The virtuous cycle of diversity

Based on propositions from the resource dependency theory (RDT), we seek to understand how firms respond to social performance problems through diversity. We consider the impact of negative customer and employee incidents as social performance problems because these incidents represent two critical stakeholders, and because of the potential for such problems to cause a wider impact on the affected firms. Using firm‐level longitudinal data across four‐time points and a cross‐lagged panel model (CLPM) to test our hypotheses, as well as a variety of supplemental analyses, we find that social performance problems relate to increases in board diversity. We also find that social performance problems act as a trigger for a virtuous cycle such that increases in board diversity are related to the subsequent adoption of diversity management practices, which are related to subsequently higher levels of board diversity. We contribute to the theory on diversity management by demonstrating how firms seek diversity as a response to social performance problems. Further, we connect board diversity to the adoption of diversity management practices, which are often studied independently, and demonstrate the mutually positive influence they have on each other. We discuss implications for theory and human resource management.