Top management team demography and firm operating performance: a path analysis

This paper examined the relationship between TMT demographic properties and firm performance using diversity and level variables and measuring differing constructs of firm performance representing divergent strategies.

Structural equation modelling was used to test the relationships between TMT demographic properties and firm performance measured as return on net operating assets (RNOA), and its disaggregates profit margin (PM) and asset turnover (ATO). Data were from 89 Finnish firms during the years 2008–2011, resulting in 320 observations.

TMT team tenure had associations with RNOA through both PM and ATO while TMT age, age diversity, firm tenure, firm tenure diversity and team tenure diversity showed paths through ATO. TMT firm tenure diversity showed effects in opposing directions through PM and ATO.

The results help to understand and apply the separate effects of age, firm tenure and team tenure on TMT and firm performance. These results also provide explanations on how these TMT properties affect firm performance in diverse types of firms pursuing different strategies.

The results suggest that both diversity and level in a measured TMT demographic property are linked with firm performance, and the effect can be in differing directions. These links go through differing paths when using disaggregated operational firm performance measures. Also, diversity in top management is not always beneficial since it can cause separation or conflict impairing performance.