Businesses Benefit from Board Members’ Diverse Experiences

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HSE researchers have assessed the influence of board members’ work experience diversity on a company’s economic performance. Who makes a better board member—company veterans or outsiders? Their findings have been published in the Russian Management Journal.

A company’s board of directors is generally responsible for making key strategic decisions, setting objectives and outlining areas of development, as well as directing management, identifying risks and addressing them appropriately. The board helps to prevent an authoritarian management style, facilitates a smooth takeover when a new CEO is appointed, and preserves stability and lowers the risk of the business collapsing if its founder resigns. It is assumed that having a diverse range of experience in the board of directors allows it to assess situations from different angles and make more considered decisions. But is this really the case? Is it possible to assess this factor’s contribution to a company’s success and uncover the optimal ‘combinations of experience’ in a board to maximize the benefit to the company?

The authors of the research used data from a survey of 602 private Russian companies managed by a board of directors. Respondents were asked to report which of nine types of work experience their directors had over the past decade: within the company or group of related companies, in other companies in the same industry or other industries, in government bodies (authorities of various levels, law enforcement agencies), and in science, education, or politics. The first type of work experience is thought to provide the deepest insight into a company or industry’s performance. People with experience working for government bodies are often employed by enterprises that communicate with public officials and authorities on a regular basis, while work experience in science or politics is valued by companies that organize large numbers of people to tackle general tasks.

The researchers also proposed and calculated a diversity index for every company. The value of the index is based on the number and combination of different types of work experience among a company’s directors. The economists also developed several additional indices to characterize the number of experience types. They used two common values to evaluate a company’s efficiency: the return on ordinary shareholders’ equity and the return on long-term funds (ie capital, including long-term liabilities), as well as their deviations from the sector average in the relevant industry.

The responses showed that the boards of directors of most entities (84%) are comprised of people who have previously been employed by the same company (46.5% of the companies are run by a board of ‘in-company’ directors). The second and third most common work experience is gained within the group of related companies and in other companies in the same industry (20.6% and 29.0% of entities respectively). The rarest kinds of experience among directors were in law enforcement agencies (0.01%), as well as in science, education, and the socio-political sphere (1.3%). The boards of more than half of the companies consisted of people with only one type of work experience. Another quarter of the companies had boards with two types of experience, and only 25% of the companies were managed by boards with three or more types of work experience. As such, Russian boards of directors can hardly boast a high diversity of experience.

To find out whether the characteristics of a board are related to a company’s economic performance, the researchers proposed a number of mathematical models using different sets of company performance indicators, including diversity. All models confirmed that diversity in executives’ experience significantly improves a company’s efficiency. The higher the diversity index, the bigger the return on shareholders’ equity—even more so if the company’s owners are also its senior managers or chief executive officers. Meanwhile, foreign ownership seems to have a negative impact on the return on shareholders’ equity (possibly due to sanctions). Similarly, diversity of experience also affects the dynamics of capital.

Irina Dergunova, co-author of the article and doctoral student of the Institute for Industrial and Market Studies

This is the first time that data about Russian companies has been used to show a positive correlation between the diversity of a board’s work experience and the efficiency of a company’s performance, and we have obtained meaningful and reliable results. Previous Russian research has examined the influence of separate board characteristics such as directors’ average age, board size, and the number of executives. As far as western European research is concerned, there are relatively few papers containing complex analysis of work experience, and their results are contradictory. Moreover, our research is based on the analysis of a sample of private companies, whereas previous studies have relied primarily on data accumulated from public entities.

Tatyana Dolgopyatova, co-author of the article and Professor at the Faculty of Economic Sciences

'It was interesting to discover that diversity of work experience among board members helps businesses improve their performance. It was equally interesting to learn that there is a higher return on equity in companies whose owners or co-owners are also senior managers there. In other words, a more centralized management structure has a positive effect on a company’s efficiency amid the instability of the Russian economy.'