The Effects of Board Diversity on Overall Firm Performance

This thesis analyzes the relationship between diversity within U. S. boards of directors and overall firm performance. In the summer of 2020, various political and social movements erupted, fighting against police brutality and racial violence. These events were followed by an influx of diversity, equity, and inclusion (DEI) frameworks across corporate America. It was becoming increasingly clear that diversity within company leadership was lacking. A company’s board of directors, who is responsible for creating value for shareholders, was not an accurate representation of the people it served. First, I will begin by discussing the current state of diversity in corporate boards by discussing reasons firms diversify, benefits and risks of a diverse board, and major barriers to diversification efforts. A main goal of directors is to maximize shareholder return, which prompts the question: is there a financial benefit to having directors of different backgrounds, skills, and perspectives? In the second part of my thesis, I explore the correlation of board compositions and the company’s financial performance through a study of 45 Fortune 500 companies. Previous studies have mixed results; some studies concluded that there is a positive correlation, some found a negative correlation, and others were inconclusive. While the results of my study did not demonstrate that a relationship between firm performance and diversity exists, I want to emphasize that it does not mean that diverse boards do not contribute at all to the success of the board. There are various factors that contributed to my results, but regardless of my findings, I believe that further research of this topic is necessary and will be beneficial for those in corporate governance.