Diversity in life experience among top management teams: its impact on firm financial performance
Creators: name: TRAN, Phong
Publisher: name: RMIT University
Year: 2024
Subjects: classificationCode: 350202
subject: Finance
classificationCode: 350503
subject: Human resources management

description: This study examines a debatable relationship by asking a simple question: Does life experience diversity among firms' top management teams (TMT) impact the firm's financial performance? The concept of diversity is debatable because there is no conclusive finding to the question of whether TMT diversity has a positive or negative impact on a firm's bottom line. <br><br>
The issue of diversity is vitally important because it is intrinsically linked to principles of globalisation, economic growth and whether multicultural work environments will be pursued. We can see this being currently played out on the world stage with China and the US at the heart of the debate. At the time of this thesis, China is pushing forward with its version of globalisation defined by the Belt and Road initiative, while the United States (US), an original proponent of globalisation and diversity returning to an isolationist posture. This is happening because the gains for one have been spectacular (China), while the perceived losses for the other have been staggering ('Make America Great Again'). Globalisation and diversity appear to be at a crossroads. Whether diversity creates value remains contentious.<br><br>
Diversity in life experience within this research is defined as diversity in education, experience, and professional membership. Australia is the sample study in this research due to its multicultural heritage, it's free-market principles, and the fact that China and the US are also its major trading partners.<br><br>
Building on upper echelons theory and integrating different perspectives of diversity theory, this thesis suggests that a nonlinear relationship between life experience diversity in TMTs and firm performance exists after controlling for endogeneity. The study uses a panel dataset of the Australia Standard and Poor's 200 (ASX 200) from 2013 to 2017. Comparing results from ordinary least squares (OLS) and generalized method of moments (GMM) regression models, the empirical results indicate that endogeneity does bias diversity research and this is accounted for within this analysis. <br><br>
Empirical findings indicate that TMT diversity in education (level and background) and experience (number of different firms and industries in which team members have previously worked) have a nonlinear relationship with a firm bottom line. However, the effects of other life experience variables, such as country of qualification, international work experience, holding professional certification and associational membership, do not significantly impact financial performance. The moderating effect of industry setting on the linear relationship between diversity and firm performance is explored but found to be weak.<br><br>
This study highlights several contributions to both research and practice. This study contributes to our understanding of the nonlinear effect of TMT diversity on firm financial performance. In other words, diversity may have both positive and negative impacts on firm performance depending on the level of diversity at play. In terms of theoretical implications, the study adds to research on diversity by integrating two different theoretical perspectives to propose and examine the nonlinear diversity-performance relationship. In empirical terms, this paper overcomes a popular problem in management/diversity research; the problem of endogeneity, which has been endemic in earlier research. Findings from this study will assist firms when recruiting senior managers, policymakers and ultimately the success of globalisation moving forward.