In a new paper, we investigate whether and how ethnic diversity on boards of directors helps shape a firm’s supply chain. Our empirical findings from a sample of U.S. S&P 1500 firms from 2008 to 2020 show a positive effect of such diversity on a firm’s supply chain in two areas: (1) the number of foreign suppliers, potentially leading to geographically distributed networks, and (2) the geographic dispersion among supplier countries, reflecting the extent to which the supply chain is spread across multiple regions.

Notably, a “horse race” analysis shows that, among various kinds of board diversity—such as gender, education, age and financial expertise—ethnic diversity uniquely accounts for supply chain diversification. Furthermore, we find that, following the appointment of their first ethnic minority director, firms are significantly more likely to establish supply chain connections in regions aligned with the new director’s cultural background, providing incremental evidence on the influence of ethnic diversity on strategic supply chain decisions.

To address potential concerns that unseen factors may simultaneously influence both board composition and supply chain decisions, we leverage California Senate Bill 826 (SB 826), a landmark legislation to increase the female representation on boards. Even though SB 826 aims primarily to increase gender diversity, we find that firms affected by SB 826 significantly  improved their boards’ ethnic diversity following the enactment. This improvement was evident even among California firms that already met the gender quota requirements specified in SB 826 (i.e., firms with all-white directors and at least one female director). Therefore, the bill created momentum for companies to reassess their diversity and inclusion. We document consistent and cumulative empirical evidence that the bill increases board ethnic diversity in firms affected by the bill, which in turn leads to supply chain diversification. This finding is also supported by various robustness checks.

We explore a potential mechanism: Ethnic-minority directors have better information about foreign markets.  Resource-dependence theory posits that directors bring a range of valuable skills, particularly their ability to advise and counsel firms on strategic priorities and programs, as well as their capacity to garner resources and support from outside parties (Pfeffer and Salancik 2015, Deore and Krishnan 2024).  In this context, ethnic-minority directors may have insights about foreign suppliers due to their cultural heritage and serve as valuable connections between firms and external partners, including potential suppliers. Firms may find it easire to initiate business relationships with suppliers who have cultural similarities with their directors. This fosters a geographically diversified supply chain and enables the directors to better exploit their knowledge of local markets.

We empirically demonstrate that firms affected by the California law diversify their suppliers in a way that enhances the cultural similarity between the suppliers and directors. Additionally, we show a significantly higher degree of supply chain diversification among firms with less ex-ante information about their suppliers, suggesting that boardrooms can serve as a supplemental source of supply chain-related information.

Furthermore, we examine the impact of board ethnic diversity on inventory management. When firms with greater ethnic diversity take advantage of their enhanced access to diverse information, they likely see improvements in inventory management efficiency. Consistently, we find that firms affected by the California law demonstrate less inventory volatility, higher inventory turnovers, and greater gross margin return on investment (GMROI).

Finally, we explore how ethnically diverse directors affect supply chains. We find significant increases in both board-meeting attendance rates and committee memberships among those directors, with the most substantial increases in the audit and compensation committees, which are important for risk management and executive compensation, respectively. The impact on supply chain diversification is consistently stronger in firms that face higher supply chain risks and that use supply-chain metrics as key performance indicators for executive compensation. We conclude that ethnically diverse boards significantly shape supply chains through their oversight of risks and interactions with top executives.

Our paper enriches the relatively scarce literature on ethnic diversity in boardrooms, demonstrating its impact on operations factors like supply chains. Our paper also highlights the pivotal role of board directors in shaping supply chains, along with macroeconomic factors like labor costs and geopolitical risks. Moreover, our findings inform future legislative and regulatory decisions related to boardroom diversity. Given the ongoing debates about boardroom diversity, such as those around, the Nasdaq listing rule in 2021 that set certain race and gender targets for public companies’ boards, our study provides a novel perspective for assessing the impact of such mandates. Overall, by linking boardroom diversity to operational efficiency and risk mitigation, our study unveils the value of inclusive governance in navigating the complexities of modern supply chains.

REFERENCES

Deore, A. and Krishnan, R. (2024). Diversity and firm performance: A management accounting and control systems perspective. In Why Diversity, Equity, and Inclusion Matter: Challenges and Solutions, pages 179–216. World Scientific.

Pfeffer, J. and Salancik, G. (2015). External control of organizations—resource dependence perspective. In Organizational Behavior, pages 355–370. Routledge.

This post comes to us from professors Yiwen Jin at the University of Calgary’s Haskayne School of Business, Minjia Li at the University of Alberta School of Business, and Jenny Li Zhang at the University of British Columbia’s Sauder School of Business. It is based on their recent paper, “When Diversity Aligns: From Boardrooms to Supply Chains,” available here.