How does genetic diversity in the country of origin of a firm’s board members affect the corporate performance of these firms? The answer has important implications for the optimal synthesis of corporate boards of directors as a means to enhance firms’ profitability and value. Human genetic diversity captures deep-rooted social, cultural, psychological, physiological, and institutional characteristics that were shaped many years ago. Within-board differences in these characteristics—which modern relevant indices may fail to capture—can have a unique bearing on firm performance. In this study, we explore this question by bringing together data on the biological genetic variation of board members’ country of origin along with simple measures of corporate performance.
We hypothesize that the diversity in the boardroom, in terms of genetic diversity within each director’s country of origin, can affect a firm’s performance. Although this article refers to genetic diversity in the total population of each board member’s country of origin, for simplicity we use the term “genetic diversity of the board.” To construct our diversity measure, we use information from BoardEx on the nationality of board members for a number of firms and attach country-specific genetic diversity values from Ashraf and Galor (2013) to each board member. Then, we calculate our measure of genetic diversity of boards as the standard deviation by firm-year of genetic diversity across the values given to each board member. We call this computation the “deviation effect” of genetic diversity.
With this measure, we aim to examine whether including directors from countries with different levels of genetic diversity affects firms’ profitability and value. We are of course unaware about which genes these directors carry, and we do not claim to examine the direct effect of genomes on corporate performance. We also abstain from suggesting that a higher or a lower level of diversity in the country of origin is either beneficial or unfavorable for corporate performance. Thus, we do not relate corporate performance to the mean score of genetic diversity in the boardroom. What we do examine with the standard deviation is whether and to what extent deep-rooted differences in the directors’ countries of origin affect firm performance, irrespective of whether these differences come from a genetically more robust (less diverse) country or less robust (more diverse) country. We contend that it is the diversity in these deep-rooted elements that also shapes firm performance in unique ways.
As an example, consider a U.K.-based firm with 10 directors, 8 of whom are British, 1 is Brazilian, and 1 Italian. The British directors are all assigned an equal score of B, the standard deviation of which is zero. Based on Ashraf and Galor (2013), the Brazilian director carries a score lower than B and the Italian a score higher than B. The presence of both the Brazilian and the Italian director increases the deviation of the board’s diversity. We seek to examine whether and to what extent this increase affects corporate performance. We are not considering whether the fact that the Brazilian (Italian) director has a score lower (higher) than B affects corporate performance.
We test the impact of the deviation effect on firm performance, as measured by risk-adjusted returns and Tobin’s q, using a panel of up to 1,085 firms based predominantly but not exclusively in the United States and the United Kingdom from 1999 through 2012. We overcome the potential endogeneity problem by using two instrumental variables. These variables are constructed using the mean of migratory distance from East Africa and the mean of ultraviolet exposure in the board members’ country of origin, by firm and year. Our exploration of these variables is motivated by the implications of Ashraf and Galor (2013) as well as important findings in biology.
The results show that genetic diversity plays an important role in affecting corporate performance. These findings hold even if we control for other elements of diversity, such as gender, culture, and nationality, which have been shown to have an important bearing on the efficiency and performance of corporate boards and firms. In keeping with the results of Ashraf and Galor (2013) regarding the effect of genetic diversity on economic development, we suggest that deep-rooted elements of diversity exist that were determined thousands of years ago and now play an important role in the functioning and performance of corporate groups.
More specifically, we find that the deviation effect of genetic diversity is positive and statistically and economically significant. For a firm with an average risk-adjusted return, a one standard deviation increase in the deviation of diversity implies a 20.8% increase in risk-adjusted return. Also, an increase in the deviation of diversity by the same amount will increase Tobin’s q by approximately 6.9% for a firm with an average Tobin’s q in our sample. This positive effect on corporate performance is in line with an important strand of sociology and management literature, which posits that the performance of groups is enhanced only when the level of heterogeneity is considerable and irrespective of whether the country of origin has a higher or a lower score compared to the country in which the firm is headquartered. We view this as an important finding with specific implications for organizational science, management science, and financial economics.