1. organizational teams to be effective, diversity has

1. INTRODUCTION

Since the
early 1990s, there is a worldwide increase of globalization, which gave rise to
the mobility of people and diversity in the workplace. There no longer is an
insular environment, but people are part of a worldwide economy (Green, López,
Wysocki, Kepner, Farnsworth & Clark, 2002). International borders became
smaller and nowadays companies have the opportunity to attract employees from
all over the world and embrace and manage diversity in the workplace. Diversity
encounters ‘the distribution of personal attributes among interdependent
members of a work unit’ (Jackson, Joshi & Erhardt, 2003). The increasing workplace
diversity can be seen as a result of demographic changes, such as immigrants,
an increasing number of women and racial minorities in workplaces and customers
cohorts (Fenwick, Costa, Sohal & D’Netto, 2011). Diversity attributes can
encounter differences with respect to age, class, race, ethnicity, gender etc.
(Esty, Griffin, Schorr-Hirsch, 1995), which can be labelled as the primary
level of diversity, because it can be observed. Furthermore, a secondary level
of diversity can be identified, which consists of deeper attributes such as personality,
values and beliefs that can predict individual behaviour.  

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In order for
organizational teams to be effective, diversity has to be managed. Extensive
research has shown that managing diversity is an organizational challenge. When
a company addresses differences and manages it correctly, numerous benefits
regarding performance can arise. It is said that on regional level, migration
and cultural diversity can have a positive economic impact on productivity and
innovation (Ozgen, 2013). Workplace diversity management can be defined as
valuing and recognizing differences between people of a team and encouraging an
equitable work environment (Fenwick et al., 2011). In earlier research, it is
also suggested that managing diversity refers to systematic and planned
commitment on the part of organizations to recruit and retain employees from
diverse demographic backgrounds (Prasad, Mills, Elmes & Prasad(b), 1997). Diversity
not only increased among employees in the lower workplace, but also in the top management
teams of organizations. The question that arises is whether this diversity has
a positive influence on corporate performance or whether the potential for
conflicts, communication problems and lack of trust outperforms the advantages.
Research has been done on the effectiveness and performance of diversified
teams, but a gap in the literature exists regarding the specific relationship
between the diversity of a top management team and corporate performance. Especially
empirical evidence regarding multiple diversity dimensions simultaneously over a
specific time period is thin and received relatively little attention from
researchers (Ruigrok, Peck & Tacheva, 2007).

 

The aim of
this study is to fill this gap and investigate the relationship between
diversity in Top Management Teams (from now on: TMTs) and corporate performance
on the banking industry of the European Union from 2014-2016. The research
question of this study will be: What is
the relationship between diversity in TMTs and corporate performance?

 

Thereby,
three sub-questions can be established.

1.    
What
is the relationship between gender diversity in TMTs and corporate performance?

2.    
What
is the relationship between nationality diversity in TMTs and corporate
performance?

3.    
How
is the relationship between TMT diversity and corporate performance moderated
by the degree on internationalization?

 

 

To give an
answer on all the research questions, this article will consist of the
following. 

First, existing
researches on diversity in TMTs and corporate performance will be reviewed and
discussed in the section theoretical framework. Hypotheses on the relationships
will be identified and this will lead to a conceptual model. Subsequently, the
research methodology will be presented and data will be studied and analysed.
Finally, a conclusion and discussion on the results will be presented and
recommendations for future research will be given.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2. THEORETICAL
FRAMEWORK  

2.1 Diversity in Top Management Teams (TMTs)

Since the
early 1980s an academic interest in management teams emerged and strategic
leadership theorists adopted the term top management team, TMT, which refers to
”a small group of most influential executives at the apex of an organization –
usually the CEO (or general manager) and those who report directly to him or
her-” (Finkelstein, Hambrick & Cannella, 2009). Research suggests that it
is better to study TMTs, instead of only CEOs, because it provides better
estimates on the influence of management on organizational outcomes.

 

TMTs can be
seen as the brain centre of an organization and experienced top managers bring
knowledge of opportunities and threats to a company to formulate and implement
effective strategies (Singh, Gaur & Schmid, 2010). An important element of
a TMT is the group composition. Composition refers to the combination of characteristics
of top team members, encompassing both executive experience such as age,
background and education, as well as psychological factors such as values, beliefs
and cognitions (Finkelstein et al., 2009). Similar to groups in social life, TMTs
are not a random sample of people and research shows that groups in companies
differentiate themselves by creating niches in social space (Boone, Wezen &
van Witteloostuijn, 2006).  The most
important forces that drive team composition are homophily and network constraints,
which is described as the ‘homophily principle’ (Ruef, Aldrich & Carter,
2003). It implies that TMTs tend to selectively strive for team members that
have their own demographic characteristics, so that these characteristics are
strengthened and homosocial reproduction is promoted (Boone et al, 2006). Moreover,
studies found that team heterogeneity is a strong predictor of team turnover
rates and teams members with dissimilar personal attributes are more likely to individually
leave the team (Jackson, Brett, Sessa, Cooper, Julin & Peyronin, 1991).

 

However, the
workforce population became more diverse and organizations began to realize
that diversity, instead of homogeneity, might be beneficial and can change
patterns of behaviour (Jackson et al., 1991). Thereby, problem solving is said
to be best handled by a heterogeneous group, because they elaborate more on
alternatives due to knowledge, diversity of opinion, and background (Hambrick
& Mason, 1984).

2.2 Corporate Performance

Corporate
Performance is one of the most investigated business concepts. When it is
measured correctly and efficient, a true picture of an organization can be
painted which is useful for the future (Brown & Laverik, 1994). Financial
information is used most often to measure corporate performance. This
information is widely available, because of law requirements regarding
accounting disclosures. The specific extent of financial information that
companies are obligated to disclose, depends on whether the company is private
or public. Financial ratios are especially extensively used to analyze the
financial health of a company, because it makes comparison across companies
within a industry possible (Delen, Kuzey & Uyar, 2013).

 

The
performance measure used in this paper is Return On Assets (ROA). It is the
most common measure of profit for financial institutions (Augustine, Wheat,
Jones, Baraldi & Malgwi, 2016) and gives an idea of how effective a company
is in converting investments into money and the earnings that were generated from
the assets. The ROA is highly dependent on the industry, as assets are being
used across industries in a different way. This is the reason for this paper to
be studied on a specific industry, the banking industry. Furthermore, ROA can
also be used for comparison against multiple years, because it gives an insight
in trends. ??????

2.3 Upper Echelons Theory

In 1984,
Hambrick and Mason published their article ”Upper Echelons: The Organization as a Reflection of Its Top Managers”
which surged the interest for TMTs and its relation to corporate performance. The
Upper Echelons theory states that ”organizational outcomes – strategic choices
and performance levels – are partially predicted by managerial background
characteristics” (Hambrick & Mason, 1984; Hambrick, 2007).  Executives’ experiences, values and
personalities influence their strategic actions and choices, which is in turn related
to corporate performance. Thereby, it is said that organizations
are, to a certain extent, a reflection of the characteristics of their top
managers (Upper Echelon) and can be seen as the distribution of their members’
traits (Boone et al., 2006). However, Hambrick and Mason also recognized the
fact that emerging situations and a specific environment can influence upper
echelons characteristics (1984).

 

Since the
publication of Hambrick and Mason and the increasing degree of diversity in the
workplace, literature regarding the impact of diversity on corporate
performance developed. Team diversity can be seen as a valuable resource, since
it stimulates effective group discussions, creates original decisions and it
prevents potential groupthink, which arises in homogenous groups (Bantel &
Jackson, 1989). A valuable theoretical argument is that: ”High levels of
diversity among board members, TMTs or work groups are assumed to lead to
improved performance”(Homberg & Bui, 2013). This is often referred to as
the diversity-performance link, which examines the impact of diversity in TMTs
and corporate performance. Thereby, research suggests that all demographic
attributes alleviate performance due to the increase in the resources offered
to the team (Webber & Donahue, 2001).

However, not
all research provides evidence on a positive relationship. Moreover, the
linkage between diversity and corporate performance shows contradictory
results. According to Kirca et al., group diversity can affect decision-making
processes, decision implementation and may lead to conflicts and communication
problems (Kirca, Hult, Deligonul, Perryy & Cavusgil, 2012). Furthermore, it
is suggested that heterogeneity may limit the exchange of valuable information,
due to differences in organizational tenure and management characteristics and
there is more interpersonal conflict between members (Bantel & Jackson,
1989).

2.3.1 Gender diversity and Corporate
Performance

Gender
diversity in top management teams has always been a critical topic, since women
often suffer from the consequences of gender stereotyping when cooperating and
working with men in teams (Badal & Harter, 2013).  They have difficulty ‘climbing the corporate
ladder’ in a company. This was visible in 2012, when only 3.4% of the highest
positions or chairman functions in EU member states were occupied by women
(Marinova, Plantenga & Remery, 2015). For this reason, increasing the
gender diversity in top management positions has become a point of focus for
governmental institutions, especially in Europe. New governance guidelines were
introduced, such as the Higgs Report in 2003, which required all FTSE 350
companies in the United Kingdom with less than 20 percent of women in the
boardroom to explain their top management team composition (Kakabadse,
Figueira, Nicolopoulou, Hong Yang, Kakabadse & Özbilgin, 2015). Thereby,
the most well-known is the quota legislation of at least 40 percent female
representation among the TMT, which was introduced in Norway in 2006 (Marinova
et al, 2016). Due to the increased governmental guidelines regarding gender
diversity in TMTs, the degree of women in boardrooms has steadily increased.
The question that arises is whether gender diversity has a positive influence
on corporate performance or if it is just a worldwide trend. In the media,
there is more emphasis on the positive relationship between gender diversity in
TMTs and corporate performance, despite their shortcomings (Lückerath-Rovers,
2011). However, there are also numerous researches that find no effect or
negative effects.

 

One study
that suggested a positive relationship is that of Catalyst (2004). He investigated
the link between gender diversity in TMTs and corporate financial performance,
by examining 353 Fortune 500 companies in the US. His key findings concluded
that companies with a high representation of women in their TMT experienced
better financial performance, measured on Return on Equity and Total Return to
Shareholders. However, this research does not show any evidence of the
direction of causality, which limits its findings. Furthermore, McKinsey stated
that companies with a higher proportion of women on their TMTs are the
companies that have the best performance (McKinsey & Company, 2007). Adams
and Ferreira (2009) found no evidence suggesting that policies regarding gender
diversity in TMTs would improve corporate performance on average and they state
that the overall effect is even negative. Another study indicated that on the
basis of a data set from the Netherlands and Denmark, there is no relation
between TMT gender diversity and corporate performance (Marinova et al, 2016). Overall,
there is a lack of strong evidence regarding gender-diverse board and higher
financial performance (Augustine et al, 2016).

 

Hypothesis 1: Gender Diversity in TMTs has no significant influence on
corporate performance

2.3.2 Nationality Diversity and
Corporate Performance

Research
suggests that over the last 25 years the appearance of foreigners in
supervisory boards and top management teams of the world’s largest MNCs
increased considerably (Kaczmarek & Ruigrok, 2013). Evidence of Staples
(2007) showed that in late 2005, 75 percent of the world’s 80 largest MNCs had
at least one non-national board member, but still only 25 percent of these TMTs
consisted of non-nationals. The trend of integrating multiple nationalities in
TMTs became more widespread, because it provides a transnational social
infrastructure that may facilitate the emergence of global business class
(Staples, 2007).

 

Nationality
can be defined as the national origin of individuals, which reflects the
environment of the country in which the individual spend the majority of its
formative years (Nielsen & Nielsen, 2013). It is investigated that
nationality strongly influences values and cognitions of individuals and
groups, however the effect of nationality diversity on corporate performance
has not been studied that extensively. The 1984 Upper Echelons theory of
Hambrick and Mason does not take into account that nationality diversity might
reflect Echelons characteristics, so the original model is extended to
integrate the Upper Echelons internationalization variables (Kaczmarek &
Ruigrok, 2013). The study of top managers’ nationality is a recent enhancement
to the original framework.

 

Nationality
can affect a person in numerous ways, from values to language and these in turn
will affect the person’s behaviour and how he or she is perceived in a team or
the entire company (Hambrick, Davison, Snell & Snow, 1998).  In a national diversified TMT, the members
differ in terms of nationality, which can have substantial influence on team
functioning. Nationality has a direct effect on communication styles, attitudes
and cultural values of managers and influences the group decision-making
process. Research has shown that nationality diversity can lead to higher
corporate performance, due to access to more relevant and higher quality
information. Institutionally embedded experiences reconcile the consideration
of alternatives, the generation of creative ideas and the engagement in
in-depth discussions (Hambrick et al, 1998).

 

However, also
negative relationships between nationality diversity in TMTs and corporate
performance are suggested. Nationality diversity may lead to conflicts,
miscommunications, a lack of trust and relationships between team members and
slower decision-making (Kirca et al, 2012). Thereby, nationality diversity may disrupt
and raise high costs for team dynamics and cohesiveness in the company will be
lowered (Nielsen & Nielsen, 2013).

 

Hypothesis 2: Nationality Diversity in TMTs has no significant influence
on corporate performance.  

2.4 Firm Internationalization

Firm internationalization is a multidimensional phenomenon that has attracted
attention from researchers since the late 1980s. Moreover, a number of
empirical studies attempted to investigate the influence of internationalization
on behaviour and performance of firms. Several terms are used, such as multinationality,
international expansion and international geographic diversification, to
describe the extent to which a firm is active beyond their home borders (Kirca
et al, 2012).  Internationalization can
be defined as ”the strategy through which a firm expands the sales of its
goods or services across the borders of global regions and countries into
different geographic locations or markets” (Hitt, Tihanyi, Miller &
Connelly, 2006).  

It became visible in the international business environment that
internationalization has become an increasingly import strategic option for
firms who want to gain sustained competitive advantages (Hitt et al, 2006).
Thereby, firms might internationalize more to achieve monopolistic advantages,
risk reduction or to benefit from advantages in the foreign country and use
them in conjunction with their own resources (Riahi-Beklkaoui, 1998). However,
achieving a beneficial degree of firm internationalization requires multiple actions
by companies and is often a lengthy process. Markets and appropriate products
have to be analysed, competent managers and methods of communication have to be
chosen and capital has to be obtained (Jankoswska, 2011).

It is assumed that firms who are involved in many countries have a
higher degree of internationalization than firms who are conducting business in
only a few countries (Jankowska, 2011). Therefore, the scope of
internationalization is universally measured by the number of countries the
firm cooperates within each area of its activity or the global presence. The
best measure according to literature is the foreign revenues to total revenues
and foreign assets to total assets ratio (Riahi-Belkaoui, 1999). However this
may lead to potential bias to the exclusion of intermediate goods (Berrill,
Hutson & Sinkovics, 2011) and most of the companies do not disclose
information on foreign revenues and assets. In this paper, we will focus on the
OSTS ratio, the number of overseas subsidiaries in relation to all
subsidiaries.

Furthermore, a distinct relationship between the degree of
Internationalization and TMT diversity exists. The growing internationalization
of companies can lead to an increasing demand for board members who possess
knowledge, experience and connections in foreign markets, which are necessary
to link the company to different contexts of foreign countries (Ruigrok et al, 2007).  As nationality diversity is a recent dominant
enhancement to the Echelons theory, the degree of internationalization is also
important to take into account and therefore it is added as a moderator in this
paper to include its effects. I will now elaborate more on these effects
regarding gender and nationality diversity.

2.4.1 Gender diversity and
Internationalization

Gender
diversity in TMTs is seen as an important source of economic advantages for
firms whose significance is increasingly recognized by institutional investors
and shareholders (Saeed, Yousaf & Alharbi, 2017). The context of gender
diversity may differ in emerging countries and that in the most developed
countries, due to ownership characteristics and culture. It is found that there
is a positive relationship between gender diversity and internationalization,
because firms that operate in international markets are relatively open-minded
regarding women in TMTs and internationalization creates demands for female TMT
members (Saeed et al, 2017). Thereby, local firms tend to rely more on family
ownership and traditional value systems, which not necessarily includes women
in TMTs.

 

Hypothesis 3a: The degree of internationalization positively moderates
the relationship between gender diversity and corporate performance

2.4.2 Nationality diversity
and Internationalization

Nationality
diversity can be seen as an often neglected, but imported indicator for the
degree of internationalization of a firm and its ‘transnational mindset’ (van
Veen & Marsman, 2007).

Research of
Kaczmarek & Ruigrok (2013) suggested that nationality diversity in TMTs
becomes beneficial only in firms with a high degree of internationalization. This
can be explained by the fact that human and social capital of the nationality
diverse TMT members can be fully utilized, when they are exposed to serious
challenges of operating in multiple culturally and institutionally distant
markets (Kaczmarek & Ruigrok, 2013). Thereby, a higher degree of firm
internationalization is associated with enhanced organizational complexity and
gives management more challenges regarding governance, coordination and
information processing. This will be better handled by a nationally diversified
TMT (Sanders & Carpenter, 1998).

 

Hypothesis 3b: The degree of internationalization positively moderates
the relationship between nationality diversity and corporate performance.