Diversity for the longest part of human history has not only been a tricky issue to solve, but also one that’s been thorny. In ways, it’s been so tricky because of how thorny it is. So, the recent consensus around the benefits of diversity has been a breath of fresh air. The benefits of diversity predominantly revolve around a couple of major points:

• Diversity fosters creativity and innovation by considering a great variety of perspectives.
• Diverse firms are likely to be more informative, bringing about a diverse range of information, and hence make better decisions.
• Diverse firms, that better represent their customers also better understand their needs.

Overall, while the previous points make perfectly reasonable sense, the general discussion around diversity is limited along, race and gender. The discussion though misses a few additional tenets that though present through certain race characteristics ought to be part of the bigger discussion. Tenets such as socio-economic status, geographical diversity and perspectives. The neighborhood effect which is an economic and social science concept that posits that neighborhoods have either a direct or indirect effect on individual behaviors is strikingly missing from most studies when it comes to research on Diversity.

This post hence is an attempt to extrapolate some of the hidden tenets surrounding research on diversity and summarize a recent research paper by Aggarwal et al, on Board level diversity and its effect on firm performance. The paper primarily focuses its findings on India which presents a fascinating case simply because of how diverse a country like India truly is. Diversity in India revolves not only around, race and gender, but also, religion, caste/socio-economic status, language, geographical diversity, etc. India truly reflects a basket case that’s perfect for a research such as this.

The extensive prior research done on this topic though has been quite conflicting. While the majority of research is centered around developed economies, this paper’s focus on India, a developing economy is a marked difference. As mentioned prior research has also failed to take into account the neighborhood effect which has a massive impact on a person’s life. The paper when focusing on board level diversity tries to make a distinction between a board that has primarily monitoring duties and a board that has resource driven/advisory capabilities. The paper also distinguishes between boards of standalone firms, and of firms that are family/business group affiliated, thus testing their status as an independent or non-independent board member. Distinctions that come in handy while evaluating the extent of diversity within boards. Firm level performance on the other hand is separated by general firm level performance such as Return on Assets (ROA), Return on Equity (ROE), etc, and Tobin’s Q which describes the ratio between a physical asset’s market value and its replacement value.

The paper goes on to extrapolate data from the top 500 firms on the NIFTY 500 index, and finds something truly Indian in that sixty percent of the top 500 firms in India are family run. Something that in a sense is exceptionally unique to India. While other developing economies might have a lot of state run enterprises, India only has a few, thus in a way allowing for stringent regulatory compliance. The paper finds that there indeed is a very strong positive correlation between demographic diversity and Tobin’s Q of a firm (p<0.05), but alas that correlation withers out and turns negative when that diversity comes from family members in a business group firm. If the point of diversity is to bring varying perspectives to a firm, it’s easy to see why that’s the case. The other finding relates to diversity in the independence of board level directors; the paper finds that firms with greater independence at board level generally have better firm level performance along standardized metrics such as ROA,ROE etc.

Overall, while it might seem that the paper substantiates on-going research on Diversity, its contributions on the independence of directors and business group affiliations are novel approaches. Diversity is a truly tricking thing to tackle and hence doesn’t have a one size fits all solution. While we might all agree that diverse firms in general do perform better, it’s harder to point out specific drivers of such along different firms and sectors. The issue currently surrounding Diversity can best be summed up as this- It’s an a la carte issue that’s currently being dealt with by a buffet approach. That needs to change.