Top management team diversity and firm performance

Abstract

This paper examines whether top management team (TMT) diversity has a positive or negative impact on firm performance, based on evidence from Western European firms during a three-year period (2007-2009). TMT diversity is calculated as the equally weighted average of the adjusted Blau indexes on five diversity variables: gender, nationality, age, educational background, and expertise. This research found no clear trend towards more TMT diversity. The amount of TMT diversity is limited especially with respect to the variables gender and nationality. In addition, female and foreign directors are not only underrepresented in the TMT, they also hold less important TMT positions than male and domestic directors. A panel data analysis is applied in order to investigate the influence of TMT diversity on firm financial performance (measured by Tobin’s Q). This study found an inverted U-shape curvilinear relationship between TMT diversity and firm performance which indicates that there is an optimal amount of TMT diversity.