Diverse boards pay more dividends, take fewer risks, study finds

That's what researchers at Wake Forest University found in a study of more than 2,000 companies over a 13-year span.

"We found strong evidence that board diversity significantly curbs excessive risk taking," says Ya-wen Yang, assistant professor of accounting at the Wake Forest University School of Business.

The paper, "Board Diversity and Corporate Risk Taking" is a research project with co-researchers Rini Laksmana, associate professor of accounting at Kent State University, and Agus Harjoto, associate professor of finance at Pepperdine University.

Most research on corporate boards has focused only on gender diversity. Yang's team, however, used a broader-than-normal definition encompassing gender, race, age, experience, tenure and expertise.

They looked at company records and used five variables to measure risk: capital expenditures, research and development expenses, acquisition spending, the volatility of stock returns, and the volatility of accounting returns.

"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," says Yang.

Additional analysis showed that companies with more diverse boards were more likely to pay dividends and to pay a greater amount of dividend per share than corporations with less diverse boards.

The study, which covered the years between 1998 and 2011, showed that most corporate boards are relatively homogenous in gender and race -- being mostly white and mostly male. They were, however, more diverse in age, experience, tenure, and expertise.

"Measuring diversity based only on gender misrepresents the actual diversity in corporate boardrooms," comments Yang. She says the research provides insights that company nominating and governance committees should consider when evaluating director candidates.

"One the one hand, diverse boards could reduce the level of corporate risk taking, discouraging innovative and risky projects. On the other hand, if firm management is overly aggressive in its use of corporate funds for investing in risky projects, our results suggest that more diverse boards could perform better oversight of corporate risk taking than less diverse boards."