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The link between top management team nationality diversity and firm performance

Deloitte, Diversity, Racial diversityDoes the diversity of the Top Management Team (TMT) make a difference to a company’s performance? Research on the subject has generated mixed results.

This research by Professor Bo Nielsen and Associate Professor Sabina Nielsen (both Copenhagen Business School and University of Technology, Sydney) examines the link between a particular aspect of diversity – nationality diversity – and company performance.

The researchers found that TMT nationality diversity was positively related to performance, and that its effect was stronger in longer tenured teams, highly internationalised firms and high-growth industries.

Aim

This research investigated performance implications of TMT diversity. It focuses on nationality diversity as nationality is believed to have a significant impact on leader behaviour and decision-making. Researchers tested the relationship between nationality diversity and firm performance using a framework that allowed for team, company and industry contexts.

Method

To test the theory that TMT nationality diversity has a relationship with performance, the researchers sampled 146 Swiss listed firms across the period 2001-2008. Using firm and industry data from annual reports and research databases, they measured firm performance, TMT nationality diversity, other TMT variables (e.g. TMT functional diversity) and firm variables (e.g. internationalisation, industry growth).

The researchers sampled Switzerland because it is “among the most competitive labour markets in Europe” and “Swiss firms have a relatively high degree of internationalization”.

A nested hierarchical research design structure was used that considered three levels of random variation: TMTs within companies over time, companies within industries and between industries. Nesting means the modelling separates the variables to their respective levels e.g. team variables are all analysed at the team level. This enables better discrimination of the effects from the different levels of team, company and industry.

Findings

The research found that (1) TMT nationality diversity was positively associated with firm performance. Furthermore, this effect was larger in the following contexts: (2) longer TMT tenure, (3) greater company internationalisation and (4) higher industry growth.

(1) The researchers found that some diversity attributes (nationality and function) had positive effects on performance whereas others (age, education, industry and international experience) did not, once nationality diversity was taken into account. Researchers suggested that nationality has an enduring impact on decision-making because thinking patters are developed at a young age and teams need to engage in thorough decision-making processes to work through their different perspectives, reaching more innovative solutions as a result.

(2) The impact of TMT nationality diversity became stronger over time i.e. TMT nationality diversity had increasing effects on performance for TMTs with longer tenure.

(3) TMT nationality diversity was more important for internationalised firms than for non-internationalised firms.

(4) Industry munificence (growth) positively interacts with TMT nationality diversity i.e. firms experiencing higher growth rates derived a larger benefit from TMT nationality diversity

Implications

This research illustrates the importance of nationality diversity in Top Management Teams for company performance. By breaking down the construct of diversity, the researchers were able to isolate nationality diversity as the element that related to higher firm performance in the sample of Swiss organisations. This suggests that the spotlight on gender in top management teams may need to be extended to include other diversity dimensions that also contribute to high performance, such as national origin. The results suggest that international firms in particular should look for a mix of national and non-national executive team members if they are to enhance team decision-making.

It is important to also point out that many studies of executive/board member diversity and performance, including the present study, do not consider the moderating effect of inclusion for maximising the potential of a diverse team. This may explain the intriguing result that educational background did not have a positive effect on performance, which appears to contradict Professor Page’s (2007) findings on the importance of educational diversity for team performance. The interaction between management team inclusiveness, diversity and firm performance may be an interesting avenue for future research.

The analyses also demonstrated that the relationship between diversity and firm performance may change according to the context of the TMT, the company and the industry. For example, higher TMT nationality diversity may not be equally beneficial for all organisations as multiple factors appear to affect the outcome such as tenure of TMT, growth rate of organisation.

To read the full article, see Nielsen B.B., Nielsen S. (2013) “Top Management Team Nationality Diversity and Firm Performance: A Multilevel Study” Strategic Management Journal, Vol. 34, No. 3, 2013, pp. 373-382. 

URL: http://dx.doi.org/10.1002/smj.2021

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