Board diversity and firm efficiency: evidence from China
| Pages | 587-607 |
| Published date | 03 February 2021 |
| DOI | https://doi.org/10.1108/CG-10-2019-0312 |
| Date | 03 February 2021 |
| Subject Matter | Strategy,Corporate governance |
| Author | Farman Ali,Man Wang,Khalil Jebran,Syed Tauseef Ali |
Board diversity and firm efficiency:
evidence from China
Farman Ali, Man Wang, Khalil Jebran and Syed Tauseef Ali
Abstract
Purpose –The purpose of this paper is to explore how multiple facets of board diversity influence
technicalefficiency (TE) and total factor productivity(TFP).
Design/methodology/approach –The authors measure board diversity in two dimensions: relation-
related dimension (age and gender)and task-related dimension (tenure, education and expertise).The
authors use a balanced panel data of 806 nonfinancial Chinese firms over the period 2009–2017. The
authors usea two-stage approach for analysis. Inthe first stage, the authors use a non-parametricfrontier
approach to calculatethe TE and factor productivity scores. In the second stage,the authors regressed
these scoreson board diversity attributes(relation-related diversity andtask-related diversity).
Findings –By using tobit regression and two-step system GMM, the authors find that board diversity
improves TE andTFP. The authors’ analyses illustrate that a higherdiversity on corporate board (in terms
of age, gender,tenure, education and expertise)positively influence firm efficiency.
Practical implications –The findings have important implications for policymakers. The findings
suggest that regulators shoulddevise policies to encourage board diversity. Because a diverse board
can bring knowledge, skills, abilities, expertise and experience of diverse group members, which will
ultimately enhancea firm’s efficiency. Especially, in the emergingmarkets (such as China), there is still a
need for standard governance mechanisms; therefore, the authors suggest that policymakers should
develop regulationsand promote diversity of directors as one of the factorsfor improving the governance
mechanisms,which will ultimately improve firms productivity.
Originality/value –Prior studies mostly considered only one dimension (such as gender) of diversity
and, therefore, have overlooked how other dimensions influence firms. The authors consider several
dimensionsof diversity and quantify them intorelation-related (age and gender) andtask-related (tenure,
education and expertise) attributes and show how they influence firms’ efficiency. To the best of the
authors’ knowledge, thisis the first study to comprehensively investigate how severalfacets of diversity
influencea firm’s TE and TFP.
Keywords DEA, Technical efficiency, Board diversity, Malmquistproductivity index,
Relation-related diversity, Task-related diversity
Paper type Research paper
1. Introduction
Teamwork is considered an important factor in improving performance. This is because a
team consists of different members who can possess unique characteristics. Each member
of a team contributes to the group performance by usingits characteristics, knowledge and
skills (Knippenberg and Schippers, 2007). Organizations consist of teams such as
management team and board team. The members of the team are differentiated based on
several attributes, such as age, gender, tenure,education and expertise. When members of
a team have different attributes, it forms a diverse team. As our focusis on board members’
diversity, we call it board diversity.
As boards work as a team, the focus should be on how and what kind of attributes and
characteristics of the members combine to form an effective team (Chen, 2013). If the
attributes of the board members are the same, they may quickly agree on a decision
Farman Ali is based at
School of Accounting,
Dongbei University of
Finance and Economics,
Dalian, China. Man Wang is
based at School of
Accounting, Internal
Control Research Centre in
China, Dongbei University
of Finance and Economics,
Dalian, China. Khalil Jebran
is based at School of
Business Administration,
Dongbei University of
Finance and Economics,
Dalian, China.
Syed Tauseef Ali is based
at School of Accounting,
Dongbei University of
Finance and Economics,
Dalian, China.
Received 9 October 2019
Revised 20 December 2019
9 March 2020
12 May 2020
19 June 2020
1 October 2020
18 October 2020
15 November 2020
Accepted 17 November 2020
DOI 10.1108/CG-10-2019-0312 VOL. 21 NO. 4 2021, pp. 587-607, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 587
(Marcel et al.,2011); however, the information drawn from such decisions may be minimal.
A task-related diversity may give rise to conflicts of opinions among members, which may
end up with further argumentation and the resolution of the problem with consensus (Marcel
et al.,2011
).
Diversity of board can enhance knowledge sharing, reduce uncertainty and can help
organizations to have a better approach to resources and ultimately can help in designing
overall organizational strategy(Hillman and Dalziel, 2003). A diverse group will have a more
significant number of ideas, which will increase the alternatives for making an effective
decision. Hence, the differencesin the attributes of the members can enhance the decision-
making (Adeabah et al., 2019;Bhat et al.,2019;Marcel et al.,2011;Walt et al.,2006).
Several studies support the view that diversity on a board can enhance corporate
governance and board outcomes (Arena et al., 2015;Ayadi et al., 2015;Bhat et al.,2019;
Groening, 2019;Jebran et al.,2020;Lin et al.,2018;Ullah et al.,2019).
Prior studies have restricted their focus to exploring the influence of board diversity on
various performance outcomes. One of the crucial performance measures overlooked is,
that is, operating performance, which is measured through technical efficiency (TE) and
factor productivity. Farrel (1957)argues that TE is the capability of an organization to create
maximum output with limited inputs or to use minimum input for a fixed output to reduce
resource wastage. Factor productivity, also known as Malmquist productivity (MP), was first
developed by Caves et al. (1982) andis measured as the change in TE for each year. There
are only a few studies that investigate how diversity influences firms’ TE and factor
productivity. Ramly et al. (2017) document that TE of banks increases with an increase in
gender diversity. Andries et al. (2017) also find that gender diversity positively affects the
TE of commercial banks. Adusei (2019) shows that the TE of microfinance institutions
enhances with board’s gender diversity.They also report that firm size positively moderates
the link between gender diversity and the firm’s TE. However, most of the studies have
limited their focus to only one aspect of diversity (such as gender). Thus, the conclusions
drawn from the literature are limited without considering other attributes of diversity into
consideration. This studypursues to fill this gap.
This study shows how various dimensions of board diversity jointly explain TE and total
factor productivity (TFP). Specifically, we consider five different dimensions of diversity ona
board that are age, tenure, expertise, gender and education. Following Harjoto et al. (2018)
and Jebran et al. (2020), this studydivides these attributes into relation-related diversity and
task-related diversity. Diversity attributes such as age and gender are considered as
relation-related characteristics because they are demographics attributes. The job-related
attributes such as tenure, educationand expertise are quantified as task-related diversity.
Our study offers two important contributions. First, p rior studies examine the effect of diversity
on different performance outcomes, such as financial performance (Miller and T riana, 2009;
Reguera-Alvarado et al.,2017;Terjesen et al., 2 016;Unite et al.,2019;Ullah et al., 2019;
Vafaei et al.,2015;Knippenberg and Schippers, 2007), social performance (Coffey and Wang,
1998;Kyaw et al.,2017;Zha ng, 2012),innovation (Bernile et al., 2018;Midavaine et al.,2016),
bank performance (Garcı
´a-Meca et al., 2015) and environmental performance (Alazzani et al.,
2017). However, the influence of board diversity on TE and TFP is less if not absent. To the
best of our knowledge, this is the first study to comprehensively investigat e the influence of
different facets of board diversity on TE and TFP. Our study contributes to the literature by
exploring that different attributes of diversity on a board can enhance the firm’s efficiency (in
terms of TE and TFP). Thus, our results provide new evidences that different board diversity
attributes are important factors for enhancing a firm’s efficiency.
Second, we extend the research on how different attributes of board diversity influence the
firm’s outcomes. Although prior studies (Adusei, 2019;Uribe-Bohorquez et al.,2019)are
limited to considering only a single dimension of diversity (i.e. gender), this study extends
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