Introduction

Research on corporate boards has studied board composition, such as the presence of independent directors serving on corporate boards, and suggested that independent directors enhance monitoring function. However, an important but mostly overlooked factor that affects a board’s ability to perform its monitoring and advisory roles is the heterogeneity (diversity) of directors. In recent years, investors and regulators worldwide have called for a more diverse board composition. On December 16, 2009, the U.S. Securities and Exchange Commission (SEC) approved a set of rules requiring public companies to disclose in proxy statements whether and how they consider diversity in evaluating director candidates (Securities and Exchange Commission (SEC), 2009). Under these rules, companies are allowed to define diversity in ways they consider appropriate,1 with some companies emphasize functional attributes, such as tenure and expertise, and others focus on surface-level attributes, such as race, gender and age. While diversity has been widely recognized as a desirable board characteristic, research findings on the effects of board diversity on firm performance are inconclusive because of the differences in how diversity is measured and conceptualized.2 Some researchers turned to examine the impact of board diversity on boards’ advising and monitoring functions (e.g., Adams & Ferreira, 2002, 2009, Farrell & Hersch, 2005). However, most studies on board diversity have a narrow focus on single attribute, such as gender, race, or expertise and results from these studies are difficult to generalize without taking other dimensions of diversity into account (Rhode & Packel, 2010). In this study, we examine the impact of board diversity on board performance in overseeing corporate investment activities. Unlike other studies examining only one diversity attribute, we measure diversity in both relation-oriented dimension, which consists of “surface-level” differences such as gender, race, and age, and task-oriented dimension, which consists of “deep-level” or job-related differences such as tenure and expertise. Corporate investment oversight provides an interesting setting to examine board performance and effectiveness. While firms have to take risky investments to run business, both over-investment (i.e., excessive risk taking) and under-investment (i.e., excessive risk avoidance) could damage firm value and endanger their survival. In the wake of the major financial crisis in the late 2000s, regulators and the investing public have broadened boards’ role to include risk oversight (e.g., COSO, 2009). Board responsibilities for overseeing corporate risk taking activities, including corporate investments, come from state law fiduciary duties, federal law and regulations, stock exchange listing requirements, and general best practices (Brancato, Tonello, Hexter, & Newman, 2006; Lipton et al., 2011). In general, board responsibilities include reviewing the company’s investment guideline, strategy, and performance, and overseeing the company’s investment-related risks. Boards of large public companies could establish an investment committee or a finance committee to assist in performing these highly specialized and complex tasks.3 Despite the increased significance of boards’ role in investment oversight, corporate governance research has not provided much guidance on what board characteristics are associated with board performance in overseeing corporate investment. Drawn from theories in group diversity and group performance, especially social categorization (Turner, 1987), similarity/attraction (Berscheid & Walster, 1978), intergroup contract (Allport, 1954), and cognitive diversity theories, this study examines the association between board diversity and board investment oversight.