrary.com/journal/corg © 2021 John Wiley & Sons Ltd 277

1|INTRODUCTION

This paper considers the causes and consequences of internal corpo-

rate board diversity on innovation across a broad array of different

types of diversity (education level, gender, and age) both internal to

the firm in different external firm contexts. This topic of diversity,

governance and management is timely in terms of media and regula-

tory focus and timely in terms of academic attention, particularly for

small innovative firms (Hülsbeck et al., 2019). Diversity is an integral

part of the culture in many countries around the world. Quotas for

board gender diversity (and not other types of diversity such as age,

profession, or education) have become law in numerous countries,

such as Norway, France, India, and Israel. Little is known about the

economic and innovation consequences of a growing and diverse

array of external stakeholders with competing interests, coupled

with the growing diverse internal structures of firms (Bradley &

Klein, 2016). How well do policies on corporate board diversity pro-

mote and facilitate economic outcomes, such as innovation outcomes,

among firms?

Despite the timeliness of the topic, the evidence on the impact of

board diversity is mixed. We review this evidence in the next

section of this paper. Our analysis departs from prior approaches in a

few straightforward respects to help resolve some conflicting evi-

dence in the prior literature. First, we make use of regional demo-

graphics to explain the extent of board diversity. This first step is

helpful to establish causal inference from diversity to firm-level out-

comes. Second, we theorize that the value of diversity to a firm

depends on the type of diversity and the nature of the industry in

which the firm operates. For reasons of procedural justice and moral

hazard, firms with boards that are not diverse, with respect to the

characteristics—such as gender—of the board members, suffer worse

innovation outcomes. Our theoretical propositions are based on a

simple insight. Gender diversity on boards is likely to lead to fewer

innovative outcomes in female-dominated industries because the nov-

elty brought by additional females by virtue of their “femaleness”on

any particular board will be marginal given the industry is female-

dominated; by contrast, a female perspective is more likely to be inno-

vative in a male-dominated industry where “femaleness”potentially

offers unique insights. The general principle we learn from this

“female”context is that diversity matters for innovation where that

diversity characteristic adds a unique perspective or characteristic that

has not been fully utilized to create industrial value.

We extend these arguments to other contexts as well to consider

a broad array of board characteristics beyond gender, including diver-

sity in education level and age, while also considering expertise in sci-

ence and business. The value of these diversity benefits is more

important in industries that themselves are not characterized as being

diverse. The marginal impact to a firm's innovation success from diver-

sity will be scant within an industry that has already seen the value of

such diversity in other organizations. By contrast, industries character-

ized by their homogeneity will be less likely to have seen or developed

a perspective regarding the value of openness to diverse approaches

to enhance innovation capacity.

We test our theories with large sample evidence from China

between 2008 and 2013. China is a natural setting to examine these

ideas for a variety of reasons. China is now the world's largest pro-

ducer of patents and enjoys the second largest gross domestic prod-

uct (GDP) in the world. As well, there is substantial heterogeneity in

the regions, boards, and industries, which creates a compelling setting

for empirical tests. The data examined are strongly consistent with

the theory. Gender diversity facilitates innovation in male-dominated

industries, not female-dominated industries. In low-tech and non-

patent intensive industries, all types of diversity facilitate innovation,

whereas in high-tech and patent intensive industries, scientific diver-

sity matters more than other types of diversity. The data offer some

guidance in respect of suggesting that age diversity results in lower

quality patents, while boards with scientific expertise result in higher

quality patents.

We note that we do not test specific policies designed to pro-

mote diversity and potential effects on innovation. Instead, we exam-

ine the broad context of diversity in organizations, and examine

whether there is a gap in firm's diversity insofar as we can infer that

diversity explains innovative activity within organizations. By identify-

ing a role of diversity in facilitating innovation, and which types of

diversity matter for organizations, appropriate policy responses can

be identified to enhance innovation.

The findings have a number of implications for future research.

Most importantly, as a general lesson, the value of diversity for inno-

vation is context dependent. Diversity matters if the industry has not

seen much of a diverse perspective. However, not all types of diver-

sity have equal value. Our empirical tests point to specific types of

diversity and institutional settings where diversity has relatively more

value.

Further, our work suggests that there are significant implications

for policy and practice. In the tech world, there is ample reason to

believe that the value of diversity has not been fully utilized, particu-

larly with events involving Google and related incidents, where

women are clearly less valued or not welcome.

4

And there could be

room for policy makers to take a stronger role for mandating diversity

standards in regions where market failures and institutional biases are

an impediment to diversity.

This paper is organized as follows. The next section formulates

testable hypotheses. Thereafter, we introduce the data and empirical

tests. After presenting the main results and robustness checks, the

final sections provide a discussion of the policy implications and offer

concluding remarks.

2|THEORY DEVELOPMENT AND

HYPOTHESES

The causes and consequences of organizational diversity within

firms are often the subject of scholarly examination. The analysis of

diversity in organizations is normally isolated to one type of diver-

sity. However, there is a more diverse nature of diversity than a sin-

gle dimension, such as gender, and herein, we consider gender

278 CUMMING AND LEUNG