Board Diversity as a Camouflage Signal

Previous research on board diversity suggests that diverse boards can signal quality of the firm to the public, influencing firm reputation and legitimacy. However, signals vary in nature, with different characteristics based on intent and need. We propose that board diversity may be used as a “camouflage signal” to disguise potential liability and divert attention away from underlying social issues in an organization. In a longitudinal analysis of 103 firms from 2003-2006, we find that firms with a gender discrimination lawsuit are more likely to appoint female members to their boards over the next two-year time period, suggesting the use of camouflage signaling in board appointments for gender issues. However, we did not find support for our prediction for firms facing racial discrimination suits. Instead, we found the opposite. The coefficient estimate on multiple race discrimination lawsuits is negative and statistically significant (p<.05). Firms with a history of multiple racial discrimination suits...