Diversity and return: the impact of diversity of board members’ education on performance

• DOI: https://doi.org/10.1108/CG-01-2019-0017
• Pages: 824-842
• Published date: 09 July 2019
• Date: 09 July 2019
• Author: Isaac Boadi,Daniel Osarfo
• Subject Matter: Strategy

Diversity and return: the impact of

diversity of board members’education

on performance

Isaac Boadi and Daniel Osarfo

Abstract

Purpose –This paper aims to examine the impact of diversity of board members’ educational

qualificationson the financial performance of banks in Ghana.

Design/methodology/approach –The present studyapplies system generalized methods of moments

as an econometric model in carrying out the analysis. The study yielded a usable sample of 28 banks

spanningfrom 2001 to 2016.

Findings –The paper concludes that the Ghanaian bankingsector profit diverges and invalidates the

convergence theory or ‘‘catch-upeffect’’. Specifically, educational qualifications of board membersare

relevant to banks’financial performance. Across all the models used,board members with a first degree

have a significant positive impact on performance. The opposite is the case for board members with

Doctorof Philosophy (PhD).

Research limitations/implications –Unobservable characteristics such as entrepreneurial skills and

intellectualcompetence experiences are excludedfrom the study because of the difficultiesin measuring

these variables. Notwithstanding, the exclusion of thesecharacteristics does not invalidate the general

outcomeof the study.

Originality/value –The present study examinesthe impact of diversity of board members’ educational

qualification on financial performance in the context of Sub-Saharan Africa, particularly Ghana. It also

extends the existing literature by decomposing the banking sector into listed, non-listed, foreign and

domesticbanks.

Keywords Prof‌itability, Ghana, Diversity, Board member, System generalized methods of moments

Paper type Research paper

1. Introduction

Section 6 of Act 930 Bank of Ghana (BoG) banking business corporate governance

directive regulated under the banks and specialized deposit taking prescribes, among

others, the following:

䊏Board members shall be and remain qualified, including through training, for their

positions. They shall have a clear understanding of their role in corporate governance and

be able to exercise sound and objective judgement about the affairs of the regulated

financial institution. They shall possess, individually and collectivel y, appropriate

experience, competencies and personal qualities, including professionalism and integrit y.

䊏The competencies of the board of directors shall be diverse to facilitate effective

oversight of management and shall ideally covera blend of the following fields: banking,

law, finance, accounting, economics, information technology, business administration,

financial analysis, entrepreneurship, risk management, strategic planning and corporate

governanceand other areas that the Bank of Ghana deemsfit.

Isaac Boadi is base at the

Department of Banking and

Finance, University of

Professional Studies,

Accra, Ghana.

Daniel Osarfo is base at the

Department of Economics,

University of Ghana, Accra,

Ghana.

Received 10 January 2019

Revised 19 March 2019

Accepted 7 May 2019

PAGE 824 jCORPORATE GOVERNANCE jVOL. 19 NO. 4 2019, pp. 824-842, ©Emerald Publishing Limited, ISSN 1472-0701 DOI 10.1108/CG-01-2019-0017

These directives underscore the relative value relevance of board members’ education to

the financial performance of banks. In managing such highly skilled and highly regulated

jobs in the modern corporation, banks need to recruit board members, withcertain levels of

either observable or unobservable capabilities. Although studies have also shown that

unobservable characteristics contribute immensely to firms’ performance, it is difficult to

measure (Bhagat et al., 2010). Therefore, observable measures i.e. educational

qualifications should be regarded when appointing board members. Notwithstanding,

further studies conclude that high-level managerial capabilities and performance are not

often a function of the high level of board members’ education (Kagzi and Guha, 2018;

Chen et al.,2016). The inconclusive findings of previous studies add to the callin examining

the impact of diversity of board members’ educational qualifications influence on banks’

financial performance. To the best of the authors’ knowledge, such empirical studies are

relatively uncommon in literature,especially within the Sub-Saharan African countries.

This study contributes to the literature in a number of relevant ways. First and foremost, the

focus on Ghana was unhurried. Ghana provides an interesting setting for this study. The

Republic of Ghana, with Accra as its capital, was the first colony in Sub-Saharan Africa to

obtain independence from London in 1957 (Dana, 2008). Acheampong and Dana (2015)

opine that Ghana represents a fast-expanding market (FEM). Economic performance for

Ghana during 2016 was rather mixed. After its remarkable performance in bringing the

fiscal deficit down from 10.2 per cent of Gross Domestic Product (GDP) in 2014 to 6.3 per

cent in 2015, the country’s GDP target of 5.3 percent was missed, widening the margin to 9

per cent of GDP. Notwithstanding, GDP growth exceeded the target of 3.3 per cent by

recording 3.6 per cent, inflation reduced from 17 per cent to 15.4 per cent and further to

13.3 per cent in January 2017[1]. Bawumia et al. (2008) conclude that the banking sector

only reports 70 per cent of the financial sector banking.This underscores the importance of

this sector to the growth and development of the country, hence the study. Second, studies

have shown that there is a high preponderance of family control or oversight and Ghana is

not an exception. This seems to suggest that board members are chosen or selected

somewhat because of family connections with the owner or the controlling shareholder,

rather than their expertise andknow-how (Westhead and Cowling, 1998). This indicates that

the relevance of board members educational qualification to corporate performance is

relatively scarce in the less-developed world, for instance, Ghana. Third, in the

management literature, scholars have attempted to investigate the value relevance of

educational backgrounds of board members on firms’ financial performance with little

success. Until recently, in an attempt to resolve this puzzle, majority of studies which have

come close, have focused on board independence or diversity (Hermalin and Weisbach

2003;Farrell and Hersch 2005;Campbell and Vera 2010;Johnson et al., 2013). Results

from these studies, however, have yielded only inconclusive results. This might stem from

the fact that rather simple attributes of board independence and diversity might have

omitted other important board characteristics such as diversity of board education.

Unfortunately, in the context of less developed countries, such studies are comparatively

scarce. This, therefore, suggests that educational qualification of board members and

banks’ financial performance nexus is an area that deserves further research, particularly

Ghana. Further, empirical findings between the diversity of board members’ educational

qualifications and financial performance are mixed. While some studies have established a

negative relationship (Adams and Ferreira, 2009;Haslam et al.,2010), others have reported

a positive relationship (Bear et al.,2010;Mahadeo et al.,2012;Post and Byron, 2015).

Unlike the previous studies, thepresent study seeks to extend the existing body of literature

on board members’ education and financial performance by decomposing the banking

sector into listed, non-listed, foreign and domestic banks. Besides, existing studies (Jalbert

et al., 2002,Gottesman and Morey, 2006;Bhagat et al., 2010) are based on USA market

data leaving a glaring gap for countries in Sub-Saharan Africa market data, and Ghana in

particular. This study is thus imperative to undertake what is, to the best of the author’s

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