The impact of top management team members diversity on

The Impact of Top Management Team Members Diversity on Corporations’ Performance and Value in Emerging Markets

Introduction

As corporations continue to operate in an increasingly globalized and diverse business environment, the effective management of diverse workforces has become an essential factor in ensuring long-term success and economic growth. Top management team (TMT) member diversity has emerged as a critical corporate strategy that plays a pivotal role in enhancing a corporation’s overall performance and sustainable competitive advantage.

While the significance of TMT member diversity has been widely recognized in developed markets, its impact in the context of emerging markets has garnered relatively less attention. This study aims to bridge this gap in knowledge by examining how TMT members diversity contributes to the generation of financial benefits for common stockholders in emerging market settings.

Diversity in top management teams (TMTs) can be assessed using various criteria, including demographic diversity (e.g., gender, race, age, nationality) and experiential diversity (e.g., functional backgrounds, industry experience, educational backgrounds, length of service). The concept of diversity in the top management team of corporations has gained increasing attention in recent years, as diverse perspectives and experiences in decision-making processes can lead to improved performance and value for corporations.

Maximizing the wealth of shareholders is the long-term goal of the TMT, and this goal has become generally accepted by academics and professionals, not only at the level of international markets but also in emerging markets. This objective has been viewed through the lens of various financial theories and models, including “agency theory” and “upper echelon theory.”

The study does not adopt managerial ability as a measure to explain the corporation’s performance, as the basis for building the concept of estimating managerial ability is a benchmark between the same industries by identifying the best performers, which limits its application to all stocks listed on the stock exchange. Instead, the study utilizes economic value added (EVA) and Tobin’s Q as financial metrics to measure a corporation’s performance and value.

Prior research utilizes social psychology theories to elucidate the primary impact of top management team (TMT) diversity on a corporation’s performance. Two contradictory theoretical reasons are presented in the literature: one explanation is grounded in social categorization theory and the similarity-attraction paradigm, which suggest that TMT diversity has a detrimental impact on the performance of corporations. The other explanation points to the positive impact of TMT member diversity.

Investigating the impact of TMT diversity on corporations’ performance and value in emerging markets is crucial for understanding how diversity can be leveraged as a creator of value. While there are clear potential benefits, it’s essential to critically examine this relationship considering the complexities of different markets and organizational contexts. Corporations that effectively harness the power of diverse leadership teams can gain a competitive edge, drive innovation, and navigate the challenges of emerging markets more effectively.

Theoretical Framework and Literature Review

The business strategy landscape has shifted from a static view of corporations to a more dynamic one. Early studies emphasized a focus on maintaining the status quo in corporate strategy, potentially hindering strategic changes by managers. In contrast, another school of thought advocated for a more proactive approach to strategic change within corporations, highlighting the crucial role of the top management team (TMT) in leading these changes.

The upper echelons theory proposed by Hambrick and Mason suggests that the performance and decision-making processes of a corporation are greatly influenced by the backgrounds, experiences, and values of its TMT members. According to this theory, the characteristics and traits of these key decision-makers, such as their education, experience, values, and cognitive abilities, can significantly impact the strategic choices and overall direction of the corporation.

Diversity in top management teams (TMTs) can be assessed using various criteria, including demographic diversity (e.g., gender, race, age, nationality) and experiential diversity (e.g., functional backgrounds, industry experience, educational backgrounds, length of service). Despite this diversity in measurements, academic studies have been more interested in both gender, nationality, and education.

Studying the impact of top management team diversity in emerging market corporations is interesting for several reasons:

1. Innovation and Creativity: Diversity in the TMT can lead to increased innovation and creativity within the corporation, which is crucial in emerging markets where adaptability and creative problem-solving are essential.

2. Market Understanding: A diverse TMT can better understand and connect with the diverse customer bases in emerging markets, enabling corporations to tailor their products and services to meet specific demands.

3. Global Competitiveness: As emerging markets become increasingly interconnected with the global economy, a diverse TMT can enhance a corporation’s ability to navigate international business environments and build relationships with stakeholders from various cultural backgrounds.

4. Talent Attraction and Retention: Diversity and inclusion are becoming key factors in attracting and retaining top talent, which is crucial in emerging markets where talent acquisition can be competitive.

5. Risk Mitigation: A diverse TMT may provide a broader perspective on potential risks and help the corporation develop more effective risk mitigation strategies, which is essential in the dynamic environments of emerging markets.

6. Corporate Social Responsibility (CSR): Demonstrating a commitment to diversity and inclusion can positively impact a corporation’s reputation, especially in markets where societal expectations for responsible business practices are high.

7. Employee Engagement and Productivity: A diverse and inclusive workplace fosters a sense of belonging among employees, leading to increased engagement and productivity, which is crucial in emerging markets where the motivation and commitment of the TMT can significantly impact a corporation’s success.

8. Regulatory Compliance: In some markets, there are regulations and policies that encourage or require corporations to promote diversity and inclusion, so understanding the impact of diversity helps corporations stay compliant with local laws and regulations.

Despite the importance of the results of empirical studies, whether in international or emerging markets, the study formulates the following research questions:

1. Does diversity-based gender in top management teams have an impact on corporate performance and its value in emerging equity markets?
2. Does diversity-based education in top management teams have an impact on corporate performance and its value in emerging equity markets?
3. Does diversity-based nationality in top management teams have an impact on corporate performance and its value in emerging equity markets?

Value cannot be created without a trade-off between risk and return, and the role of diversity in top management can be classified into two dimensions: its impact on risk and its impact on return. This matter can be simpler under the assumption of a positive relationship between risk and return.

Existing studies on the impact of diversity in top management-based nationalities on a corporation’s value and performance have mostly shown a favorable effect. However, the research on the impact of diversity-based gender and education in top management teams on corporate performance and value, particularly in emerging markets, has shown inconsistent results.

The study aims to fill this research gap by examining the impact of top management team (TMT) members diversity on the performance and value of corporations in emerging equity markets, specifically focusing on diversity based on gender, education, and nationality.

Methods

To test the study’s hypotheses, the researchers used cross-sectional unit analyzes for the top ten corporations based on the top ten non-financial corporations listed on each emerging market from the seven stock exchanges in Brazil, Egypt, India, Russia, Saudi Arabia, South Africa, and Turkey. The sample consisted of 70 non-financial corporations, and the study included the period from 2013 to 2022.

The study used cross-sectional analysis to investigate the impact of gender, education, and nationality diversity in top management on corporations’ performance and value in emerging markets. The researchers initially processed the outliers using winsorization at 1% for the continuous variables.

The study used four measures to estimate the corporations’ performance based on total leverage degree, returns on equity, the common stock’s systematic risks, and the common stock’s return. The study also used two measures to estimate the corporations’ value based on economic value added and Tobin’s Q.

The study tested six hypotheses using cross-sectional unit analyzes within weights based on per-unit error variances. The researchers examined the stationarity of the time series of the basic independent and dependent indicators at level zero using the Augmented Dickey–Fuller (ADF), Philips–Perron (PP), Im, Pesaran and Shin W-stat (IPSW), and Levin, Lin and Chut (LLC) tests.

Results

The study found that diversity in top management based on education and nationality has a significant impact on both corporations’ performance and value, but diversity based on gender does not have a significant impact on a corporation’s value or return on equity (ROE) in addition to its common stock’s return.

1. Impact on Corporations’ Total Leverage: The study found a significant impact of diversity in top management based on gender, education, and nationality on corporations’ total leverage.

2. Impact on Common Stock’s Systematic Risks: The study found a significant impact of diversity in top management based on gender, education, and nationality on the common stock’s systematic risks.

3. Impact on Corporations’ ROE: The study found a significant impact of diversity in top management based on education and nationality on corporations’ ROE, but not for diversity based on gender.

4. Impact on Common Stock’s Return: The study found a significant impact of diversity in top management based on gender, education, and nationality on the common stock’s return.

5. Impact on Creating Economic Value Added: The study found a significant impact of diversity in top management based on gender, education, and nationality on creating economic value added to common stockholders.

6. Impact on Corporations’ Value: The study found a significant impact of diversity in top management based on education and nationality on corporations’ value, but not for diversity based on gender.

The study believes that the optimal mass of diversification, or the weight of members with diverse backgrounds, determines whether the impact of diversification is positive (it leads to increased creativity, innovation, problem-solving ability, talent attraction and retention, and employee engagement and productivity) or negative (it leads to increased organizational conflict and communication difficulties). If it is less than this mass, the benefits of diversity are limited, but if the mass is greater than it, the harms of diversity are greater than the benefits. However, with the optimal mass for diversification, the benefits are maximized.

Conclusions and Recommendations

The study found that diversity in top management based on education and nationality has a significant impact on both corporations’ performance and value in emerging markets, while diversity based on gender does not have a significant impact on a corporation’s value or return on equity (ROE) in addition to its common stock’s return.

The study believes that the optimal mass of diversification, or the weight of members with diverse backgrounds, determines whether the impact of diversification is positive or negative. If it is less than this mass, the benefits of diversity are limited, but if the mass is greater than it, the harms of diversity are greater than the benefits. However, with the optimal mass for diversification, the benefits are maximized.

To enhance diversity in top management, the study recommends the following steps:

1. Assessment of Current Diversity Landscape: Conduct a comprehensive analysis of the current diversity landscape within the organization.

2. Establish Clear Diversity Goals and Metrics: Set specific, measurable, achievable, relevant, and time-bound (SMART) goals for enhancing diversity in top management.

3. Develop Inclusive Leadership Training Programs: Implement comprehensive training programs focused on cultivating inclusive leadership behaviors.

4. Implement Unbiased Recruitment and Promotion Processes: Review and modify recruitment and promotion processes to eliminate bias and ensure equitable opportunities for all employees.

5. Diversify Talent Pipelines: Collaborate with educational institutions, professional organizations, and community groups to create diverse talent pipelines.

6. Create a Supportive and Inclusive Organizational Culture: Foster an inclusive organizational culture that values diversity and encourages open communication, collaboration, and respect among employees at all levels.

7. Promote Transparency and Accountability: Establish transparent reporting mechanisms to track the progress of diversity initiatives and hold leaders and managers accountable.

8. Regularly Evaluate and Adjust Strategies: Continuously monitor and evaluate the effectiveness of diversity enhancement strategies and make necessary adjustments.

9. Engage with External Diversity Experts and Consultants: Seek guidance and support from external diversity experts and consultants.

10. Celebrate Diversity and Promote Visibility: Recognize and celebrate the contributions of diverse leaders within the organization and promote their visibility as role models.

By implementing this comprehensive plan, organizations can create a more inclusive and diverse top management team, fostering a culture of innovation, collaboration, and excellence that reflects the richness of diverse perspectives and experiences.