Board diversity, corporate governance, corporate performance, and executive pay

• DOI: http://doi.org/10.1002/ijfe.1690
• Date: 01 April 2019
• Published date: 01 April 2019

RESEARCH ARTICLE

Board diversity, corporate governance, corporate

performance, and executive pay

Ahmed A. Sarhan

1,3

| Collins G. Ntim

2

| Basil Al‐Najjar

1

1

Department of Accountancy, Finance

and Economics, Huddersfield Business

School, University of Huddersfield,

Huddersfield, UK

2

Centre for Research in Accounting,

Accountability and Governance,

Department of Accounting, Southampton

Business School, University of

Southampton, Southampton, UK

3

Department of Accounting, Faculty of

Commerce, Zagazig University, Zagazig,

Egypt

Correspondence

Ahmed A. Sarhan, Department of

Accountancy, Finance and Economics,

Huddersfield Business School, University

of Huddersfield, Huddersfield, UK.

Email: a.sarhan@hud.ac.uk

Abstract

Departing from previous studies, this paper investigates the impact of corpo-

rate board diversity on corporate performance and executive pay within the

context of Middle East and North African countries. Our sample includes a bal-

anced panel of 600 firm‐year observations, consisting of 100 individual firms

drawn from five Middle Eastern countries (Egypt, Jordan, Oman, Saudi Arabia,

and United Arab of Emirates) over the 2009–2014 period. The findings are

three‐fold. First, board diversity, as measured by director gender and national-

ity, has a positive effect on corporate financial performance. Second, the rela-

tionship between board diversity and corporate performance is stronger in

better governed firms than their poorly governed counterparts. Finally, board

diversity, as measured by director gender, ethnicity, and nationality, enhances

the pay‐for‐performance sensitivity but not the actual executive pay. Our

results suggest that decisions about board diversity are not merely influenced

by moral values; they arise because of the cost–benefit considerations of what

diversity can bring to the firm. The findings are robust to controlling for differ-

ent alternatives of board diversity measures, corporate governance proxies, cor-

porate outcomes, and types of endogeneities.

KEYWORDS

corporate board diversity, corporate governance, corporate performance, economics and finance,

executive pay, MENA countries

1|INTRODUCTION

The events of the Arab Spring seemed to have ushered in a

new era in which there is an increasing demand for change

throughout the Middle East and North African (MENA)

region. Young people, especially women, want to play a

greater role in society, with better economic opportunities.

In addition, modern women in MENA countries are gener-

ally younger, better educated, and have fewer children than

previously (Chamlou, 2008; Hegland, 2018; Jamali,

Safieddine, & Daouk, 2007; Salloum, George, & Catherine,

2017; World Bank, 2013). Moreover, most MENA countries

have made significant progress towards improving access to

education and health care, as well as enhancing gender

equality (Salloum et al., 2017). According to the United

Nations Development Programme (UNDP, 2010), MENA

countries have made the world's fastest progress in human

development since 1970. However, this investment in

human development is not yet reflected in higher rates of

female participation in political governance and leadership,

senior management positions, and on corporate boards in

particular but in the labour force in general. This is widely

known as “a gender equality paradox”(Hegland, 2018;

Jamali et al., 2007; Metcalfe, 2007; World Bank, 2013).

Economic, financial, governance, political, and social

reforms are being pursued worldwide (Bussiere & Mulder,

Received: 7 May 2018 Revised: 18 July 2018 Accepted: 10 September 2018

DOI: 10.1002/ijfe.1690

Int J Fin Econ. 2019;24:761–786. © 2018 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/ijfe 761

2000; Gupta, Baldacci, Clements, & Tiongson, 2005;

Swamy & Dharani, 2018). Recent corporate scandals have

directed more attention to CG and EP mechanisms (Hasan,

Kobeissi, & Song, 2014; Ullah, Ahmad, Akbar, & Kodwani,

2018a), especially on the importance of board of directors

in terms of their roles, effectiveness, composition, and

diversity (Carter, D'Souza, Simkins, & Simpson, 2010;

Carter, Simkins, & Simpson, 2003; Yamori, Harimaya, &

Tomimura, 2017). It is worth noting, however, that the

extent to which such contemporary economic, financial,

governance, and social (e.g., education) reforms influence

a number of key corporate outcomes is rarely investigated

(Salloum et al., 2017). Consequently, in this paper, our

objective is to extend the existing literature by examining

the extent to which contemporary economic, financial,

and social reforms that are often aimed at enhancing gov-

ernance and diversity of major corporations have influ-

enced corporate outcomes in such conservative

institutional contexts. Specifically, we seek to contribute

to the extant corporate governance (CG) literature in four

main ways, by investigating whether (a) corporate board

diversity, as measured by gender, ethnicity, and national-

ity, affects corporate financial performance; (b) CG quality

moderates the relationship between corporate board diver-

sity and corporate financial performance; (c) corporate

board diversity influences executive pay (EP); and (d) cor-

porate board diversity moderates the pay‐for‐performance

sensitivity (PPS), using a sample of firms operating in a

number of MENA countries. The analysis draws on a

multi‐theoretical perspective that incorporates insights

from agency, resource dependence, and social identity

theories.

Board of directors is one of the top decision‐making

subgroups in modern organizations (Dale‐Olsen, Schone,

& Verner, 2013; Luckerath‐Rovers, 2013; Mahadeo,

Soobaroyen, & Hanuman, 2012; Ntim, 2015; Roberson &

Park, 2007; Yamori et al., 2017). Corporate boards possess

the responsibility for making strategic decisions regarding

mergers and acquisitions, hiring, firing, compensating,

and promoting executives, among others (Abdullah,

2014; Jensen, 1993; Ntim, Lindop, Thomas, Abdou, &

Opong, 2017). In addition, corporate boards can help

modern organizations connect better with the external

environment, which can facilitate access to resources,

such as finance and business contracts (Estélyi & Nisar,

2016; Wellalage & Locke, 2013).

Meanwhile, existing CG codes and reforms have

focused mainly on the composition of the board of

directors (e.g., size, independence, and diversity), as an

influential tool, which can help enhance CG standards

(Adams & Ferreira, 2009; Carter et al., 2003, 2010;

Ntim, 2015; Ullah et al., 2018a). Observably, board diver-

sity may be pursued for two main reasons: economic

and/or social reasons. First and economically, the extant

literature suggests that appointing female, ethnic minority,

and foreign nationals to corporate boards may not only

improve board diversity and bring different expertise,

ideas, talents, skills, work ethic, backgrounds, and experi-

ence to boardrooms (Carter et al., 2003, 2010; Gyapong,

Monem, & Hu, 2016; Ntim, 2015; Salloum et al., 2017;

Ullah et al., 2018a) but also may enhance board

independence and monitoring (Baranchuk & Dybvig,

2009; Jamali et al., 2007). Second and socially, board diver-

sity incorporates social equity or equal opportunities

(Carter et al., 2003; Gyapong et al., 2016; Terjesen,

Aguilera, & Lorenz, 2015; Terjesen, Sealy, & Singh, 2009).

Thus, appointing female, ethnic minority, and foreign

directors may help in building more inclusive and fair busi-

ness institutions that better reflect the constituencies of

existing stakeholders (Jamali et al., 2007; Terjesen et al.,

2009, 2015; Terjesen & Sealy, 2016).

Therefore, diversifying corporate boards on the basis

of gender, ethnicity, and nationality has recently become

a key global policy issue (Adams & Ferreira, 2009;

Gyapong et al., 2016; Mahadeo et al., 2012; Ullah et al.,

2018a). Indeed, a large number of countries around the

world, especially in Europe, have recently implemented

some form of affirmative action in order to address it

(Ullah et al., 2018a). In this case, Scandinavian countries

have shown a significant interest in passing “hard

(enforceable in a law court)”national laws that specify

quotas for the number of female director representation

on publicly traded firms and/or state‐owned enterprises

(Rose, 2007; Terjesen et al., 2015). For example, Norway,

Finland, and Iceland passed laws in 2003, 2005, and

2010, respectively, requiring 40% of corporate board mem-

bers to be female. The European Commission also

requires all publicly traded EU firms to have a minimum

of 40% women on their boards (European Union, 2012).

Similar “hard”or “soft (best practice guidance)”affirma-

tive policies and laws exist in other developed countries,

such as Australia, Belgium, Canada, France, Germany,

Ireland, Israel, Italy, Japan, Netherlands, Spain, and

Sweden. Developing countries have also recognized the

importance of having diverse corporate boards. Accord-

ingly, these developing countries have also either passed

a similar “hard”national law that set quotas for women

directors or issued CG codes that require the appointment

of a certain percentage of women into corporate boards

(Terjesen et al., 2015). Kenya, for instance, passed a law

in 2010 requiring 33% of the directors of state‐owned

enterprises to be women. Similarly, Brazil, India, Malawi,

Nigeria, and South Africa have issued codes of good gov-

ernance that include board gender representation recom-

mendations. Of closer relevance to our study, MENA

countries, including highly conservative ones, such as

762 SARHAN ET AL.