Board nationality and educational background diversity and corporate social performance

DOIhttps://doi.org/10.1108/CG-04-2018-0138
Pages217-239
Date10 October 2018
Published date10 October 2018
AuthorMaretno Agus Harjoto,Indrarini Laksmana,Ya wen Yang
Subject MatterCorporate governance,Strategy
Board nationality and educational
background diversity and corporate
social performance
Maretno Agus Harjoto, Indrarini Laksmana and Ya-wen Yang
Abstract
Purpose This paper aims to examine the relationship between the nationality and educational
background diversity of directors serving on corporate boards and the firms’ corporate social
performance(CSP).
Design/methodology/approach This study measures nationality diversity by directors’ national
citizenship and measures educational background diversity by countries from which they earned their
undergraduate and post undergraduate degrees. It measures firms’ CSP using the MSCI ESG ratings.
The study usesboth univariate and multivariate analysesto empirically test the hypotheses.
Findings Using a sample of US firms, the authorsfind that board nationality diversity and educational
background diversity are positively associated with CSP. The findings suggest that improving director
nationalitydiversity and educational backgrounddiversity could improve firms’ socialperformance.
Originality/value This studyshows that the increasing trend of foreign nationals in the US boardscould
shift thefocus of US corporations to be more stakeholder-oriented.
Keywords Corporate social performance, Board diversity, Board educational background,
Board nationality
Paper type Research paper
1. Introduction
Globalization has a significant impact on the composition of boards of directors in publicly
traded corporations around theworld. Capital movements across borders have significantly
affected the composition of firms’ ownership, and therefore, the composition of boards of
directors who represent the interests of shareholders. As the number of foreign directors
serving on US corporate boards increases[1], it is imperative to examine and understand
the impact of having directors with different nationalities on firm performance. Most existing
studies focus on the impact of foreign directors on firm value and corporate financial
performance and generally found a positive impact (Daniel et al.,2013;Estelyi and Nisar,
2016;Miletkov et al.,2013;Oxelheim and Randoy, 2003). In this study, we examine the
impact of directors’ nationality and educational background diversity on an alternative
measure of firm performance, corporate social performance (CSP). Stakeholder theory
suggests that firms have both explicit and implicit contracts with various stakeholders
(Freeman, 1984) and failing to fulfill these contracts can expose firms to a range of financial
and nonfinancial risks and reputational damage. Therefore, boards of directors have an
important oversight role in ensuring managers effectively balance various stakeholders’
interests. In fact, 65 per cent of S&P 100 companies have board committees with explicit
responsibility for oversight of CSR concerns (Calvert Asset Management and the Corporate
Library, 2010).
Maretno Agus Harjoto is a
Professor of Finance at the
Pepperdine Graziadio
Business School,
Pepperdine University,
Malibu, California, USA.
Indrarini Laksmana is an
Associate Professor of
Accounting at the College
of Business Administration,
Kent State University, Kent,
Ohio, USA. Ya-wen Yang is
an Associate Professor of
Accounting at the School of
Business, Wake Forest
University, Winston-Salem,
North Carolina, USA.
JEL classif‌ication M14, G34,
G39, J1
Received 8 April 2018
Revised 2 July 2018
Accepted 22 August 2018
The authors thank the Editor
Gabriel Eweje, Associate Editor
Maggie Foley, and four anony-
mous reviewers for their con-
structive comments and
recommendations. Harjoto
acknowledges the Denney
Professorship for the release
time. Laksmana acknowledges
the research funding provided
by the College of Business
Administration at Kent State
University. Yang acknowledges
the summer research grant pro-
vided by the School of
Business at Wake Forest
University.
DOI 10.1108/CG-04-2018-0138 VOL. 19 NO. 2 2019, pp. 217-239, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 217
Nationality and educational background diversity brings different priorities on
corporate ultimate objectives into board discussion and decision-making. For
example, directors with different backgrounds could bring different perspectives on
whether the ultimate corporate goal is to maximize shareholders’ interests or broader
stakeholders’ interests. These differences could shape the vision of firms’ purposes to
exist in our society and their social performance. Studies focusing o n foreign directors
have examined the reasons for companies to have foreign directors on their bo ard
and the impact of foreign directors on firm financial performance (Mas ulis et al., 2012;
Daniel et al., 2013; Garcia-Sanchez and Martinez-Ferrero, 2015). For example, Daniel
et al. (2013) find that US firms operating in countries with business environment
dissimilar to the USA are more likely to choose foreign directors for their dissimilarity,
suggesting that firms value the advisory role of foreign directors. Masulis et al. (2012)
find that US firms with foreign independent directors make better cross-border
acquisitions when the targets are from the home regions of these directors, although
they also perform significantly poorer when their business presence in these regions
becomes less important. We extend prior literature and examine the impact of foreign
directors and foreign educated directors on CSP using a sample of US companies.
Prior studies have examined the impact of board independence (Harjoto and Jo, 2011;Jo
and Harjoto, 2011) and board diversity in gender, race, tenure and expertise (Ferrero-
Ferrero et al.,2015
;Harjoto et al.,2015;Byron and Post, 2016;Hyun et al.,2016;Rao and
Tilt, 2016;Francoeur et al.,2017;Cucari et al.,2018) on CSP. However, to our best
knowledge, the current study is the first to investigate the relationship between director
nationality and educational background diversity and CSP. Theories predict a mixed effect
of diversity on team performance. The similarityattraction or social categorization
perspective predicts negative effects of diversity, while the information-decision-making
perspective predicts positive effects of diversity on team performance (Williams and
O’Reilly, 1998). Nonetheless, Janis (1982) points out that nationality and educational
diversity could help teams avoid pitfalls such as premature consensus or “groupthink.” We
test this assertion and the theories of diversity on team performance in the boardroom
setting. Because the majority of board members in Corporate America is from the USA, a
more individualistic and shareholder-centric value system, we hypothesize that board
nationality diversity and educational background diversity are positively associated with
board effectiveness in developing and overseeing firms’ commitment and performance in
maximizing the interest of multiple stakeholders, as reflected in CSP. We measure
nationality diversity using directors’ citizenships and measure educational background
diversity using the countries (regions) from which directors earned their graduate and
undergraduate degrees. Using the director data of 874 US firms from the BoardEx
database for the period of 2000 to 2013, we find empirical evidence supporting our
hypotheses.
This study contributes to the literature in several ways. First, this study tests the mixed
predictions of theories explaining the impact of workgroup diversityon team performance in
the setting of US boardrooms. Our findings provide more insights on the role of diversity on
group decision-making process and outcome. Second, using board nationality and
educational background diversity to capture the different cultural perspectives and value
systems directors bring to the team provides a more complete picture than using board
nationality diversity alone. Because the country of origin of directors is often undisclosed, a
foreign born and foreign-educated director who later became a US citizen would be
classified as a domestic director by nationality/citizenship. Including educationbackground
to measure board diversity mitigates this data limitation. Finally, our findings suggest that
improving directors’ nationalitydiversity and educational background diversity could benefit
companies with a stakeholder view of corporate responsibility and companies that want to
improve their social performance.
PAGE 218 jCORPORATE GOVERNANCE jVOL. 19 NO. 2 2019

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