REVISITING THE CASE OF TMT DIVERSITY

AND FIRM PERFORMANCE. MYTH OR A FACT

By:
Nikolay Petrov Aleksiev
2845423
A thesis submitted to the
Faculty of Economics and Business
In partial fulfilment of the requirements for the degree of
BACHELOR OF SCIENCE IN INTERNATIONAL BUSINESS

UNIVERSITY OF GRONINGEN
Thesis supervisor: PhD H.Ul. Haq
Date: 05.06.2018
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ABSTRACT

The purpose of this paper is to examine the relationship between top management team diversity

and firm performance. In order to do that, various literature related to diversity, TMTs and firm

performance is discussed and based on it three hypotheses are derived. To investigate them, a

hierarchical multiple regression model is constructed based on three independent variables (tenure,

gender and education diversity) and two control variables (firm size and TMT size). The data used

comes from two sources: Orbis and BoardEx. There is a gap of one year between the dependent

variable and the independent variables in order to allow for causality. The results, however, are

insignificant and point to the idea that diversity doesn’t play a role in a company’s financial

performance. On the other hand, the results point to the fact that companies with bigger TMTs and

larger workforce perform better than their respective counterparts.

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Table of Contents

INTRODUCTION ...................................................................................................................... 3
LITERATURE REVIEW ........................................................................................................... 4
TMT diversity............................................................................................................................... 4
Positive view on diversity ........................................................................................................ 4
Negative view on diversity ....................................................................................................... 6
TMT diversity and firm performance ........................................................................................... 6
Gender ...................................................................................................................................... 7
Education .................................................................................................................................. 9
Tenure ..................................................................................................................................... 10
METHODOLOGY ................................................................................................................... 11
Sample ........................................................................................................................................ 11
Measures ..................................................................................................................................... 12
Dependent Variable ................................................................................................................ 12
Independent Variables ............................................................................................................ 12
Control Variables .................................................................................................................... 12
Analysis ...................................................................................................................................... 13
RESULTS ................................................................................................................................. 14
Testing for assumptions .............................................................................................................. 14
Descriptive statistics and correlations ........................................................................................ 15
Correlations ................................................................................................................................ 15
Hierarchical Multiple Regressions ............................................................................................. 16
DISCUSSION .......................................................................................................................... 17
Limitations & suggestions for future research ........................................................................... 19
Acknowledgements .................................................................................................................... 20
REFERENCES ......................................................................................................................... 21
APPENDICES .......................................................................................................................... 25
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INTRODUCTION

The upper echelons of businesses have increasingly gotten more diversified especially with the

advent of globalization. As a result researchers have shown a great interest into the topic of top

management team diversity and firm performance. Hambrick and Mason (1984) were one of the

first to contribute with their seminal work. They organized previous literature fragments that

address TMT composition into a more “upper echelon perspective” and built a theory around the

demographic and psychological characteristics of managers and organizational outcomes.

Empirical results on demographic diversity of TMTs & firm performance, however, have been

ambiguous. They tend to vary from negative e.g. (Michel and Hambrick, 1992), insignificant (West

and Schwenk, 1996) or even positive (Carpenter, 2002). Consequently, this casts a doubt on the

knowledge of diversity within the scientific community and calls for additional research.

Furthermore, researchers tend to focus almost exclusively on observable characteristics related to

diversity, such as age, gender and nationality etc. (Niclas et al., 2003). As a result this leaves an

unexplored gap at the cognitive level also referred to as unobservable (Erhardt, Werbel, & Shrader,

2003).

In light of the above, the contribution of this research is twofold. Firstly, I will use a new dataset

that hasn’t been utilized in the past. It is based on two European countries – Germany and the

Netherlands. Those two countries were chosen because they contribute a big part of the European

GDP, and they also provide a fresh perspective on the study of diversity because most research is

based on companies from the United States of America (e.g. Chen, Crossland, & Huang, 2016;

Herrmann & Datta, 2006). Secondly, I will attempt to operationalize my theoretical construct in a

more comprehensive manner by incorporating both observable (gender) and non-observable

(education & tenure) characteristics of diversity. In this way I incorporate both previous practise
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but also address the above mentioned gap. In order to do that, I first discuss the concept of diversity.

Then I link it to firm performance and ultimately hypothesise relationships between the above

mentioned characteristics of diversity and company performance.

LITERATURE REVIEW

TMT diversity

When researchers talk about diversity, they usually differentiate between 2 main categories.

Those can be broadly labelled as observable (demographic) and non-observable (cognitive).

Examples of the former are factors such as age, gender or race, whereas for the latter: values,

personality characteristics, knowledge, work experience, education etc. (Milliken and Martins,

1996; Pelled, 1996; Maznevski, 1994). A core assumption in that research agenda is however, the

idea that demographic characteristics are a good proxy for the cognitive ones (Neale, 1999). This

is one of the main reasons why extant studies tend to focus on demographics of TMT managers. A

top management team is often times referred to as senior management or executive management

and is responsible for the highest level of management at the organization. Here I define a TMT as

the firm’s board of directors (Homberg & Bui, 2013).

Overall, there are several theoretical lenses through which researchers look in order to assess

the impact of diversity. They can be further divided into two opposing stances based on how they

interpret the impact of diversity on performance – positive and negative.

Positive view on diversity

The first theoretical lens is the one that stems from the Upper Echelons Theory (UET). It states

that individual characteristics of TMT managers affect strategic decisions and this as a result affects

company performance. When the authors discuss strategic choice they define it as a fairly
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comprehensive term that includes decisions that are made both informally as well as formally. Their

arguments are derived from the idea that if a strategic choice involves a large behavioral component

it should then to an extent project the idiosyncrasies of the decision maker, in this case the TMT

managers (Hambrick and Mason, 1984). This claim directly goes to complement the second lens

which is discussed below.

Human Capital Theory suggests that skill & knowledge among top management team members

is the crucial component that affects the potency of execution of resource provision and monitoring

related roles, which are responsible for the firm performance (Hillman & Dalziel, 2003). A human

capital could be described as the skills, knowledge, competences and other attributes belonging to

individuals, which are relevant for the economic activity (OECD, 1998, p.9). According to Becker

(1964) the chief forms of human capital are training on the job and education. As a result members

of TMTs contribute with the unique human capital that they supply at the board of directors due to

different experiences and educational background (Kesner, 1988). This causes the decision making

process to be enhanced and more efficient, owing to the different perspectives and knowledge

contributed by diverse TMT members. Thus according to the human capital theory firm

performance will be positively affected by the heterogeneity of board members (Carter et al., 2010)

The third lens is based on the Resource Dependency Theory (RDT) which states that the main

role of TMT members is to provide supervision to lower managers and supply resources to the

enterprise. The RDT states that companies are reliant on their environments (Pfeffer, 1972). Thus

they are expected to procure resources from their surroundings which in its turn is said to improve

firm performance and to decrease uncertainty levels (Taljaard et al., 2015). TMT heterogeneity is

believed to promote better resource collection from the environment compared to a homogenous

TMT. The reason for this is that diverse TMTs have a wider and better access to networks &
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information (Bryant & Davis, 2012).

Negative view on diversity

The negative view on diversity and firm performance originates from social psychology. In

order to explain the relationship, literature derived from this field generally relies on the so called

similarity attraction perspective (Jehn et al., 1999; van Knippenberg, De Dreu, & Homan, 2004). It

looks at the homogeneity of the team and highlights its positive effects (Williams & O’Reilly,

1998). Allport (1954), claims that individuals constantly attempt to decrease the uncertainty that

comes from the unfamiliarity with new members during the time of formation of a group. This

happens because there is a fear of relational conflict which is attempted to be avoided.

Heterogeneity among people of the same team is believed to cause uncertainty and fear. Therefore,

uniformity among teams boosts the identification within the team. (van Knippenberg & Schippers,

2007; Jehn, Chadwick, & Thatcher, 1997). According to this stance, decision making will be of

better quality when teams are less diverse (Jehn & Mannix, 2001).

TMT diversity and firm performance

Company performance is an important topic in strategic management research. It is commonly

used as a dependent variable. In spite of its importance, however, there is almost never a unanimous

agreement about its definition, measurement and dimensions. This is one of the biggest issues that

limits progress in this field of research (Santos et al., 2012). For the purpose of this study, financial

performance will be defined by certain financial ratios that a firm reports at the end of the financial

year. Dursun et al. (2013) used this same approach and based on a sample of 2 351 Turkish firms

found that the best ratios that reflect firm performance are Earnings Before Tax-to-Equity Ratio

(Earnings Before Tax / Owners’ Equity) and Net Profit Margin (Net Income / Sales). Some other

frequently used ratios are Return on Assets, Return on investment (ROI) & Return on Equity
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(ROE). In this study I determine financial performance as the ROE or the Profit Margin of a

company for a given year.

Many scholars were intrigued by the topic of TMT diversity and its effect on firm performance.

There are both researches in favor and against that notion. For example, Nielson and Nielson (2009)

study the effect of nationality diversity in TMTs and its effect on firm performance. The data used

for the research is based on companies located in Sweden. The reason for this is that the country

has one of the most nationally diverse top management team backgrounds. Their results point to a

positive relationship. They argue, however, that different aspects of diversity affect performance

differently. For example, they claim that diversity in age, education or international experience do

not lead to a better firm performance. Additionally, conceptualizing diversity as a single variable

that combines many aspects poses a risk of omitting an important contextual variable that could

otherwise point to a different result.

As a result top management team scholars still have a long way before unravelling the mystery

behind TMT heterogeneity and its strategic implications (Hambrick et al., 1996). So far, researchers

have proposed that team diversity has a three-fold effect. Namely, that it promotes diversity in idea

formulation and strategic innovation but also that it results in more emotional conflict which

inevitably results in counter productivity, which is summarized under the positive and negative

view (Amason, 1996, Jehn, 1995). In this research I have decided to examine diversity as three

separate components, namely, gender diversity, education diversity and tenure diversity.

Gender

Generally, there is a growing trend that top management teams incorporate more female

members. Daily et al. (1999) conducted a study on Fortune 500 companies, and conclude that

women have made a substantial progress with regards to becoming part of boards of directors, but
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have not in terms of becoming CEOs. Bilimoria (2000) confirms that there is a slight increase in

the number of female board members but that there are very few companies that recruit females on

a higher level and that there is still bias based on sex, tokenism and stereotyping. Additionally, there

are studies that suggest that gender diversity in terms of females on TMT leads to firms having a

better financial performance. An example is Joecks et al., (2013)’s work where they find that

initially female representation on boards in German companies is associated with negative

company performance, but once a “critical mass” of at least 30% is achieved a reverse relationship

follows. Mahadeo et al. (2012) conducted a similar study but based on sample of firms from

emerging economies. They also found a positive relationship between gender diversity and firm

performance.

Based on Campbell & Mínguez-Vera, (2008)’s work it could be argued that gender diversity

promotes a better understanding of the marketplace by means of matching the TMT diversity to

that of the potential employees & customers, therefore increasing the chance of market penetration.

The consequences of this are usually associated with increased firm performance. Second

argument that could be derived is that higher female board representation is linked to more

innovation and creativity, which are thought to increase performance. Because those characteristics

are not uniformly distributed among men, but have a tendency to vary greatly among demographic

variables such as gender, an increase in females is expected to increase those characteristics as well

(Robinson & Kathleen, 1997). A third argument is that gender diversity is thought to increase

problem solving capacity based on the idea that females can contribute to the solution of a problem

by providing a more “feminine” set of values, which are not always present in men. According to

Hofstede (2001), those could be consideration of others, desire for consensus and less desire to

dominate over others. It is common sense then that better problem solving would bring costs down,
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therefore, increasing performance. Thus in light of the above mentioned arguments and studies I

propose the following hypothesis:

H1: Higher gender diversity leads to higher firm financial performance

Education

Studies show that when one is different from their colleagues with regards to the type or level

of education, the chance for higher turnover would seem to increase both in TMTs as well as work

groups. (Jackson et al., 1991). In another research, Wiersema and Bird (1993) found that Japanese

TMT members that were different in terms of the prestige of the university from which they

graduated are turning over more frequently than members that graduated from university with

similar prestige, and also that members with the highest dissimilarity would be the ones who had

the highest rates of turnover. In light of the above, higher turnover is most commonly associated

with more expenses because of the need to hire new managers, train them and bear the costs of

decision affected by bounded rationality which is usually higher in newly hired managers (Arthur,

1994). Thus, more costs automatically reduce the financial performance of the company. Another

explanation for the higher turnover could be that TMTs with high education diversity would have

managers with a lot lower degree of education (e.g. High School) compared to others from the team

(e.g. MBA/Masters). That discrepancy could result in conflict and bad functionality of the TMT

because of superiority complex exhibited by the people with better education (Hansen, 2007). This

as a result could force people with lower education to quit because of the toxic environment at the

workplace. In another study by Smith et al., (1994) diversity in TMT educational background was

found to negatively affect firm’s return on investment and the growth of sales, measures frequently

used as an assessment of the financial performance of the firm (Dursun et al., 2013). The reason

for those findings could be because of a cognitive disadvantage similar to the superiority complex
 10

mentioned above. Thus, based on the previously mentioned arguments and studies I propose the

following general hypothesis:

H2: Higher educational diversity leads to lower firm financial performance

Tenure

The argument that ТМТ tenure diversity has an impact on the organizational actions and

respectively on the organizational performance comes from the notion that tenure diversity

increases creativity and brings down group thinking - the psychological phenomenon which

happens within a group of people that desire harmony or conformity and this therefore results in an

irrational or suboptimal decision-making process and outcome (Weick, 1984). Additional argument

in support of the benefits of tenure diversity comes from the decision-making and information

theories. Diversity in terms of managers’ organizational tenure could have a positive effect on team

performance due to an increase in the knowledge, information, skills and abilities that heterogeneity

contributes (Williams & O’Reilly, 1998). Such teams theoretically are better equipped to solve

complex problems and to innovate more frequently. In similar vein, the cognitive resource

perspective points to the idea that TMTs would be more effective in solving non-routine and

complicated problems when the members possess an array of viewpoints (Wanous & Youtz, 1986).

In this regards, TMTs with heterogeneous organizational tenure appear to be having an enchanted

innovation capacity, which as mentioned earlier, has a positive impact on organizational

performance.

Generally, there is literature that supports those notions. In his study, Murray (1989) concluded

that temporal diversity, (defined as the combination of heterogeneity in TMT tenure, age & tenure

within the workforce) among both inclusive and exclusive TMT groups was positively associated

with long term performance in the oil industry, not so much however, in the food one. He reckons
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that this is because TMT’s in the oil industry have a more important role in defining a strategy

whereas in the food industry the important group is not the TMT but the marketing department. To

sum up, because tenure diversity is believed to increases creativity and to bring down group

thinking I propose the following hypotheses:

H3: Higher tenure diversity leads to higher firm financial performance.

METHODOLOGY

Sample

In order to collect the data for this study I used two internationally accredited sources, namely

Orbis and BoardEx. My sample population is consisted of all the countries within the European

Union and all the companies reported on the BoardEx data set that posits information on the board

of directors related to those companies. My sample frame got reduced to 616 observations based

on two countries: Germany and the Netherlands, and the information available for them for the

year 2015. From those 616 observations, 27% represented TMTs and companies from the

Netherlands and 73% from Germany. This was expected because Germany is a lot bigger country

than the Netherlands and respectively has more output and economic activity. Because of the

uneven distribution of German and Dutch companies I used stratified sampling. I selected 99

companies on a random principle – 27 Dutch ones and 72 Germans. Those companies are coming

from various sectors ranging from banking to aerospace and defence. Due to some companies

lacking information on certain variables that are relevant for this research I decided to substitute

them with companies that have the complete set of information from within the randomly generated

sample.
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Measures

Dependent Variable

I am only using one dependent variable (DV), namely firm performance. I measure it by

collecting data on two financial ratios that are very closely related to the company’s financial

performance, Return on Equity (ROE) and Profit Margin. I do not use the Net Profit Margin as

suggested by Dursun et al. (2013), because the financial statements provided by Orbis provide

financial information only on before-tax basis whereas the Net Profit Margin is calculated on after-

tax basis. This minor deviation, however, shouldn’t cause any big issue in the data analysis because

the corporate tax in the Netherlands and Germany is quite similar, respectively 25% & 29%

(Trading economics, 2018). The data for the dependent variable was collected for the year 2016.

Independent Variables

In this study I identify 3 independent variables, namely: IV1 gender diversity – measured by

the percentage of females on the board of directors from the companies sampled. IV2 education

diversity – measured by the coefficient of variation in education within a TMT, as suggested by

Barkema and Shvyrkov (2007). And IV3 TMT tenure diversity – measured again by the

coefficient of variance resulting from the various amount of years each TMT member has spent on

the board of directors. All the data for the independent variables has been collected one year prior

to data related to the dependent variable in order to enable causality (Pearl, 2009).

Control Variables

Control variables are incorporated in the regression model to ensure that the research isn’t

biased. In this study, I am controlling at two stages, namely, at the TMT level and at the firm level.

On the firm level I control for company size based on the number of employees, because the

companies in my sample range from such with 13 employees up until 232873. Because of the huge
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difference in company sizes I had to convert my control variable into a natural logarithm. On the

TMT level, I control for the number of people on the board of directors. The expected effect of the

control variables is that they both would be positively related to firm performance. Thus bigger

companies in term of workforce and TMT size would outperform such that are smaller. I chose

those two control variables because they have been widely incorporated by other researchers

(Arena et al., 2015; Campbell & Minguez-Vera, 2008; Mahadeo et al, 2012).

Analysis

In order to find if there is a relationship between TMT diversity and firm performance, as

defined in this thesis, I use Hierarchical Multiple Regression. It provides a way to reveal if variables

that are of interest explain a statistically significant amount of variance in the DV (Dependent

Variable) after taking into consideration any additional variables (controls). This is more of a

framework that compares models than an actual statistical method. With it, you can build multiple

regression models by means of adding the additional variables to the previous model at each step.

Follow-up models invariably include the previous models that were tested. In most instances the

interest is to determine if newly plugged variables improve the coefficient of determination (R2)

significantly or in other words the percentage of explained variation in the dependent variable of

the model (Gelman & Hil, 2006). Thus I regress the dependent variable on the three IVs and the

controls. Based on that, the following equation can be derived:

ROE= β0 + β1GDIV + β2EDIV + β3TDIV + β4FSIZE+ β5BSIZE+ε

Where:

ROE = Return on investment (DV)

GDIV = Gender diversity (IV1)

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EDIV = Education diversity (IV2)

TDIV= Tenure diversity (IV3)

FSIZE = Firm size (Control1)

BSIZE = Board size (Control2)

Before conducting the regression analysis, however, several assumption must be met, Firstly,

homoscedasticity - this assumption requires that the variance of the error terms is spread similarly

across the different values of the IVs. Secondly, a linear relationship between the outcome variable

(DV) and the independent variables (IVs) must exist. Scatterplots would reveal the type of

relationship – curvilinear or linear relationship. Absence of Multicollinearity— Hierarchical

Multiple Regression just as the normal multiple regression, assumes that the independent variables

do not exhibit high correlation (above 0.7 usually) with one another. And last but not least,

multivariate normality, where the residuals of the regression must be normally distributed (Gelman

& Hil, 2006).

RESULTS

The results of my empirical research are discussed here. They are derived by an analysis trough

SPSS. The initial hypotheses are also discussed. Firstly, I am testing the above mentioned

assumptions, secondly I am providing an overview of the descriptive statistics related to the

variables of interest. Then I am discussing correlations among the variables. Lastly, I show the

multiple regression results and provide a short summary of the findings.

Testing for assumptions

Appendix 3 shows a scatterplot with a regression of the standardized residuals and the

standardized predicted value. When looking at the residuals it looks like they are plotted somewhat
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evenly across the scatterplot. This means that the assumption for having homoscedasticity is met.

Additionally, multicollinearity doesn’t seem to be an issue because the VIF of all the variables is

smaller than 5 (table3). The multivariate normality assumption also seems to be unviolated based

on the QQ – plots in appendix 1, because most of the observations lie on the diagonal line. The

assumption for linearity, however, may not completely hold as seen by the wide spread in appendix

4.

Descriptive statistics and correlations

Due to extreme outliers in both the dependent and independent variables I was forced to remove

several extreme observation. This resulted in an overall smaller sample (N=87) with which all the

three hypotheses were tested. A table of the descriptive statistics of the sample without the extreme

outliers is provided bellow:

Table 1: Descriptive Statistics

Std.
N Minimum Maximum Mean Deviation Variance Skewness Kurtosis
Statistic Statistic Statistic Statistic Statistic Statistic Statistic Statistic
FirmSize 87 2.00 31.00 10.46 6.04 36.53 1.29 1.41
BoardSize 87 2.56 12.36 7.55 2.39 5.74 -0.14 -0.89
Gender 87 0.00 0.40 0.12 0.11 0.01 0.42 -0.81
Education 87 0.00 4.67 1.34 0.90 0.81 1.45 2.78
Tenure 87 0.00 144.50 21.84 23.82 567.39 2.46 8.73
Firm performance 87 -0.65 0.83 0.11 0.22 0.05 -0.54 3.18
Valid N 87

What is worth mentioning is that for example, on average there are only 12% women on the

TMTs and that there are companies from the data set that don’t have a single woman. This could

cause difficulties in testing the hypothesized relationship in H1.

Correlations

All the variables were tested for correlations between each other. Correlation is a technique
 16

used in statistics that can reveal if and how strong variables are related to each other. It doesn’t

however, explain causality. No big correlations were observed. The results are displayed below:

Table 2: Correlations

1. DV 2. CV1 3. CV2 4. IV1 5. IV2 6. IV3

Pearson 1. FirmPerformance 1.000
Correlation 2. FirmSize .276** 1.000
3. BoardSize .339*** .683 1.000
4. Gender .074 .194 .220 1.000
5. Education .076 -.016 .049 .266 1.000
6. Tenure .119 -.105 -.022 -.121 .006 1.000
1% *** 5%** 10%* significance

Hierarchical Multiple Regressions

In order to test the three hypotheses suggested earlier, I incorporated them in a Hierarchical

Multiple Regression models. In the first model of the regression I regress just the control variables

on the dependent variable and in the second one, all the IVs and CVs on the DV. The results are

below:

Table 3: Hierarchical regressions

Model 1 Model 2
Beta t-value VIF Beta t-value VIF
Control Variables -1.599 -1.975
FirmSize 0.082 0.588 1.875 0.112 0.784 1.921
BoardSize 0.283** 2.016 1.875 0.264* 1.848 1.92
Independent Variables
Gender -0.006 -0.058 1.152
Education 0.066 0.616 1.086
Tenure 0.136 1.297 1.03
Model Fit
R2 0.119 0.141
F-value 5.649*** 2.658**
1% *** 5%** 10%* significance

It becomes clear, from the first model, that the control variables (Firm Size and TMT Size) that
 17

are used in this analysis explain 11.9% of the variation in the dependent variable (firm

performance). Those results confirm the hypothesized effect of one of the controls, namely that

companies with bigger board of directors perform better than the opposite counterparts. The second

model accounts for the three original hypotheses. It includes the CVs and the IVs and is overall

significant (appendix 2). None of the independent variables, however, seem to be significant. The

R2 compared to the first model only increased by 2.2%. From this it could be concluded that the

hypothesized relationships between gender (H1), education (H2), tenure (H3) diversity and firm

performance are not present. This is a signal that there may not be a linear relationship which is in

line with the earlier test of this assumption (appendix 4). Only IV3 – tenure diversity appears to

be having a somewhat smaller p-value of 0.198, this nevertheless, still being too big to claim any

significance. What is worth mentioning, nevertheless, is the negative direction that the second

model displays for gender diversity and firm performance (H1). Even though it is not significant

(p-value 0.198) it shows that more women aren’t really associated with better financial

performance, but perhaps with a negative one. Based on this data set and the analysis, it becomes

apparent that none of the three original hypotheses can be confirmed.

DISCUSSION

This study examined the relationship between certain aspects of demographic and cognitive

diversity and their effect on firm performance, specifically at the level of board of directors. The

results, however, didn’t support any of the initially proposed hypotheses, that gender, education

and tenure diversity would affect firm performance. A potential explanation for the disappointing

findings could be that demographic diversity here is hypothesised to have a direct effect on firm

performance, whereas it could be the case that its effect is indirect, as hypothesises by Glick et al.,

(1993). This would mean then, that demographic diversity would pose effect on other factors
 18

unrelated to firm performance, for instance type of communication used within the TMT.

Additionally, it might very well be that demographic diversity effects are too meagre to be captured

consistently. What is more, demographic heterogeneity might not truly affect cognitive diversity

thus explaining the absence of any important effects on firm outcomes (Burke et. al., 1998).

Majority of researchers assume that there is a link between cognitive and demographic diversity

(Smith et al., 1994), however, there is also evidence against this notion. Glick et al. (1993),

discovered that heterogeneity measured in terms of demographic characteristics of board of

directors doesn’t correlate with cognitive diversity.

Even though this is not what I originally expected to find, it is not surprising because many

researchers have also faced similar results, an example is Michel and Hambrick (1992) where they

find that TMT tenure diversity had results contrary to those that were initially hypothesised.

Homberg and Bui (2013) also attempt to resolve the issue on diversity. They try to synthesize and

accumulate the results on TMT diversity and firm performance from 53 studies. Their work

integrates more than 200 estimates in a meta-regression analysis. The results from this analysis,

however, do not show a link between top management team diversity and corporate performance.

Nevertheless, the authors find that there is a basis for a publication bias in TMT literature and firm

performance. This leads them to doubt the impact of TMT diversity on company performance.

Publication bias is the practise of treating research with significant result more favourably than

research with insignificant results. This can result in flooding of results that are significant even

though the general trend might be such of insignificance.

While I discussed two views on diversity in the literature review, Positive and Negative, perhaps

those results point to a third one – Insignificant, where TMT composition doesn’t matter at all.

Even though the hypotheses suggested couldn’t not be backed up by evidence, something else came
 19

as a relevant finding. It appears that companies that have larger board of directors, seem to be

outperforming such with less TMT members.

Limitations & suggestions for future research

This study has important limitations that need to be discussed. The first one is that it was

conducted in a very short amount of time – only four months. This means that there are a lot of

unpolished aspects that could have been addressed better had there been more time and resources.

For example, the data collected came from data set composed for reasons other than those of this

research. Additionally, firm performance was measured in a very simplistic way, namely by the

Return on Equity (ROE) of companies. Firm performance cannot really be analyzed objectively

just by looking at a single ratio. For example, nothing could be said about the productivity of the

employees, turnover, CSR performance etc. Additionally, there are qualitative aspects of

performance, such as sustainability, that aren’t really reflected in any way by this study. A company

could have good figures but could be wasting a lot of resources in a very inefficient way and this

is not really reflected here. The third major limitation of this paper is caused by the research

approach used. It is impossible to determine if diverse TMT members in fact do differ significantly

in their behavior compared to no diverse ones. Even though the results are such of non-significance

the case might be different if behavioral diversity could have been accounted for, because gender

diversity for instance doesn’t necessarily mean an entirely different pattern of behavior. This issue

could be address by means of a both qualitative (participant observations, interviews etc.) and

quantitative approaches which are far beyond the scope of this research.

But even with those limitations, this research contributes important information related to the

effects of diversity on performance. It challenges the idea that diversity has any role at all. It might

very well be the case that it indeed doesn’t matter that much whether a TMT is composed of diverse
 20

members or not. There could be other latent factors that successful board directors bring about,

which are responsible for the better performance of organizations, but those might not be a result

of diversity. This study calls for a further research in this area, however, in a more qualitative aspect

in order for some of the limitations exhibited here to be overcome.

Acknowledgements

This Bachelor thesis wouldn’t have been possible without the close supervision of Mr. H.U.

Haq, PhD.
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APPENDICES

Appendix 1: Multivariate Normality testing (CVs, IVs & DV)

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Appendix 2: Significance of regression models

ANOVAa
Sum of Mean
Model Squares df Square F Sig.
1 Regression .501 2 .251 5.649 .005b
Residual 3.727 84 .044
Total 4.229 86
2 Regression .596 5 .119 2.658 .028c
Residual 3.633 81 .045
Total 4.229 86

Appendix 3: Checking for Heteroscedasticity

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Appendix 4: Checking for linearity