Does a diverse top management team increase firm performance? New research by SMG Professor Bo Bernhard Nielsen with Sabina Nielsen from INT suggests that the answer is: It depends.
Important strategic decisions in firms are typically made by a select group of upper echelons, often referred to as top executives or the top management team (TMT). The composition of this team of top managers has received a lot of attention in the academic literature as well as in practice as firms and academics ask themselves what the optimal composition of firm upper echelons should look like. Does a homogenous team outperform a more diverse team? If so, why, when and how?
Professor Bo Nielsen explains: “Theory suggests that diversity may result in both positive (cognitive) as well as negative (affective) consequences, however, despite decades of research into this topic, we still do not fully understand when (under what conditions) the benefits of TMT diversity will outweigh the costs. More fundamentally, most research assumes diversity to be uni-dimensional and its effects to be unitary – that is either positive or negative”. Bo Nielsen goes on to explain that this assumption is highly problematic as diversity is a complex multidimensional construct which needs to be unpacked in order for its effects to be adequately understood. Moreover, the context, within which a specific set of decisions are made, is also likely to influence the performance outcomes of TMT diversity.
In the forthcoming article in Strategic Management Journal, Professor Nielsen (with Sabina Nielsen also from CBS) demonstrate that the consequences of TMT diversity depend on the (1) specific attributes of diversity being considered and (2) team, firm, and industry conditions under which strategic decisions take place. In their multilevel study, they provide strong evidence of the multi-dimensional nature of diversity and show that TMT diversity is not unitary (positive or negative); rather the salience of specific diversity attributes vary with different layers of context. Based on a unique sample of Swiss multinationals, they start out by studying the effects of nationality diversity (the heterogeneity in different nationalities present on the top management team) on performance, moderated by team, firm and industry contextual influences. Their findings clearly show that while nationality diversity in general is positively associated with firm performance, it is more so in long-tenured teams of highly internationalized firms operating in munificent industries.
With globalization accelerating and executive search transcending national borders, these findings are important as the number of non-nationals on TMTs of multinational corporations (MNCs) is steadily increasing. The resulting TMT nationality diversity may have important implications as national origin has a profound influence on strategic decision making, team dynamics, and firm performance. “Different nationalities bring different values and cognitions to the decision-making process, which ultimately leads to more creative and better strategic solutions”, says Bo Nielsen. He explains that having grown up, gone to school and been embedded in a particular institutional context has profound implications for how a person understands the environment and ultimately makes decisions. “We bring with us these institutionally imprinted experiences wherever we go and thus top managers are likely to, subconsciously, draw on these deeply embedded experience when making strategic decisions; especially under high complexity, ambiguity and uncertainty. As such, institutionally embedded experiences acquired during an individual’s formative years are far more likely to influence strategy-making than say international experiences acquired during a relatively short period of stay in a foreign country”, says Bo Nielsen, who goes on to emphasize that international experience is a poor substitute for nationality diversity, however, one that is often invoked by CEO’s when asked about the lack of nationality diversity among its upper echelons.
In Denmark, most top management teams are rather homogenous – both in terms of nationalities as well as many of the other dimensions of diversity (e.g., gender, age, industry experience etc.). This is interesting given the relative high level of international dependency of many large Danish firms. In contrast, the degree of nationality diversity on top management teams in Switzerland is significantly higher and successful firms like Nestle has a tradition of having many different nationalities on their top management team. This raises important questions regarding the potential value of nationality (or other types of) diversity for multinational firms. The forthcoming article in Strategic Management Journal helps answer some of these questions.
Nielsen, Bo B., Nielsen, Sabina. 2013. “Top Management Team Nationality Diversity and Firm Performance: A Multilevel Study”, Strategic Management Journal. 34:3, pp. 373-382. DOI: 10.1002/smj.2021.