Organization Leader and decision making - Discussion

Strategic Organization 2015, Vol. 13(2) 117 –140

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Do minority leaders affect corporate practice? Analyzing the effect of leadership composition on governance and product development

Alison Cook and Christy Glass Utah State University, USA

Abstract This study examines the effect of racial/ethnic minority CEOs and diverse corporate boards on corporate governance and product development. We test an author-constructed dataset of corporate practices, CEO race/ethnicity, and board racial/ethnic composition in Fortune 500 firms from 2001 to 2010. Findings suggest that diverse boards are positively associated with effective corporate governance practices and product development. Moreover, an interactive effect occurs between a diverse board and the race/ethnicity of the CEO in that corporate governance strengths and product innovation for the firm are increased when a White CEO operates with a diverse board. Thus, while promoting individual minority leaders is important, board diversity is paramount for achieving corporate benefits.

Keywords Governance, innovation, leadership, organizations, race/ethnicity

Introduction

Over the past two decades, the corporate elite in the United States and abroad has undergone a significant demographic shift, resulting in increased diversity among corporate decision makers. Boards of Directors (BODs) as well as corporate officers are increasingly characterized by gender diversity (Vinnicombe et al., 2008), social class diversity (Maclean et al., 2014), national and cul- tural diversity (Harvey and Maclean, 2010), and racial/ethnic diversity (Zweigenhaft and Domhoff, 2006, 2011). In response to these trends, scholars have sought to analyze the effects of diversity on organizational outcomes. Most scholarship to date has focused on the effect of diversity on broad performance measures and/or on diversity outcomes (e.g. Jackson and Joshi, 2011; Kochan et al.,

Corresponding author: Alison Cook, Department of Management, Jon M. Huntsman School of Business, Utah State University, 3555 Old Main Hill, Logan, UT 84322-3555, USA. Email: [email protected]

564109 SOQ0010.1177/1476127014564109Strategic OrganizationCook and Glass research-article2014

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2003; Van Knippenberg and Schippers, 2007). While some studies conclude that diversity among decision makers increases firm performance (Bear et al., 2010; Brown et al., 2002; Fondas and Sassalos, 2000; Miller and Triana, 2009; Torchia et al., 2011), others find that diversity increases conflict and competition and therefore limits performance (Hogg et al., 2012; Pelled et al., 1999; Williams and O’Reilly, 1998). Other scholars have considered the effects of diversity among deci- sion makers on diversity outcomes such as segregation, wage disparities, and mobility opportuni- ties (Bilimoria, 2006; Carter et al., 2003, 2010; Cohen and Huffman, 2007; Skaggs et al., 2012; Stainback and Kwon, 2012; Terjesen and Singh, 2008).

Despite growing attention to the effects of diversity on firm practices, relatively little scholar- ship has focused on the impact of racial/ethnic diversity among leaders beyond broad performance measures or organizational diversity outcomes. Thus, we do not yet fully understand the impact of leadership integration on organizational practice, policy, or strategy. Yet, as Zweigenhaft and Domhoff’s (2006, 2011) analysis of the background and career trajectory of racial/ethnic minority leaders demonstrates, these individuals bring a degree of functional diversity with them into cor- porate board rooms which may impact corporate practices in ways not yet fully understood. This study fills an important gap in the literature by analyzing the effect of racial/ethnic composition among CEOs and BODs on firm governance and product development. As such, this analysis makes an important contribution to research on diversity, leadership, and organizational practice by providing a more complete understanding of the impacts of minority leaders on organizational practices by moving beyond diversity and performance and identifying the effect of leadership diversity on a range of firm-level practices.

Effective corporate strategy development requires cooperation among a firm’s governing body (Papadakis and Bourantas, 1998; Thong and Yap, 1995). Not surprisingly, CEO attitudes toward strategy and practice are key predictors of policy adoption and, as such, have been the focus of much research in the field (Thong and Yap, 1995; Waldman et al., 2006; Waldman and Siegel, 2008). However, there is growing evidence that BODs also play a critical role in shaping firm outcomes. Boards serve as a critical intermediary between investors and other stakeholders and the executives charged with running the organization. Thus, boards not only monitor and advise CEOs but also influence firm strategy, policy, and long-term planning (Demb and Friedrich Neubauer, 1992; Matsa and Miller, 2013; Westphal and Zajac, 1995, 1997). Indeed, board members are an important source of information and ideas about opportunities for change and growth across a range of issues (Charan, 1998; Tuggle et al., 2010), and board members view themselves as impor- tant contributors to strategic planning (Demb and Friedrich Neubauer, 1992).

Thus, corporate leaders at the CEO and board level are critical for shaping firm outcomes in the areas of product development and governance (Miles et al., 1978). Governance includes the devel- opment of new and effective administration policies and practices, including strategic planning, transparency, and accountability, as well as effective systems of human resource management (Elenkov et al., 2005; Hoffman and Hegarty, 1993). Product development includes the develop- ment of new products through innovation and the strengthening of existing product lines. Both of these outcomes are strongly influenced by top leadership teams comprising the CEOs and BOD (Papadakis et al., 1998). This study tests the effect of a racial/ethnic minority CEO separately and in interaction with racial/ethnic diversity on the board.

To analyze the effect of leadership diversity on firm practice, we rely on an author-constructed dataset that includes measures of governance and product development as well as the race/ethnicity of the CEO and BOD among Fortune 500 firms from 2001 to 2010. We test two sets of hypotheses. The first set of hypotheses tests the business case for diversity thesis, which predicts that the presence of a minority CEO or minority board members will improve firm governance and product develop- ment. The second set of hypotheses tests the power in numbers thesis, which predicts that the benefits

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of diversity are dependent on the relative representation or the relative influence of individual minor- ity leaders. We find mixed support for both perspectives. While minority CEOs have no independent impact on firm practices, board diversity—measured in terms of representation and influence—is associated with strong governance and product development. Our analysis also reveals interesting interactions between CEO and board characteristics, whereby firms with traditional CEOs and diverse boards are more effective at pursuing innovation and stronger in governance compared to other firms. Overall, our findings suggest that while promoting individual minority leaders is impor- tant, board diversity is paramount for achieving diversity-related benefits.

Theory and hypotheses

The power of one: The business case for diversity

Proponents of the business case for diversity argue that diversity is conducive to—even critical for—innovation and competitiveness (e.g. Bassett-Jones, 2005; Østergaard et al., 2011). According to this perspective, demographic diversity can provide important sources of information, knowl- edge, and experience that contribute to organizational growth (Cox et al., 1991). Scholars argue that diversity exposes the firm to a broader network of information, ideas, and perspectives and, as such, leads to improved problem solving (Milliken and Martins, 1996; Van der Vegt and Janssen, 2003; Williams and O’Reilly, 1998). Empirical support for this position confirms that, under cer- tain conditions, diversity is associated with enhanced creativity and consideration of a broader range of alternative solutions, which in turn lead to improved problem solving and innovation (Cox and Blake, 1991; Jackson et al., 1995; Torchia et al., 2011).

Many proponents of the business case for diversity root their arguments in agency theory, which posits that non-traditional incumbents, such as women and minorities in corporate settings, bring new and different perspectives, backgrounds, and information sources to bear on complex problem solving (Francoeur et al., 2008). Agency theory further holds that such non-traditional incumbents will be able to exercise power and authority over decision making processes in ways that embed their alternative perspectives into decision outcomes and thereby balance the competing interests of external and internal stakeholders (Carter et al., 2010).

Research specific to board diversity supports this perspective. Diverse boards are associated with greater transparency and accountability as well as more effective communication and more innovative problem solving (Bear et al., 2010; Brown et al., 2002; Fondas and Sassalos, 2000; Hambrick et al., 1996; Miller and Triana, 2009; Torchia et al., 2011). Some scholars have even found that diversity among board members is associated with improved communication between CEOs and boards, which also results in improved firm reputation and more collaborative strategic planning (Brown et al., 2002; Fondas and Sassalos, 2000; Torchia et al., 2011). Importantly, board diversity is also associated with a greater commitment to corporate social responsibility, suggest- ing that board diversity has a significant effect on governance priorities (Post et al., 2011; Wang and Coffey, 1992). In their study of board composition effects in Canada, for instance, Brown et al. (2002) found that board diversity was associated with improved measures of strategy evaluation, more effective monitoring, higher levels of accountability, and a greater focus on non-financial performance outcomes. Finally, under certain conditions, diverse boards have been associated with reduced conflict and a greater range of resources available to top decision makers (Burke, 1997; Westphal and Milton, 2000), characteristics that can support or even induce innovation and crea- tive problem solving.

There is compelling evidence that the integration of leadership teams is associated with changes in firm strategy and policy and an increased likelihood that a firm will pursue effective governance

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and product development strategies. The mechanisms that explain these associations center on dif- ferences in the functional background of non-traditional leaders. Minority leaders are assumed to bring different experiences, perspectives, and priorities with them into the executive suite and the boardroom. Indeed, previous scholarship suggests that differences in functional background can significantly expand the range of alternative perspectives considered among decision makers and thereby improve decision quality (Cannella et al., 2008). Beyond evidence of the positive impacts of diversity on firm outcomes, there is also a strong perception that diversity on the leadership team enhances strategic outcomes. Speaking about the importance of diversity among leaders, Sun Oil’s former CEO, Robert Campbell, argued, “often what a woman or minority person can bring … is some perspective a company has not had before … Those perspectives are of great value, and often missing” (Carter et al., 2003: 34).

There is evidence that minority executives as compared to White executives bring different functional background characteristics with them into leadership positions—including job-relevant differences in job history, education, and tenure, as well as differences in perspective and experi- ence (see Hülsheger et al. (2009) for review). The business case for diversity posits that these dif- ferences in background and perspective will translate into stronger governance and product development for firms.

In their study of women and minority CEOs and directors in the Fortune 500, Zweigenhaft and Domhoff (2011) concluded that “members of underrepresented groups who made it to the top were consistently better educated than white men” (p. 11). Specifically, minority corporate leaders are more likely than their White male peers to have degrees from prestigious academic institutions and more likely to have advanced graduate and professional degrees (Zweigenhaft and Domhoff, 2006). Importantly, minority executives are more likely than their White peers to have MBAs (Bell and Nkomo, 2001), an educational credential associated with the adoption of strong governance practices as well as innovation in the areas of research and development (Wincent et al., 2010). This suggests that the educational credentials of minority CEOs and directors are more likely to expose them to cutting edge practices in the field, including in the areas of governance, product development, and innovation.

Minority executives also tend to have different career trajectories compared to their White peers. Minority executives are more likely to have non-business backgrounds and experience in areas such as community affairs, human resources, and other support functions (Collins, 1997; Hillman et al., 2002). While race-specific job trajectories may lead to fewer opportunities for advancement, differences in functional background of these leaders can also mean that when they are promoted to top positions, minority leaders bring a different knowledge base due to their expo- sure to different areas of practice. And, indeed, minority leaders are more likely than White leaders to express strong support for responsible governance (Bell and Nkomo, 2001). In fact, minorities’ greater exposure to non-productive areas could further strengthen their commitment to corporate social responsibility, fairness, and accountability—all characteristics of strong governance.

Minority leaders also bring different perspectives and priorities as a result of their status as outsiders within. There exists a significant racial/ethnic gap in authority not explained by human capital or background, with the gap largest at the top of the organization (Smith, 2005). As a result, minority executives are rare and, compared to their White peers, are more likely to have experi- enced barriers, discrimination, and bias prior to their promotion to top leadership positions (Bell and Nkomo, 2001; Collins, 1997). Minority leaders are also more likely to perceive structural bar- riers and weaker workplace supports compared to their White counterparts (McGuire, 2002; McGuire and Reskin, 1993). As a result, minority leaders are less likely than White leaders to express comfort with organizational culture, norms, and politics (Bell and Nkomo, 2001). These experiences may influence minority leaders to place a greater emphasis on strong governance,

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especially mechanisms that promote strong and equitable corporate cultures, including transpar- ency, accountability, fairness, and social responsibility.

Differences in the functional background of minority executives therefore lead to differences in the perspectives, priorities, and attitudes of these leaders and their White peers. Both types of diversity—background and attitude—are associated with creativity, innovation, and effective gov- ernance (Perry-Smith, 2006; Woodman et al., 1993). Thus, diversity in the functional background of top leaders will enable top leadership teams to achieve stronger governance practices and more effective product development as compared to leadership teams that lack diversity.

Research specific to corporate leadership supports this conclusion, although most research to date has focused on gender rather than racial/ethnic diversity. For instance, gender diversity is associated with improved performance and innovation because women are more likely to promote open and democratic debate and greater engagement of alternative perspectives (Fondas and Sassalos, 2000). In fact, the more diversity among decision makers in terms of skills, knowledge, and experience, the more likely firms will innovate (Østergaard et al., 2011). In a study of corpo- rate leaders in the United States, Miller and Triana (2009) found that gender and racial diversity were associated with enhanced firm reputation and innovation, a finding supported by additional corporate research in Norway (Torchia et al., 2011).

Diversity is also associated with stronger governance practices (Kramer et al., 2006; McInerney- Lacombe et al., 2008). In a survey of women corporate leaders in the United Kingdom, for exam- ple, Singh and Vinnicombe (2004) found that diversity can encourage stronger governance policies. Similarly, Adams and Ferreira’s (2009) study of US firms concludes that diverse boards are associ- ated with more effective monitoring functions in that women directors are more likely than men to hold CEOs accountable for poor performance. These findings suggest that differences in the func- tional background and perspectives of minority leaders may impact governance and product devel- opment in significant and positive ways. Thus, the business case for diversity perspective predicts the following hypotheses:

Hypothesis 1a. Racial/ethnic minority CEOs will be positively associated with corporate gov- ernance strengths and product development.

Hypothesis 1b. Racial/ethnic minority board members will be positively associated with corpo- rate governance strengths and product development.

Power in numbers: Beyond tokenism

While the business case for diversity perspective predicts that the presence of racial/ethnic minori- ties will strengthen governance and product development, the power in numbers thesis predicts that absent a critical mass of minority leaders, diversity may impede innovation (Hogg et al., 2012; Pelled et al., 1999; Williams and O’Reilly, 1998). Scholars critical of the business case perspective argue that diversity reduces cohesion, increases conflict, and obstructs communication (Ely and Thomas, 2001; Ibarra, 1993; Kirkman et al., 2004; Knight et al., 1999; O’Reilly et al., 1989; Tajfel, 1982; Williams and O’Reilly, 1998). Diversity can be a particular impediment to innovation, a process which tends to exacerbate conflict among and between work groups due to the risky and uncertain nature of change (Eisenhardt et al., 1997; Elenkov et al., 2005). In fact, research specific to corporate boards confirms that diversity can enhance conflict and pose constraints on action (Goodstein et al., 1994).

Furthermore, while research on the effects of diversity rarely considers the impact of leadership composition at different levels of the organizational hierarchy, there is reason to expect that the

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ability of minority CEOs or minority board members to affect organizational change is dependent on the presence of other minority leaders on the leadership team. Theory and scholarship on token- ism suggest that, in the absence of multiple or influential minority leaders, individual minorities are unlikely to affect business outcomes. Due to the scarcity of minorities in top leadership posi- tions, individual minority leaders may suffer from token status. Token status affects individuals who are in the numerical minority and is associated with high visibility, exaggerated differences, isolation, and scrutiny (Kanter, 1977; Moore, 1988; Yoder, 1991). Token pressures become more intense at the top of the organizational hierarchy where minorities are often the only or the first minority to serve at that level (Bell and Nkomo, 2001). And because racial/ethnic minorities are assumed to be less competent, intelligent, and successful than their White counterparts (Bobo and Kluegel, 1993; Ragins, 1997), top minority leaders may even be subject to hostility, resistance, and dislike by peers and subordinates (Heilman et al., 2004; Nesbitt, 1997).

Scholarship on tokenism suggests that token leaders face significant challenges that reduce their ability or willingness to affect organizational change. First, token pressures limit the ability of minority leaders to exercise the full range of their leadership capabilities because scrutiny and negative bias lead to constraint, frugality, and reduced influence over organizational outcomes (Avolio et al., 1999; Eagly et al., 2003; Gutek and Cohen, 1987; Hogg, 2001). Token leaders tend to be less assertive and less engaged with organizational processes, less likely to invest in decision making processes, and more likely to withdraw from full engagement in organizational change (Cohen et al., 1998; Edmonson, 2002; Edmonson et al., 2001; Ely et al., 2012; Steele et al., 2002; Swann et al., 2004; Tropp and Pettigrew, 2005; Wingfield, 2010).

Second, token leaders often receive less support, information, and assistance from peers and subordinates, which reduces their influence and ability to successfully affect change (Taylor, 2010; Wingfield, 2009). Scholarship on workplace support suggests that when minorities perceive a lack of workplace support, overall performance is reduced (Ely et al., 2012). Importantly, the lack of organizational support and assistance also makes the successful implementation of innovative practices less likely.

Finally, token pressures often lead to intense conformity pressures for minority leaders (Bell and Nkomo, 2001; Hewlin, 2003). Token leaders often avoid taking chances or experimenting with new and risky practices out of fear of intensifying scrutiny or activating negative bias. As a result, tokens often try to keep a low profile, to blend in and avoid deviation from traditional norms and practices (Allmendinger and Hackman, 2005; Kanter, 1977). Conformity pressures are most intense in elite institutions, like large corporations, where tokens are most likely to adopt the same or similar attitudes regarding institutional norms and work-related values as the majority (Allmendinger and Hackman, 2005). As a result of these pressures, minority leaders may be less likely to propose novel solutions or to depart from traditional corporate trajectories.

Research specific to corporate settings supports these conclusions. The selection of minorities to corporate boards is rare, and, when selected, minority board members often occupy subordinate roles and experience very limited influence over board decisions (Adams and Ferreira, 2009; Westphal and Milton, 2000; Westphal and Zajac, 2013). There is also evidence that conformity can be a rational response to these limitations; research suggests that ingratiatory behavior toward the CEO—including flattery and deference—can increase opportunities for minority board members (Westphal and Stern, 2006).

Taken together, this evidence suggests that token minority leaders will have little or no effect on organizational practices or policies related to governance and product development. To overcome these limitations, integration of the leadership team is necessary. We refer to this perspective as the power in numbers thesis because it predicts that the integration of multiple levels of corporate leadership—the CEO and the board—is necessary to achieve the benefits of leadership diversity.

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Theory and research on organizational composition suggest at least two mechanisms through which board composition can affect CEO influence over firm practice: relative numerical represen- tation and relative influence.

First, increasing the relative representation of minority members of the board can overcome the problem of exaggerated biases and stereotypes faced by token CEOs. As organizations move toward a greater representation of numerical minority members, demographic differences become less salient and interdependence across demographic boundaries is increased (Allmendinger and Hackman, 2005; Ely, 1995). Integration can also reduce the scrutiny and conformity pressures that token leaders face (Bratton, 2005). As noted by Allmendinger and Hackman (2005) in their study of the integration of elite orchestras, greater demographic balance means that “all members have plenty of people like themselves with whom to do social comparisons and from whom to seek sup- port” (p. 454). As conformity pressures decline, minority leaders are likely to engage more fully in decision making processes, to contribute a greater range of ideas, and to exert greater influence over decision making outcomes (Ely and Thomas, 2001).

The presence of multiple minority leaders can also overcome the problem of isolation and infor- mation deficits token leaders face. The presence of co-ethnic leaders can be a particularly important source of job-related support and assistance for minority professionals (Denton, 1990). Furthermore, minority leaders at different levels of the leadership hierarchy can serve as a critical source of social support, subgroup formation, and network resources (Allmendinger and Hackman, 2005). For instance, women directors report that the presence of other women on the board leads to a greater sense of support and belonging (Singh and Vinnicombe, 2004). And when non-traditional leaders perceive greater workplace support, they are more likely to invest in cooperative decision making processes (Bacharach et al., 2005; Ely et al., 2012).

This research suggests that as the number of minority board members increases, token pressures facing minority CEOs will be reduced. And, indeed, research specific to corporate settings— although primarily focused on gender—underscores the importance of integration for non-tradi- tional leaders. Several studies find that the presence of multiple women on the board positively impacts opportunities for other women (Bilimoria, 2006; Konrad et al., 2008; Singh, 2008; Skaggs et al., 2012; Terjesen and Singh, 2008). In her study of the effect of women directors in the Fortune 500, Bilimoria (2006) finds that the presence of multiple women on the board increases women’s opportunities for advancement. Similarly, Konrad et al. (2008) find that the presence of multiple women on the board reduces the salience of gender, limits the disadvantages of token status for women CEOs, and provides a significant degree of support and recognition for women’s contribu- tions. And studies of women corporate leaders confirm that the presence of other women serves as a critical source of informal network support (Singh and Vinnicombe, 2004: 484–5).

In addition to integration through numbers, the relative influence of individual minority direc- tors—irrespective of their overall representation on the board—may also overcome the limitations of tokenism for minority CEOs. For instance, some scholars have argued that numerical integration is insufficient for overcoming disadvantages associated with token status (Ely, 1995), arguing instead that minority influence or position is more important for overcoming token status (e.g. Chambliss and Uggen, 2000). In their study of the integration of law firms, Chambliss and Uggen (2000) found that the presence of minority partners was more important to supporting the careers of associates than greater numerical representation among associates. Likewise, Ely’s (1995) study of law firms found that the presence of women partners was most effective at limiting gender stereo- types and bias. This suggests that the presence of influential minorities may provide a critical source of peer support, network resources, and/or advocacy for other minorities in the organization.

In terms of board composition, there is growing evidence that interlinked board members, defined as a director who serves on multiple boards (Mizruchi, 1996), exercise disproportionate

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influence over firm outcomes (Shropshire, 2010). By virtue of their ties to other firms, interlinked board members provide a valuable source of industry-wide information that is viewed as trustwor- thy and legitimate and which can serve as an important conduit for innovation and change (Chen et al., 2009; Haunschild, 1993; Mizruchi, 1996). According to Shropshire (2010), interlinked direc- tors provide firms with “a way to manage environmental uncertainty, gain access to diverse skills and resources, facilitate communication across firms, and provide legitimacy for the focal firm.” (p. 246). Because interlinked directors have access to trustworthy information about other firms’ practices, their presence is associated with the adoption of innovative practices that require signifi- cant investments and have uncertain returns (Walls and Hoffman, 2013). By expanding the range of relevant information that the firm can access, decision makers are more capable of learning and innovation (Cohen and Levinthal, 1990; Zahra and George, 2002).

Scholarship on the impact of interlinked directors has found that these directors are more effec- tive at establishing stricter monitoring practices and, as outsiders, are more likely to initiate inno- vation in strategic planning and governance (Ferris et al., 2003; Tuggle et al., 2010; Westphal and Fredrickson, 2001; Westphal and Zajac, 1997). The presence of outside members, including inter- links, is also associated with more effective firm governance and greater innovation in the areas of policy, planning, and practice (Howton et al., 2001; Ibrahim et al., 2003; John and Senbet, 1998; Webb, 2004). As a result, the presence of interlinked board members is associated with a range of innovations in the areas of strategic planning and development as well as socially responsible poli- cies and practices (e.g. Ortiz-de-Mandojana and Aragon-Correa, 2013; Papagiannakis et al., 2014; Webb, 2004).

Extant research on minority board members’ links to other firms through board interlinks reinforces the influence of such members on organizational outcomes. First, there is some evidence that non- traditional directors are more likely than White men to hold multiple directorships (Sealy et al., 2007) and that women and minorities join subsequent boards at a quicker pace than White men (Hillman et al., 2002). Second, in their study of the appointment of new board members, Zhu and Westphal (2013) find that women and minority directors are more likely to be appointed when they have inter- linked network ties to other companies. In these instances, the focal CEO is more likely to trust demo- graphically dissimilar directors who have experience working with similar CEOs. Finally, Westphal and Milton (2000) show that minority board members with ties to other firms and other directors are more influential than non-networked minority board members. Indeed, the authors conclude that inter- links are one important mechanism through which minority board members can “avoid out-group biases that would otherwise minimize their influence” (Westphal and Milton, 2000: 366).

Taken together, extant research on the influence of interlinked board members suggests that the influence minority interlinks exercise over firm practice can provide an important source of sup- port for minority CEOs. Indeed, when interlinked board members are also racial/ethnic minorities, then their influence may overcome a lack of representation of minorities on the governing team. Overall, the scholarship on tokenism and group integration suggests that in order to realize the innovative benefits of diversity, governance teams must achieve a degree of integration. In the absence of integration through numbers or influence, token minority CEOs will be unable to exert significant pressures on organizational practice and policy. However, in the presence of diverse boards or minority interlinks, minority CEOs will have a significant effect on firm outcomes. The critical mass thesis predicts the following hypotheses:

Hypothesis 2a. Racial/ethnic minority CEOs will be positively related to strong governance and product development when there is diversity on the BOD.

Hypothesis 2b. Racial/ethnic minority CEOs will be positively related to strong governance and product development when there are interlinked minority members on the BOD.

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Data and methods

Procedure

Two datasets were used to examine our research questions. One was an author-constructed dataset and the other was the KLD dataset (Kinder, Lydenberg, Domini, Inc.) available through Wharton Research Database Services (WRDS). For the author-constructed dataset, we collected a comprehensive list of all Fortune 500 firms over the 10-year period from 2001 to 2010. Using the CNN money website, we noted the 500 companies for each specific year paying careful attention to mergers, and companies coming on and falling off the list. We also collected biographical information on each firm’s CEO and BOD. Specifically, we noted their name, gender, race, and age. To obtain the biographical information, we used many reference (e.g. Business Week, Forbes, Edgar) and company websites. For our dataset, we also collected firm information of total assets, return on assets, and debt ratio from Compustat (also available through WRDS). In our analyses, the author-constructed dataset was used for the predictor and control variables, and the KLD dataset was used for the outcome variables.

The KLD dataset is collected by an independent group of researchers and provides information on a large number of US corporations. Although the exact items comprising each attribute assessed are proprietary to Kinder, Lydenberg, Domini, Inc., the validity and reliability of those assessed attributes have been established by various researchers (Hart and Sharfman, 2012; Mattingly and Berman, 2006; Sharfman, 1996; Waddock and Graves, 1997). Specifically noted is that KLD has a single group of researchers who are not affiliated with any rated firm or conflicting party (Waddock and Graves, 1997). The rating criteria are objective and applied consistently to all included firms, and the sources for evaluation are both internal and external to the firms (Hart and Sharfman, 2012). Primarily, quantitative criteria are used; however, for judgment issues and borderline cases, the KLD group meets to determine the assigned rating and ensure that it is consistent from firm to firm and year to year (Waddock and Graves, 1997). Examples of the sources KLD uses to assess each evaluated attribute are firms’ annual reports, proxy statements, and regulatory filings, among several other internal forms, and external sources such as the Wall Street Journal, Fortune maga- zine, and Business Week magazine, among other general press materials (Waddock and Graves, 1997). For the annual screening, each firm begins as neutral without a rating, and the noted criteria for each attribute are objectively assessed (Walls et al., 2012). The ratings provided by KLD have been tested against other similar measures and have demonstrated sufficient correlation in order to deem the data valid (Sharfman, 1996).

Our collected sample resulted in 151 separate entries with a racial/ethnic minority leader serving as CEO and 3734 separate entries with a White leader serving as CEO. If a racial/ethnic minority served as CEO and was a member of the board, his or her membership on the board was not counted. We chose not to double-count the representation of a minority CEO in order to better assess the cumulative or interactive effect that may be occurring as it relates to our outcome variables. Given the small number of minorities within both the governing bodies, this action helps lessen any infla- tion of that combination effect and provides a more conservative test of our hypotheses.

Measures

Outcome variables Corporate governance strengths. This attribute was assessed by a number of sub-items and an

index was created. Items assessed for this index rating are the following: effective communication processes, measurement of a positive corporate culture, environmental and social reporting, social strengths of other owned entities, leading public policy issues, and limited pay for top management and directors. Each sub-item was coded as 1 for yes, and the index is a tabulation of those items.

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Although aspects of the BOD such as compensation are included in this measure, the gender and racial composition of the board are not included.

Product strengths. This attribute was assessed by a number of sub-items and an index was cre- ated. Items assessed for this index rating are the following: a recognizable and sustainable program of quality, known for research and development, provider of some goods and services to those economically disadvantaged, and notable social benefits for the goods or services provided. Each sub-item was coded as 1 for yes, and the index is a tabulation of those items.

Product innovation. This attribute was screened by the following items and reported as a dichoto- mous outcome of 1 if the assessment concluded the firm had substantial product innovation. Rep- resentative screening areas are whether the organization is recognized as a leader of research and development and whether the organization is known for bringing innovative goods and services to the market. The reported screening items from KLD suggest this is a broad measure of product innovation and not focused on innovation with regard to social issues. This attribute, although not specifically targeted to social responsibility, is still in alignment with KLD’s overall focus. Prior research has demonstrated that innovation leads to greater corporate social performance (Hull and Rothenberg, 2008). Thus, it makes sense for KLD to measure innovation broadly as a likely predic- tor of social responsibility of the firm.

As an additional validation for this outcome measure, a random check was conducted comparing 20 companies that were categorized as product innovators and 20 companies that were not catego- rized as product innovators. The comparison was based on their level of Research and Development (R&D) spending as reported in the Compustat Database. Within the 20 companies listed as product innovators, only 2 firms had R&D spending below US$1 billion annually, and within the companies not listed as product innovators, only 2 had R&D spending as high as US$100 million annually. The majority of the companies in this group were actually shown to have no R&D spending or very little R&D spending. The random check of the KLD product innovation measure affirms its veracity.

Independent variables Racial/ethnic minority CEO. This item is dichotomous and reported as 1 if the CEO is a racial/

ethnic minority and reported as 0 if the CEO is White. In a situation where there was a CEO change during the year, the CEO in place for the majority of the year was used in the analyses.

Percent of racial/ethnic minority members on the board. The percent of racial/ethnic minority members on the board was tabulated as the total number of racial/ethnic minorities on the board (minus the CEO if fitting) divided by the total number of board members.

Network interlinks. Network interlinks were determined by tabulating the total number of other board connections for each racial/ethnic minority member of the board. Specifically, if a board had two racial/ethnic minorities and only one served on the one board but the other served on the one board plus three other boards, then the number of interlinks would be three. With the limited num- ber of top racial/ethnic leaders in corporate America, there is a concern that the same individuals will serve on many boards and, thus, eliminate some of the benefits of board diversity. Through further examination of our data, we found that only 5% of the racial/ethnic minority board mem- bers served on more than six boards. In fact, 89% of our minority board members served on four or fewer boards with 47% only serving on one board.

Control variables. Several variables were controlled in our analyses. Firm-level controls included firm size as measured by total assets and reported in millions, firm performance as measured by

Cook and Glass 127

return on assets, and firm leverage as measured by debt-to-assets ratio. Board-level controls included the average age of the BOD and the percent women on the board, and CEO-level controls included whether the CEO also served as the Chairman of the Board and the age of the CEO.

Analyses

We examined our hypotheses with panel data analysis with time and firm-level fixed effects. Using fixed-effects models, we were able to control for unobserved variables that are likely consistent over time for each of the firms in the study (Allison, 2009). By eliminating the unobserved varia- bles, our results provide a more accurate picture of our predictor variables’ impact on our depend- ent variables (Allison, 2009). We also conducted the Hausman test to determine whether a fixed- or random-effects model would be more appropriate. Results indicated that the unobserved variables within each cluster of firms were not significantly correlated with the other firms; thus, a fixed model was used for our panel data. Specifically, we used a negative binomial regression model with time and firm fixed effects for our outcome variables of corporate governance strengths and product strengths. This method appropriately addresses the repeated firm observations in our panel dataset and also addresses the count data outcome variables of the index items. Additionally, unlike a Poisson model, the negative binomial regression does not eliminate outcomes with a value of zero from the model. And for the binary outcome variable of product innovation, we used a repeated measures logistic regression model with time and firm fixed effects. To plot our interaction graphs, we followed the guidelines put forth by Dawson (2014) for plotting interactions from a negative binomial regression and a logistic regression.

Results

Our analyses test two sets of hypotheses. First, the business case for diversity perspective predicts that minority CEOs or minority members on the board will positively impact a firm’s product strengths and innovation and its corporate governance strengths. Second, the critical mass perspec- tive predicts that minority CEOs will have little effect on their own, but a minority CEO and a diverse board will positively impact product strengths, product innovation, and corporate govern- ance strengths. Descriptives and correlations of the examined variables are presented in Table 1.

Hypothesis 1a predicts that having a racial/ethnic minority serving as CEO will be positively related to a firm’s corporate governance, product strengths, and product innovation. As shown in Tables 2 to 4, a racial/ethnic minority CEO has no significant direct effect with any of the examined outcome variables. The correlations table shows limited significant associations between the CEO and the outcome variables under study, but once the control variables are added within the fixed- effects models, any significant relationships disappear (refer to Tables 2 to 4). Hence, we suggest that Hypothesis 1a is not supported.

Hypothesis 1b predicts that having racial/ethnic minority members serving on the board will be positively related to a firm’s corporate governance strengths, product strengths, and product inno- vation. We assessed board composition in two different ways in order to better understand exactly how boards impact firm practices. First, we calculated the simple percentage of minority members on each of the examined boards. Next, we calculated the number of network interlinks the minority members had with other boards. We then examined these two measures to help understand the mechanism by which board composition may impact our outcome variables of corporate govern- ance, product strengths, and product innovation. As illustrated in Tables 2 and 3, findings provide moderate support for Hypothesis 1b. Within the negative binomial regression analysis, the percent minority on the board is related positively with marginal significance (p < .10) to corporate govern- ance strengths (refer to Table 2) and to product strengths (refer to Table 3). And the number of

128 Strategic Organization 13(2)

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Cook and Glass 129

Table 2. Dependent variable (DV) = Corporate Governance Strengths. Negative binomial regression with time and firm fixed effects for panel data.

IVs Direct effects Interaction effects

B SE IRR B SE IRR

Control variables Total assets .00** .00 1.00 .00** .00 1.00 ROA 2.31* 1.16 10.03 2.46* 1.14 11.69 Debt ratio −.88< .46 .41 −.84< .46 .43 CEO age −.01 −.01 .99 −.01 .01 .99 Average board age .09** .02 1.09 .09** 02 1.09 CEO serves as chair .09 .16 1.10 .09 .16 1.10 CEO gender .57< .33 1.74 .66* .30 1.94 Percent women BOD 2.70** .63 14.79 2.81** .64 16.67 Predictor—direct effects CEO race/ethnicity .13 .27 1.14 .80 .59 2.24 Percent minority BOD 1.63< .84 5.11 1.44 .91 4.20 BOD interlinks .04 .04 1.04 .05 .04 1.05 Predictor—interaction effects CEO × BOD percent – – – .26 2.57 1.30 CEO × BOD links – – – −.19* .09 .83 Constant −6.54** 1.40 .00 −6.55** 1.39 .00

IV: independent variable; SE: standard error; IRR: incidence rate ratio; ROA: return on assets; BOD: Board of Directors. N = 472 firm units with 3417 observations. <p < .10; *p < .05; **p < .001.

Table 3. Dependent variable (DV) = Product Strengths. Negative binomial regression with time and firm fixed effects for panel data.

IVs Direct effects Interaction effects

B SE IRR B SE IRR

Control variables Total assets .00* .00 1.00 .00* .00 1.00 ROA .89 1.16 2.42 .98 1.14 2.67 Debt ratio −1.19* .51 .31 −1.16* .51 .31 CEO age .00 .01 1.00 .00 .01 1.00 Average board age .04 .02 1.04 .04 .02 1.04 CEO serves as chair .00 .17 1.00 .00 .17 1.00 CEO gender .76< .36 2.14 .82* .34 2.27 Percent women BOD 1.48 1.02 4.39 1.43 1.03 4.19 Predictor—direct effects CEO race/ethnicity −.11 .42 .90 1.09 .70 2.97 Percent minority BOD 1.76< .94 5.80 1.94< 1.00 6.94 BOD interlinks .07* .03 1.07 .07* .03 1.07 Predictor—interaction effects CEO × BOD percent – – – −3.99 2.71 .02 CEO × BOD links – – – −.07 .09 .93 Constant −4.09* 1.60 .03 −4.24** 1.60 .01

IV: independent variable; SE: standard error; IRR: incidence rate ratio; ROA: return on assets; BOD: Board of Directors. N = 472 firm units with 3417 observations. <p < .10; *p < .05; **p < .01.

130 Strategic Organization 13(2)

board interlinks offers a stronger direct connection to product strengths at a significance value of p < .05 (refer to Table 3). The findings suggest that both corporate governance and product strengths are enhanced when the board has racial/ethnic minority members. The board composition, both in the numbers of minorities present on the board and in the number of interlinks these board mem- bers have with other organizational boards, provides positive benefits to firms.

Hypotheses 2a and 2b examine the effect of minority integration of the CEO and BOD (or lack thereof) to test whether integration at both levels interacts to enhance the corporate governance strengths, product strengths, and product innovation of the firm. As illustrated in the tables, interac- tion models were significant for both corporate governance strengths (p < .05) and product innova- tion (p < .05; p < .10). Specifically, the race/ethnicity of the CEO interacted with the number of board interlinks (p < .05) for minority members in impacting corporate governance strengths (refer to Table 2), and the race/ethnicity of the CEO interacted with the percent minority on the board (p < .05) and the number of interlinks for minority board members (p < .10) in impacting product innovation. Through further examination in graphing the interactions, however, the findings offer insights that differ from our hypotheses. With regard to corporate governance strengths, minority CEOs are stronger than White CEOs when the board has low numbers of minority interlinks; how- ever, as the number of minority interlinks increases, benefits are realized under a White CEO and not realized with a minority CEO (refer to Figure 1).

With regard to product innovation, the results offer similar insights. As illustrated in the graphi- cal representations of the interactions, findings suggest positive benefits for increased board diver- sity in both numbers and influence with a White CEO. Benefits with a diverse board, though, are not realized with a minority CEO. Figure 2 clearly shows that as the percent of minorities on the

Table 4. Dependent variable (DV) = Product Innovation. Repeated measures logistic regression with time and firm fixed effects for panel data.

IVs Direct effects Interaction effects

B SE Odds ratio B SE Odds ratio

Control variables Total assets .00 .00 1.00 .00 .00 1.00 ROA .26 3.56 1.30 1.06 3.28 2.88 Debt ratio −3.88* 1.42 .02 −3.81* 1.44 .02 CEO age .02 .03 1.02 .02 .03 1.01 Average board age −.02 .06 .98 −.01 .06 .99 CEO serves as chair .22 .45 1.25 .27 .47 1.31 CEO gender 2.43* .76 11.36 2.67** .74 14.49 Percent women BOD 2.32 2.73 10.16 2.60 2.86 13.44 Predictor—direct effects CEO race/ethnicity −1.50 1.57 .22 5.70** 1.80 297.73 Percent minority BOD 3.22 2.28 24.92 3.33 2.51 28.01 BOD interlinks .12 .08 1.12 .13 .08 1.14 Predictor—interaction effects CEO × BOD percent – – – −29.02** 8.11 .00 CEO × BOD links – – – −.85< .44 .43 Constant −2.28 −2.86

IV: independent variable; SE: standard error; ROA: return on assets; BOD: Board of Directors. N = 470 firm units with 3072 observations. <p < .10; *p < .01; **p < .001.

Cook and Glass 131

board increases, product innovation under a White CEO increases, and under a minority CEO, product innovation actually decreases. And Figure 3 demonstrates that as the number of interlinks for minority board members increases, product innovation again increases under a White CEO and decreases under a minority CEO but to a lesser degree. Within both representations, however, minority CEOs performed at a stronger level for product innovation than White CEOs with lower levels of board diversity. Indeed, given the numerical dominance of White CEOs, our findings underscore the critical importance of board composition on beneficial firm outcomes.

Discussion

This study analyzed the effects of leadership composition on governance and product development by analyzing the effect of racial/ethnic composition of the CEO and BOD on firm outcomes. We

Low BOD Interlinks High BOD Interlinks

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132 Strategic Organization 13(2)

advance the literature by moving beyond analysis of broad performance measures or diversity outcomes to analyze the effect of minority leaders on firm practices and outcomes. We tested two sets of hypotheses. The power of one thesis, drawn from agency theory and the business case for diversity perspective, predicted that minority CEOs or minority board members would positively impact firm governance and product development. In contrast, the power in numbers perspective, which drew upon token theory and organizational demography, predicted that diversity on the board, measured as the presence of multiple or influential minority board members, would be criti- cal for minority CEOs to positively influence organizational outcomes. To test the explanatory power of these different perspectives, we relied on a dataset that included measures of corporate governance strengths, product strengths, and product innovation, as well as the race/ethnicity of the CEO and BOD among Fortune 500 firms from 2001 to 2010.

Our findings reveal mixed support for the two sets of hypotheses tested. Contrary to the predic- tions of the power of one thesis, we find no evidence that minority CEOs significantly affect cor- porate governance or product development. However, we find that the presence of minority board members is associated with improvements in corporate governance and product strengths. Thus, while minority CEOs alone are unable to influence outcomes, the presence of minority directors benefits firms in terms of governance and product strengths. Our mixed support for the power of one thesis suggests that minority CEOs may suffer from token pressures that limit their ability (or willingness) to exert influence over firm processes.

These findings also imply that board diversity may be a more important mechanism for organi- zational change than diversity at the CEO level. Empirical tests of the power in numbers perspec- tive further affirm the importance of board diversity. Minority CEOs, on their own, may be stronger than White CEOs with regard to both corporate governance strengths and product innovation, but looking at the CEO in conjunction with a racial/ethnic diverse board, White CEOs realize greater benefits from board diversity. The presence of minority board members and minority interlinked board members significantly improves both corporate governance strengths and product innova- tion under a White CEO. In other words, firms with White CEOs and diverse boards are more likely than other firms—including firms led by minority CEOs—to pursue strong governance

Low BOD Interlinks High BOD Interlinks

P ro

du ct

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io n White

CEOs

Minority CEOs

Figure 3. Product innovation of the firm under White and minority CEOs as the number of minority board interlinks increases.

Cook and Glass 133

mechanisms and enjoy strong product innovation. These findings underscore the importance to firms of having diverse boards irrespective of the race/ethnicity of the CEO.

Thus, our findings can be summarized in the following way: board diversity improves govern- ance and product development especially in firms led by White men CEOs. There are at least two important implications of these findings. First, we have no evidence that firms with White CEOs and diverse boards experience greater conflict than other firms due to distrust, lack of social simi- larity, or resultant communication barriers. Indeed, it appears that the presence of ethnic diversity on the governing body only advances strong corporate governance. One possible explanation is that diverse boards are more likely to select CEOs—regardless of race/ethnicity—who support their ideas and priorities. Previous research on leadership effectiveness suggests that one mecha- nism by which leaders can promote positive change within organizations is through the “selection, promotion, and ongoing support of change champions” (Elenkov et al., 2005: 669). This suggests that influential minority directors may be more likely to advocate for and appoint CEOs who are more likely to share their desire for strong governance, regardless of the CEOs’ race or ethnicity.

The second implication of our findings is that diverse leaders may bring perspectives, priorities, and ideas to organizations that significantly affect organizational trajectories. In particular, minor- ity leaders at the board level affect the likelihood that a firm will pursue strong governance and effective product development. This strongly supports the business case for diversity. Our findings also suggest that relative numbers and influence on the board in conjunction with the CEO matter for realizing the benefits of diversity. Both the percentage of minorities on the board and the pres- ence of influential minorities significantly impact governance and product innovation when tradi- tional leaders serve as CEOs. Minority influence on the board matters most when firms are led by White CEOs. This suggests that in order to influence board processes in ways that advance fair- ness, transparency, and accountability, as well as enhance product innovation in firms led by White CEOs, the presence and influence of minority board members is key.

Conclusion

This study makes an important contribution to theory and scholarship on the effects of diversity on organizational outcomes. However, this study has several limitations. First, because our focus was on the Fortune 500, our analysis was restricted to a relatively small number of minority CEOs and directors. This prevented a disaggregation of these leaders by race and ethnicity. Our study also does not include analysis of other types of diversity, including gender, social class, or nationality or the interaction between these types of diversity and race/ethnicity. Previous research suggests that women and men of color may experience leadership very differently (e.g. Livingston et al., 2012), but analysis of these intersections is limited by a small number of minorities in positions of power in America’s largest corporations. Analyzing the intersection of race/ethnicity and other types of diversity could further explain the impact of diversity on organizations. Finally, because our study focuses on associations between the racial/ethnic composition of governance teams and organizational outcomes, we are also limited in our ability to make causal statements about how or why diversity impacts specific practices or policies.

Future research could build upon this study by addressing these limitations. First, expanding the analysis to organizational contexts that include a larger number of racial/ethnic minority leaders would allow comparisons of the experiences and impacts of different racial/ethnic groups. Previous scholar- ship suggests that the professional experiences and trajectory of minority leaders vary among racial/ ethnic groups and by gender (Bell and Nkomo, 2001; Chung-Herrera and Lankau, 2005; Collins, 1997; Livingston et al., 2012). Analysis of other contexts may allow differentiation by race/ethnicity beyond the broad minority category used in the current analysis. Such an analysis would provide more nuanced understanding of the compositional factors that shape organizational outcomes.

134 Strategic Organization 13(2)

Future research might also expand to include other types of diversity, including gender, social class, and/or nationality and culture. There is growing attention among scholars and practitioners regarding the impact of new sources of diversity in corporate contexts. For instance, globalization has led to a growing diversity of national origin and culture on governing bodies. New opportunities for social mobility have also led to emergent patterns of diversity by social class background (Maclean et al., 2014; Zweigenhaft and Domhoff, 2006, 2011). It is possible that other types of diversity have a stronger influence on organizational outcomes than racial/ethnic diversity. Analyzing how these sources of diversity interact with race/ethnicity to shape organizational outcomes would provide a fuller understanding of the conditions under which diversity shapes organizational outcomes.

In addition, this study assumes that the racial/ethnic characteristics of corporate leaders serve as proxies for underlying differences in educational and professional background, career trajectory, attitudes and beliefs, and cultural differences. However, scholars have increasingly sought to meas- ure behavioral variation more directly (e.g. Park et al., 2011; Westphal and Stern, 2007). For instance, in their study of the mechanisms that drive board appointments, Westphal and Stern (2007) find that rewards to ingratiatory behavior varied by race/ethnicity and gender. More recent research suggests that board members vary in the degree to which they display flattery and opinion conformity toward CEOs (Park et al., 2011). This research suggests that behavioral and perspective-based diversity may not align perfectly with social demographic characteristics. Developing more direct measures of background and perspective-based differences among and between racial/ethnic groups could help further specify the mechanisms that drive organizational outcomes.

Finally, while this study focuses on the interaction between the CEO and board characteristics, future research might also explore how racial/ethnic diversity of the top management team (TMT) impacts organizational outcomes. As noted above, the CEO and board share responsibility for firm governance and strategic planning. However, TMTs, which include top executives within the firm, also shape strategy and organizational policy. Future research might replicate our analysis with regard to the racial/ethnic composition of the management team. This type of research could begin to disaggregate individual- and group-level effects by incorporating multilevel analysis as well as theoretical models that consider the impact of individual effects on group/team and/or organiza- tional effects. This may reveal that diversity at that level has similar or different impacts on firm outcomes to diversity on the board.

Acknowledgements

The authors contributed equally to this manuscript. They are listed alphabetically for convenience.

Funding

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

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Author biographies

Alison Cook is an Associate Professor of Management in the Jon M. Huntsman School of Business at Utah State University. Her research focuses on gender and racial/ethnic diversity in the workplace. Her current focus is on the factors that shape promotion opportunities for women and racial/ethnic minorities for top leadership positions and the impact of women and minority leaders on organizational practice. Her work has recently appeared in Strategic Management Journal, Business Strategy and the Environment, Work and Occupations, and Human Resource Management. Dr Cook received her PhD from Purdue University and her BS from the University of Utah.

Christy Glass is an Associate Professor of Sociology at Utah State University. Her research focuses on recruit- ment, hiring, and promotion practices and their impact on women and racial/ethnic minorities. Her current focus is on the factors that shape promotion opportunities for women and racial/ethnic minorities for top leadership positions and the impact of women and minority leaders on organizational practice. Her work has appeared in Strategic Management Journal, Social Problems, Work and Occupations, and Gender & Society. Dr Glass earned her MS and PhD from Yale University and her BA from the University of Michigan.