Board demographic, structural diversity, and eco‐innovation: International evidence

• Published date: 01 May 2024
• Author: Rashid Zaman,Kaveh Asiaei,Muhammad Nadeem,Ihtisham Malik,Muhammad Arif
• Date: 01 May 2024
• DOI: http://doi.org/10.1111/corg.12545

ORIGINAL ARTICLE

Board demographic, structural diversity, and eco-innovation:

International evidence

Rashid Zaman

1

| Kaveh Asiaei

2

| Muhammad Nadeem

3

| Ihtisham Malik

3

|

Muhammad Arif

4

1

School of Business & Law, Edith Cowan

University, Perth, Western Australia, Australia

2

School of Business, Monash University,

Bandar Sunway, Malaysia

3

UQ Business School, University of

Queensland, Brisbane, Queensland, Australia

4

Department of Business Administration,

Shaheed Benazir Bhutto University, Karachi,

Pakistan

Correspondence

Muhammad Nadeem, UQ Business School,

University of Queensland, Brisbane,

Queensland, Australia.

Email: nadeem@business.uq.edu.au

Abstract

Research question/issue: We examine whether and how board diversity, measured

by demographics (i.e., board gender, cultural diversity, tenure, social capital, expertise,

and age) and structural diversity (i.e., board independence, size, board seat

accumulation-chair, board compensation, and board meeting frequency), influence

corporate eco-innovation.

Research findings/insights: Utilizing a global sample of publicly listed companies for

the period 2004–2019, we find that a one-standard deviation increase in demo-

graphic and structural diversity translates into 4.66% and 7.11% higher corporate

eco-innovation, respectively. Furthermore, we discover that demographic and struc-

tural diversity promotes eco-innovation by offsetting the negative effects of political

risk. In an additional analysis, we find evidence that, in the absence of greater exter-

nal monitoring (institutional investors and analyst following), organizations benefit

more from the monitoring role of board diversity.

Theoretical/academic implications: By adopting the concept of “bundling the

governance mechanisms,”our study adds to the ongoing discourse about the func-

tion of board diversity in addressing corporate climate footprints by offering original

evidence that board diversity heterogeneity—demographic and structural diversity—

matters for corporate eco-innovation.

Practitioner/policy implications: Given the increasing pressure on companies to

manage their environmental impacts and carbon footprints, our paper has significant

ramifications for those involved in promoting eco-innovative business practices, such

as policymakers, regulators, and practitioners.

KEYWORDS

corporate governance, board demographic diversity, structural diversity, eco-innovation,

political risk, stakeholder-agency theory

Received: 21 October 2021 Revised: 7 February 2023 Accepted: 10 May 2023

DOI: 10.1111/corg.12545

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any

medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.

© 2023 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

374 Corp Govern Int Rev. 2024;32:374–390.

wileyonlinelibrary.com/journal/corg

1|INTRODUCTION

Catastrophic climate change-generated incidents around the world

are now having serious consequences for man-made environmental

degradation and pollution, leading to much outcry among citizens

worldwide. Whether it is a worldwide revolt against the plastics indus-

try (Buranyi, 2018) or the continued practice of burning huge swathes

of the Amazon rainforests (AP, 2020), public pressure has pushed

global leaders to show urgency in dealing with climate change issues

(Arif et al., 2022; Benlemlih et al., 2022). Responding to public criti-

cism, there have been significant global efforts to tackle climate

change issues—from the Paris Climate Change 2016 Agreement to

the global commitments of COP 26 and COP 27. These global efforts

have given corporations added responsibility of controlling and

containing their environmental footprints. Consequently, corporations

are now under pressure to recognize climate change as a material

business risk and devise policies and procedures accordingly. Against

this backdrop, prior literature echoes environment-focused innovation

(also called eco-innovation)

1

as an effective business strategy

for corporations to reduce their environmental footprints (Zaman

et al., 2022), gain a competitive advantage (Nadeem et al., 2021), and

improve their long-term financial performance (Szutowski, 2020) and

public credibility.

Despite the importance of eco-innovation, its effective imple-

mentation requires significant corporate resources, which is why man-

agers, under the clientele effect of short-term profit maximization,

restrain themselves from accepting eco-innovation. In such instances,

the effective implementation of eco-innovation largely occurs at the

corporate boards' discretion. Being positioned at the apex of the

corporation, boards are generally responsible for monitoring manage-

ment, providing advice and access to resources, and determining com-

panies' long-term strategies, such as eco-innovation (Boivie

et al., 2016; Sierra-Morán et al., 2021; Zaman et al., 2022). However,

board actions are often constrained by their structure and diversity in

the composition, such as independence, skills and expertise, gender,

and cultural sensitivities, and age and tenure influence their decisions

(Aguilera et al., 2015,2018; Boivie et al., 2016; Jain & Jamali, 2016).

To date, there is some disagreement in the academic literature about

what diversity structures give boards an advantage in terms of navi-

gating challenges related to eco-innovation adoption (Jain &

Jamali, 2016; Zaman et al., 2022), with the empirical evidence being

inconclusive in many cases (Sierra-Morán et al., 2021). This is because

most governance studies employ single diversity characteristics (gen-

der diversity, directors' independence, board meeting frequency, and

directors' age (Jain & Jamali, 2016) in their estimations. However,

recent studies criticize the standalone, single characteristics approach

because the board of directors does not operate in isolation but rather

reflects a group's judgement (Desender et al., 2016; Jain &

Zaman, 2020; Schiehll et al., 2014). Presence and absence of certain

indicators have the potential to influence strategic board decision-

making, such as eco-innovation in the current study (Oh et al., 2018).

Against this backdrop, the current study investigates whether and

how board diversity, such as demographics (including board gender,

cultural, tenure, social capital, expertise, and age) and structural

features (board independence, size, board seat accumulation - chair,

board compensation, and board meeting frequency), influence

corporate eco-innovation.

We draw on multiple theoretical rationales to establish the

relationship between board diversity and eco-innovation. First, the

stakeholder-agency theory argues that differences in objectives

between agents (managers) and multiple principals (stakeholders)

create stakeholder-agency conflicts (Hill & Jones, 1992), and a diverse

board protecting stakeholders' interests lowers these conflicts. For

instance, on one hand, inherent characteristics of eco-innovation,

such as higher capital cost, delayed payback period, and high failure-

to-success ratio, may limit managers' efforts to implement such activi-

ties. On the other hand, pro-environmental stakeholders, interested in

corporate eco-innovation activities, count on the board of directors to

lower stakeholder-agency conflict by encouraging managers to

embrace eco-innovation practices. Prior literature argues that diverse

board structures, comprising several individual components related to

demographic and structural diversity, are in a better position to pro-

tect stakeholders' rights (Hill & Jones, 1992; Jain & Jamali, 2016;

Jain & Zaman, 2020) and may positively encourage an organization to

show eco-innovation commitment.

Second, resource dependence theory contends that every corpora-

tion holds a unique set of tangible and intangible resources and capa-

bilities. Such resources and capabilities, when companies effectively

channel them, lead to better business outcomes, including general

innovations (see Barney, 1991; Ferreira et al., 2020). Similarly, this

theory asserts that organizations extract resources from the external

environment, and outside pressures, such as a higher level of global

environmental awareness, can influence resource-seeking ability

(Wincent et al., 2010). In such cases, a highly diverse board (rich in

demographic and structural diversity), when properly constituted,

might benefit companies in accessing strategically important

resources. Such diverse boards link organizations to the outside

environment and provide resources for improving companies' eco-

innovation capabilities.

Third, the upper echelons perspective provides theoretical support

for the relationship between board diversity and eco-innovation.

Upper echelons theory argues that board composition is vital in set-

ting corporate strategy and strategic decisions (Hambrick &

Mason, 1984). According to this theory, directors' thought processes

and decisions are contingent on their personal attributes, including

experiences, knowledge, expertise, and values (Hambrick, 2007). Con-

sequently, a more diverse board (demographic or structural diversity)

brings a variety of perspectives, including a broader knowledge base,

and contributes to distinct decisions being made (Harjoto

et al., 2018)—all of which remain instrumental in achieving higher

organizational environmental commitment such as eco-innovation

(Nadeem et al., 2020). Cosma et al. (2021) support this assertion and

argue that a more diverse board (a large proportion of female direc-

tors, directors with financial expertise, and independent directors)

positively relates to companies' being more in tune with environmen-

tal protection.

ZAMAN ET AL.375