Does a diverse board matter? A mediation analysis of board racial diversity and firm performance

• Pages: 1223-1241
• Date: 26 August 2020
• DOI: https://doi.org/10.1108/CG-02-2020-0081
• Published date: 26 August 2020
• Author: Ashok Vairavan,G. Peter Zhang
• Subject Matter: Strategy,Corporate governance

Does a diverse board matter? A mediation

analysis of board racial diversity and

firm performance

Ashok Vairavan and G. Peter Zhang

Abstract

Purpose –This paper aims to reexaminethe link between board racial diversity and firm performance.It

focuses on the mechanism through which board racial diversity could affect performance. The paper

proposes and empiricallytests the role of employee productivityand R&D productivity in the relationship

betweenboard racial diversity and firm financial performance.

Design/methodology/approach –The paper adopts a mediation analysis framework with the

bootstrapping method totest both the direct and indirect effect of board diversity on firmperformance.

The data used in the study come from S&P 1500 with variables composed from COMPUSTAT,

InstitutionalShareholder Services and WhartonResearch Data Services.

Findings –Contrary to priorfindings, the results indicate thatthere is neither direct effect of boardracial

diversity on firm performancenor is there an indirect effect through either employeeproductivity or R&D

productivity.

Research limitations/implications –Because the data used in the paper are based on large public

firms,the results may not generalize to small or privatefirms.

Practical implications –The findings of the paper suggestthat not all diversity measures matter in the

same way and firmsshould carefully make board appointmentsto reduce the perception that they select

directorsfor any reason other than qualifications.

Originality/value –The paper advances the literature on boarddiversity by examining two previously

unexplored mediating variables of employee productivity and R&D productivity. It also uses more

rigorous mediationanalysis with bootstrapping methodand a validation sampleto improve robustness of

the results.

Keywords Innovation, Financial performance, Board of Directors,Corporate governance

Paper type Research paper

1. Introduction

A firm’s board of directors is the centerpiece of corporate governance and has the

responsibility for strategic oversight and guidance, including monitoring, controlling and

hiring top executives in a firm (Rothaermel, 2013). The board is responsible for helping

formulate corporate strategy regarding the markets in which the firm should compete and

where to invest or allocate resources. Given the scope of the board’s responsibilities in

formulating strategy, evaluating and approving strategic decisions that impact firm

performance, a pertinent question arises as to what board characteristics may contribute

most to positive firm financial outcomes. One of the most significant and contemporary

issues in the leadership diversity literature is the structure of the board and the extent to

which the characteristics of its members influence board actions and firm performance

given rapidly changing demographics in the USA (Carter et al.,2003;Deloitte, 2019;

Erhardt et al.,2003;Millerand Triana, 2009).

Ashok Vairavan and

G. Peter Zhang are both in

J. Mack Robinson College

of Business at Georgia

State University, Atlanta,

Georgia, USA.

Received 28 February 2020

Revised 8 May 2020

6 July 2020

Accepted 2 August 2020

DOI 10.1108/CG-02-2020-0081 VOL. 20 NO. 7 2020,pp. 1223-1241, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 1223

Companies have realized that diversity at the highest levels of their organizations such as

the board and top management team is strategically important with the key notion that

diverse leadership will help them align business strategies more effectively with a diverse

set of stakeholders in the markets they serve. Despite the recent trend of board

compositions that are beginning to reflect the changes in workforce diversity, the vast

majority of board seats in publicly traded firms today are still dominated by Caucasian

males (Deloitte, 2019;Miller and Triana, 2009). In a recent analysis conducted by Deloitte

(2019) and the Alliance for Board Diversity, the number of Fortune 100 companies with

greater than 40% of racially diverse board members has doubled since 2012. However,

while there is an increasing trend for firms to appoint more minorities to their boards, the

percentage of minority men (women)on these boards is only 13.7% (5.8%) in 2018.

A relevant issue debated in the business press and academic literature is whether board

diversity leads to improved firm performance. The popular belief among practitioners is that

a diverse board is beneficial to a firm’s stakeholders and should improve its financial

performance. Corporate board members with diverse backgrounds and external network

connections can use broad array of knowledge and information to enhance the boards’

ability to evaluate firm strategy and positioningin the competitive environment (Tasheva and

Hillman, 2019). Additionally, a firm with a diverse board may reap more financial benefits

due to its improved monitoring capability, which can create greaterlevels of legitimacy with

stakeholders (Groening, 2019). Academic research, however, has been equivocal with

mixed findings (Aggarwal et al.,2019;Broome and Krawiec, 2008). While most studies in

the literature find a positive association between board diversity and firm performance,

several studies find no significant direct relationship (Adams and Ferreira, 2009;Carter

et al., 2010;Dimovski and Brooks, 2006;Jurkus et al., 2011;Kochan et al., 2003;Zahra and

Stanton, 1988) or even a negative relationship (Ahern and Dittmar, 2012;Blackburn et al.,

1997;Matsa and Miller, 2013). In their meta-analysis of 144 independent samples, Post and

Byron (2015) find a positive relationship between gender diversity and firm performance

based on accounting returns such as return on assets and return on equity, but no

significant relationship with market-based measures such as Tobin’s Q and shareholder

returns. Given the publication bias against non-significant findings, the issue of whether

board diversity improvesfirm performance is, at best, inconclusive.

Although previous research has examined the effect of board diversity in terms of gender,

race, education, age and functionalbackground on firm performance (Bennouri et al.,2018;

Campbell and Mı

´nguez-Vera, 2008;Carter et al., 2010;Green and Homroy, 2018;Kyaw

et al.,2017

;Larkin et al.,2012;Van den Berghe and Levrau, 2004), the literature is limited

when it comes to the performance effect of racial or ethnic diversity (Cheong and

Sinnakkannu, 2014). Moreover, while several studies have shown the direct effect of board

racial diversity (Carter et al.,2003;Erhardt et al., 2003), few examine the question of how

board racial diversity impacts firm performance. As Richard and Andrevski (2011)

comment, “missing is an explanation of the process through which racial diversity affects

firm performance.” Similarly, Broome and Krawiec (2008) believe that the body of empirical

work “leaves substantial gaps in our understanding of the precise mechanisms by which

board diversity may alter the corporateenvironment if indeed it does.”

Given the above backdrop, this study aims to advance the research of whether a diverse

board has a positive impact, focusingon the relationship between board racial diversity and

firm financial performance. More importantly, we explore the mechanisms through which

board racial diversity influences firm performance. Studying intervening variables that

mediate the relationship between racial diversity and firm performance can facilitate

understanding of the relationship; enhancing our knowledge on why and how the

relationship, if there is any, exists, because board diversity may not impact firm

performance directly, and instead, its impact is indirect through some intervening

processes (Miller and Triana, 2009;Richard and Andrevski, 2011).

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