Does TMT cultural diversity contribute to firm performance and do socialisation and tenure matter? A test of two competing perspectives
| Pages | 324-348 |
| Date | 07 November 2019 |
| DOI | https://doi.org/10.1108/PR-11-2018-0468 |
| Published date | 07 November 2019 |
| Author | Fang-Yi Lo,Yue Wang,Wu Zhan |
| Subject Matter | HR & organizational behaviour,Global HRM |
Does TMT cultural diversity
contribute to firm performance
and do socialisation and
tenure matter? A test of two
competing perspectives
Fang-Yi Lo
Department of International Business, Feng Chia University, Taichung, Taiwan
Yue Wang
Department of Management, Macquarie University, Sydney, Australia, and
Wu Zhan
Discipline of International Business,
University of Sydney Business School, Sydney, Australia
Abstract
Purpose –The purpose of this paper is to establish the effect of top management team (TMT) cultural
diversity on firm performance with a framework that considers such an effect from both cost and benefit
perspectives. The paper also examines whether and how diversity management mechanisms such as
socialisation and tenure may moderate the effect of TMT diversity on firm performance.
Design/methodology/approach –Drawing upon two competin g perspectives of reso urce-based view
(RBV) a nd transaction cost econo mics (TCE), this paper the orises and tests the poten tial positive
and negative effects of TMT cultural diversity on firm performance with 442 publicly listed IT companies
in the USA.
Findings –The results supported the RBV prediction that TMT cultural diversity enhances firm
performance and socialisation strengthens the positive effects of a culturally diverse TMT on firm
performance. However, tenure was not found to be important in promoting diversity gains or mitigating
diversity costs. By showing clear support for the RBV prediction of the positive impact of TMT cultural
diversity and refuting the TCE prediction of the potentially negative effects, this research strengthens the
business case for embracing cultural diversity in TMTs.
Originality/value –This paper contributes to the current literature by developing a more balanced
framework to deepen our knowledge of how TMT cultural diversity may impact firm performance, and how
the use of socialisation and tenure may moderate the TMT cultural diversity–firm performance relationship
from both cost and benefit perspectives.
Keywords Resource-based view, Socialization, Quantitative, Tenure, Top management team (TMT),
Diversity management, Transaction costs economics
Paper type Research paper
1. Introduction
This study aims to enhance our knowledge of the top management team (TMT) cultural
diversity–firm performance relationship by embracing a competing hypotheses approach.
A number of puzzles in the current literature motivated this research. First, the performance
implications of TMT cultural background diversity are understudied and not well
established (Nielsen and Nielsen, 2013). Compared to other TMT compositions, only a few
studies have examined culture diversity in TMTs and its impact on organisational
outcomes (Carpenter et al., 2004; Gong, 2006; Greve et al., 2009; Nielsen and Nielsen, 2013).
In this paper, a TMT is defined as the top executives who have direct influence on the
formulation and execution of a firm’s strategy (Nielsen, 2010) and TMT diversity is defined
Personnel Review
Vol. 49 No. 1, 2020
pp. 324-348
© Emerald PublishingLimited
0048-3486
DOI 10.1108/PR-11-2018-0468
Received 24 November 2018
Revised 21 June 2019
Accepted 28 July 2019
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/0048-3486.htm
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PR
49,1
as the degree to which TMT members differ with respect to background characteristics
such as age, gender and nationality (Cannella et al., 2008). To make a more meaningful and
targeted contribution, we focus on TMT cultural background diversity. We follow previous
research (Elron, 1997; Nielsen and Nielsen, 2013) that considers the nationality of TMT
members as a proxy for TMT cultural diversity. A TMT is considered culturally diverse if
members come from a larger, rather than small, number of nationalities. While research on
the demographic characteristics of the TMT and their influence on firm performance is not
new, this cultural background aspect of diversity has received limited attention in the
current literature (Nielsen and Nielsen, 2013).
Although the studies focusing on the relationship between TMT cultural diversity and
firm performance are rare, the relationship between TMT composition and firm
performance has generated continuous interest among the broad field of diversity
management. However, the lack of a coherent theoretical underpinning has resulted in the
topic being studied widely, but with little consensus on whether TMT diversity enhances
organisational performance (Boone and Hendriks, 2009). In particular, past meta-analyses
show that many studies have advocated the positive effect of TMT diversity (including
cultural diversity) from the strategic-benefits perspective (Certo et al., 2006; Homberg and
Bui, 2013), but the ways in which the potential costs associated with diversity can be
mitigated remains underexplored despite the issue being recognised for over a decade
(Kravitz, 2007). Consequently, the existing literature does not offer a solid business
case for why firms should embrace cultural diversity and how it improves firm performance
(Nielsen and Nielsen, 2013). Not surprisingly, the corporate sector is left unconvinced that
TMT cultural diversity would bring more benefits than costs and is inadequately prepared
for truly embracing and managing a culturally diverse TMT.
As the first objective of the paper, we address the debate (or lack of) on TMT cultural
diversity–firm performance with a competing hypotheses approach to stimulate a more
balanced cost–benefit analysis. We do this by synthesising the diversity literature with
two theoretical perspectives widely used in management studies (but having received
much less attention in diversity research), namely, transaction cost economics (TCE) and
resource-based view (RBV), to develop hypotheses concerning the potential benefits
and costs of TMT diversity.
Second, the existing research has been dominated by theoretical perspectives such as the
TMT composition literature and upper echelon theory with a particular focus on the
composition of TMTs, neglecting the role of diversity management itself. However, as far as
the performance implication is concerned, TMT cultural diversity can only be effective
when firms create culturally diverse teams and then effectively manage them by sharing
knowledge, information and decisions (Hambrick, 2007). We argue that the way that firms
manage its TMT cultural diversity will play an important role in the TMT cultural
diversity–firm performance relationship as much as (if not more than) the nationality
composition of TMT members itself. Thus, the second objective of the paper is to provide
new insights and evidence about the effect of TMT diversity management mechanisms on
the relationship between TMT cultural diversity and firm performance.
In this study, we focus on two team-level diversity management mechanisms, tenure
(formal), and socialisation (informal), as the potential moderators of the TMT cultural
diversity–performance relationship for two reasons. First, empirical studies that have found
little direct effects of TMT diversity on firm performance often attributed such limited
effects to possible moderators, including contextual factors such as environmental
complexities (e.g. uncertainty) (Richard and Shelor, 2002) and team characteristics such as
team co-location (Cannella et al., 2008) and age (Tanikawa et al., 2017). Although these
studies have contributed to a better understanding of the diversity–performanc e
relationship, what is missing in the current literature is the moderating role of team-level
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TMT cultural
diversity
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