Across the faultlines: A multi-dimensional index to measure and assess board diversity

Drawing on faultline theory, this article proposes a multidimensional diversity index (MDI) to measure and assess board diversity. Herein, we contest that diversity needs to be considered across multiple dimensions, or faultlines. Based on the FTSE all-share non-financial firms (2005–2018), the proposed MDI captures the joint effect of differences in director attributes across four faultlines (surface, identity, demographic, and meso-level). After constructing our MDI, we examine how shifts in diversity impact firm risk. Our analysis indicates that moderate levels of diversification (between 0.25 and 0.75) are both typical across our sample and reduce riskiness. At extreme levels of diversification, however, we find that risk increases. We perform further analysis that supports these findings while also showing that, regardless of whether boards are moderately or extremely diversified, their faultline scores are significantly correlated with industry competition and financial risk.