Although prior studies examine how different dimensions of board demographic diversity, such as differences in gender and ethnicity among directors, affect firm-level outcomes, no study to date has investigated whether these dimensions enhance cognitive diversity (i.e., different perspectives and thoughts) in the boardroom. The lack of research is surprising given institutional investors’ recent efforts to promote diverse board membership as a way to bring a broader range of perspectives and thoughts to the boardroom (e.g., BlackRock’s engagement on board diversity) and regulatory mandates requiring demographic diversity as a key feature of board quality and effectiveness.
 
In their paper, “Does Board Demographic Diversity Enhance Cognitive Diversity and Monitoring” published in The Account Review, Seungjoon Oh, assistant professor at Peking University HSBC Business School, Jun-Koo Kang at Nanyang Business School, Nanyang Technological University, and Seil Kim at Baruch College, City University of New York, fill this gap in the literature by examining whether demographic proxies for diversity translate into cognitive diversity measured by the likelihood of director dissent toward management proposals.   


 
A priori, it is unclear how demographic diversity affects cognitive diversity in the boardroom. On the one hand, because directors with diverse backgrounds represent a broader range of perspectives, they can enhance cognitive diversity in the boardroom. Prior studies of group decision making suggest that individuals feel more comfortable disagreeing with people who are dissimilar. In contrast, individuals in a homogeneous group are more likely to challenge harmful norms in the group, and individuals who do not share similar traits with other group members are less likely to voice unpopular opinions because they are less committed. Hence, how board demographic diversity affects cognitive diversity in the boardroom remains an empirical question.
 
Oh and his coauthors examine this important yet unexplored issue by utilizing a novel hand-collected dataset of board proposals, individual director votes, and voting outcomes of large Korean firms from 2001 to 2014. Since 2001, the Korean Commercial Act has mandated that all listed firms publicly disclose detailed information about the specifics of each proposal, the individual director votes, and the outcomes of these votes. Korea is one of few countries in which data on proposal-specific characteristics and individual directors’ voting behavior are publicly available.
 
They focus on five dimensions of demographic diversity—director age, tenure, industry experience, gender, and nationality—that have received significant attention in prior studies and from institutional investors and regulators. Because demographic diversity can affect cognitive diversity (measured as director dissent in the boardroom) either directly by bringing different perspectives to the boardroom or indirectly by changing the dynamics of groupthink in the boardroom, they investigate the effects of demographic diversity on cognitive diversity at both the director and board levels. The multi-level analyses allow us to separately assess whether directors with dissimilar demographic characteristics are more likely to dissent and whether directors are more likely to dissent when the board in general has greater demographic diversity.
 
Among the five dimensions of demographic diversity measured at the director and board levels, they find that tenure and experience diversity at both the director and board levels and gender diversity at the board level are positively related to the likelihood of director dissent. They also find that stock market reactions to director resignation announcements are more negative for directors who have ever dissented than for other directors, suggesting that cognitive diversity adds value to the firm. Moreover, following dissent-driven proposal rejections, firms experience higher Tobin’s q, lotheyr risk, better financial reporting quality, higher forced CEO turnover-performance sensitivity, and reduced overinvestment in R&D activity.
 
Overall, their results suggest that directors with different backgrounds and characteristics, particularly directors with diverse qualifications and skillsets and female directors, provide diverse opinions in the boardroom, thereby enhancing cognitive diversity. Moreover, this enhanced cognitive diversity helps increase firm value by rejecting risky, value-reducing proposals and by monitoring management more effectively.