Thursday, August 7, 2014

Diversity Plays An Essential Role in Reducing Corporate Risk-Taking

A well-established rationale for increasing diversity in the workplace, in general, and particularly in the corporate world, is that it makes good business sense.

Based on a new study, there may yet be another compelling reason for diversity companies to grow their diversity efforts and strengthen their commitment to it, as it is beneficial in decision-making. Diversity is found to play an essential role in reducing corporate risk-taking.

The Science Daily reports the finding of a study by researchers at Wake Forest University that corporations with more diverse boards of directors are more likely to pay dividends to stockholders and are less prone to take risks than firms whose boards are more homogenous.

The SD report quotes Ya-wen Yang, assistant professor of accounting at the Wake Forest University School of Business as saying,  
"We found strong evidence that board diversity significantly curbs excessive risk taking. 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." 
Several factors help explain why this is so. 

According to a NYMag article, the researchers think, because diverse groups have a bit more social friction, and this friction can be good if you're trying to throw up roadblocks between a board and hasty, ill-conceived decisions. "Compared to diverse boards, homogeneous boards form consensus more easily and quickly, and thus are more likely to experience diffusion of responsibility, reach the 'let's try it' mentality, and exhibit risk taking behavior," they write. Diverse boards, on the other hand, "face greater challenges in communicating and accepting one shared decision."

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, a report by Mainstreet says. This gives credence to views that diversity contributes to greater group creativity.

The latest study, according to Mainstreet, considered a range of dissimilarity well beyond gender, 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.

Clearly, bringing more diversity to the corporate world reaps intangible benefits as well as financial profits, making it indeed a good business idea.

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