Does the board diversity impact bank performance in the MENA countries? A multilevel study

• DOI: https://doi.org/10.1108/CG-06-2020-0222
• Published date: 24 March 2021
• Date: 24 March 2021
• Pages: 865-891
• Subject Matter: Strategy,Corporate governance
• Author: Ayman Issa,Hesham Yousef,Ahmed Bakry,Jalal Rajeh Hanaysha,Ahmad Sahyouni

Does the board diversity impact bank

performance in the MENA countries?

A multilevel study

Ayman Issa, Hesham Yousef, Ahmed Bakry, Jalal Rajeh Hanaysha and Ahmad Sahyouni

Abstract

Purpose –The purpose of thisstudy is to examine the impact of board diversity (e.g. nationality,gender

and educationallevel) on financial performance for a sample of banks listedin 11 countries in the Middle

East and NorthAfrica region.

Design/methodology/approach –This paper uses the system generalized method of moments

estimation approach on the data of banks listed in the MENA countries over the period 2011–2018

to investigate the relationship between board diversity and financial performance. Also, t he

findings are supported by additional robustness tests, including ordinary least squares, fixed and

random effect techniques.

Findings –The empiricalresults show that there is a significant relationshipbetween board diversity and

financial performance in banks. Specifically, the findings demonstrate that board diversity related to

nationalityhas a significant positive impact on bankperformance. The findings also show an insignificant

association between gender and educational level diversity and bank performance. The robustness

analysissupports the findings of the baseline model.

Practical implications –The study provides multi-country evidence on the importance of board

diversity in the MENA region andit sheds light on possible tracksfor future reforms aimed at enhancing

the effectivenessof the board’s functions.

Originality/value –This paper extends the existing literature by providing empirical evidence on the

association between board diversity and financial performance of banks in the MENA countries. This

paper also provides preliminary evidence on the importance of board diversity to influence financial

performance.

Keywords Financial performance, Corporate governance, MENA countries, Board diversity

Paper type Research paper

1. Introduction

Board diversity has received much attention from academia and policymakers in the last

couple of decades. The board of directors is known as the most important element of

corporate governance mechanisms in a corporation and it is responsible for supervising

executive management and providing critical resources such as legitimacy, advice and

consultation (Gallego-A

´lvarez and Pucheta-Martı

´nez, 2020;Pucheta-Martı

´nez and Gallego-

A

´lvarez, 2019;Tee and Rassiah, 2019;Adams et al.,2018;Terjesen et al.,2016).

Contemporary organizational theories highlight the importance of diversity in enhancing the

board’s functions. Diversity on boards could be advantageous in decision-making as it

brings greater resources to problem-solving and could lead to better financial performance

and public disclosure of firm-specific information (Baker et al., 2020;Katmon et al.,2019;

Harjoto and Rossi, 2019;Cook and Glass,2015;Liao et al.,2015;Boulouta, 2013;Gul et al.,

2011;Bear et al.,2010). A higher degree of diversity on boards in terms of human capital,

attitudes, cognitive functions and values provides a wider breadth of knowledge,

Ayman Issa is based at the

Department of Accounting,

Dongbei University of

Finance and Economics,

Dalian, China.

Hesham Yousef is based at

the Faculty of Commerce,

Sohag University, Sohag,

Egypt. Ahmed Bakry is

based at Sohag University,

Sohag, Egypt.

Jalal Rajeh Hanaysha is

based at the School of

Business, Skyline

University College, Sharjah,

United Arab Emirates.

Ahmad Sahyouni is based

at Damascus University,

Damascus, Syrian Arab

Republic.

Received 8 June 2020

Revised 13 November 2020

Accepted 26 January 2021

The authors would like to thank

the editor of Corporate

Governance and two

anonymous reviewers for their

valuable comments on the

previous versions of this paper.

DOI 10.1108/CG-06-2020-0222 VOL. 21 NO. 5 2021, pp. 865-891, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 865

information and perspectives, which could lead to better board decision-making (Hillman

and Dalziel, 2003). Hence, boards with more diversity are likely to provide their firms with

more superior resources, that would ultimately result in greater performance outcomes

(Bennouri et al., 2018;Isidroand Sobral, 2015;Carter et al.,2010).

Moreover, board diversity has been regarded as a key characteristic of corporate

governance, and a number of regulators in many nations (e.g. Norway, Spain, Italy Belgium

and Denmark) force business organizations to have a minimal number of female directors

when they form their boards (Buchwald and Hottenrott, 2019;Reguera-Alvarado et al.,

2017;Adams and Ferreira, 2009). Partof these initiatives may be driven by public pressure,

but there may also be reasons to believe that policymakers aim to implement board gender

quotas because of the expected advantages from engaging morediverse decision-making

members (Buchwald and Hottenrott, 2019;Farrell and Hersch, 2005). Also, unique

experiences brought by directors to boards can be very helpful for effective decision-

making in corporations (Finkelstein et al.,2009). Directors with diverse backgrounds are

expected to capitalize on their pool of specialized skills and knowledge for improving firm

performance (Hambrick, 2007). Hsu et al. (2013) show that the level of educational reflects

the cognitive base of an individual, gives a better ability to take in new ideas and nurtures

the capacity for information processing. Kolev and McNamara (2019) declare that the

heterogeneity of experiences, specialized skills, ideas and innovationsthat board members

carry to a company are likely to generate a positiveimpact on overall performance.

There is a significant stream of research focused on examiningboard diversity and financial

performance in developed economies; however, we find scarce empirical evidence with

regard to the association between corporate governance mechanisms such as board

composition and financial performance in developing economies (Sarhan et al.,2019;

Salloum et al.,2017;Scholtz and Kieviet, 2018;Saeed and Sameer, 2017;Kılıc¸ and Kuzey,

2016). Therefore, our study aims to focus on developing markets, in particular the Middle

East and North Africa (MENA) where corporate governance systems may manifest different

from those of developed marketsbecause of different economic, political, legal and cultural

structures in such countries (Elamer etal.,2020;Sarhan et al.,2019;Arayssi and Jizi, 2018;

Abdullah et al., 2016;Zeitun, 2014;Hasan et al., 2014). More specifically, our study is

focused on how board composition, particularly nationality, gender and educational level,

impact financial performance in a sample of banks operating in the MENA countries. Our

findings demonstrate that board diversity related to nationality has a significant positive

impact on financial performance. However, gender diversity and educational level diversity

are found to be insignificantly associated to bank performance.

Our study makes four main contributions to the literature on board diversity. Firstly, to the

best of our knowledge, this is the only study exploring the business benefits of board

diversity in a multi-country context in the MENA region. Differently from other studies

conducted in the MENA context, we contribute to the literature on developing countries’

corporate governance mechanisms by exploring a sample that includes 11 nations in the

MENA region between 2011 and 2018. According to a recent bibliometric analysis of board

diversity by Baker et al. (2020), the majority of studies of board diversity focus on a single

nation but generalizing their findings across nations could not be robust because of

different institutional and socioeconomic factors. The main source of data is the Osiris

database, but we also hand-collect corporate governance data from annual reports,

corporate governance reports and using some websites such as marketscreener.com and

wikipedia.org to obtain directors’ demographic information. The nature of our study needs

to treat the endogeneity, reverse causality and unobserved heterogeneity. Therefore, we

use a two-step dynamic generalizedmethod of moments (GMM) to test our hypotheses.

Secondly, the research on board diversity is mostly limited to the non-financial sector in

both developed and developing markets. Our study is unique because we examine the

effects of board diversities related to nationality, gender and educational level in

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