The Gender and Ethnic Diversity of US Boards and Board Committees and Firm Financial Performance

• Published date: 01 September 2010
• Author: Frank D'Souza,Betty J. Simkins,W. Gary Simpson,David A. Carter
• Date: 01 September 2010
• DOI: http://doi.org/10.1111/j.1467-8683.2010.00809.x

The Gender and Ethnic Diversity of US

Boards and Board Committees and Firm

Financial Performancecorg_809396..414

David A. Carter, Frank D’Souza, Betty J. Simkins, and

W. Gary Simpson*

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: We examine the business case for the inclusion of women and ethnic minority directors on the

board. Specif‌ically, we investigate the relationship between the number of women directors and the number of ethnic

minority directors on the board and important board committees and f‌inancial performance measured as return on assets

and Tobin’s Q.

Research Findings/Insights: We do not f‌ind a signif‌icant relationship between the gender or ethnic diversity of the

board, or important board committees, and f‌inancial performance for a sample of major US corporations. Our evidence

also suggests that the gender and ethnic minority diversity of the board and f‌irm f‌inancial performance appear to be

endogenous.

Theoretical/Academic Implications: Reasonable theoretical arguments drawn from resource dependence theory, human

capital theory, agency theory, and social psychology suggest that gender and ethnic diversity may have either a positive,

negative, or neutral effect on the f‌inancial performance of the f‌irm. Our statistical analysis supports the theoretical position

of no effect, either positive or negative. Our results are consistent with a contingency explanation because the effect of the

gender and ethnic diversity of the board may be different under different circumstances at different times. Over several

companies and time periods, the results could offset to produce no effect.

Practitioner/Policy Implications: The results of our analysis do not support the business case for inclusion of women and

ethnic minorities on corporate boards. However, we f‌ind no evidence of any negative effect either. Our evidence implies

that decisions concerning the appointment of women and ethnic minorities to corporate boards should be based on criteria

other than future f‌inancial performance.

Keywords: Corporate Governance, Financial Performance, Board Committees, Board Composition

INTRODUCTION

Evolving cultural, political, and societal views of corpo-

rate board membership are partially driving interest in

the demographic diversity of corporate directors. In addi-

tion, the global desire for better corporate governance is a

major factor. The Cadbury Report in the United Kingdom,

the General Motors Board of Directors guidelines in the US,

and the Dey Report in Canada illustrate an interest in

improved governance in different countries (Monks &

Minow, 2004). The movement in the US for improved corpo-

rate governance following governance failures and a height-

ened awareness of the importance of corporate governance

produced the Sarbanes-Oxley Act of 2002, a massive piece of

legislation. Other countries have passed legislation and/or

guidelines regulating corporate governance as well. Rose

(2007) reports a signif‌icant interest in Scandinavian coun-

tries in increasing the number of women on corporate

boards. Norway has a law that requires 40 per cent of the

directors for a company to be women (Rose, 2007). Similar to

Norway, Spain recently passed legislation requiring a quota

for the number of female directors (Adams & Ferreira, 2009).

The Higgs Report, commissioned by the British Department

*Address for correspondence: Spears School of Business, Oklahoma State University,

Stillwater,OK 74078-4011, USA. E-mail: gary.simpson@okstate.edu

396

Corporate Governance: An International Review, 2010, 18(5): 396–414

© 2010 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2010.00809.x

of Trade and Industry, suggests that demographic diversity

increases board effectiveness and recommends that more

women be included on boards (Adams & Ferreira, 2009).

Hillman, Cannella, and Harris (2002) contend that one of the

most important trends in US boardrooms over the past two

decades is a shift toward the inclusion of women and ethnic

minorities.

The phenomenon of the gender and ethnic diversity of

corporate boards encompasses at least two signif‌icant, and

interrelated, propositions. The f‌irst viewpoint holds that

those competent women and ethnic minorities with the

human capital, external networks, information, and other

characteristics of importance to the corporation deserve

opportunities to serve on corporate boards and in upper

management. The second proposition suggests that gender

and ethnic diversity of directors results in better governance

which causes the business to be more prof‌itable. Karen J.

Curtin, a former executive vice president of Bank of

America, describes the interaction of the two propositions of

board diversity in the following statement, “There is real

debate between those who think we should be more diverse

because it is the right thing to do and those who think we

should be more diverse because it actually enhances share-

holder value. Unless we get the second point across

and people believe it, we’re only going to have tokenism”

(Brancato & Patterson, 1999:7). Herman Bulls, CEO of a real

estate advisory group and a director for Comfort Systems

USA, states “When I’m sitting in that boardroom, my f‌idu-

ciary responsibility is to the shareholders of that company –

not social engineering. I can talk about diversity. But there

ought to be a business case” (Dvorak, 2008:R4). The business

case implies that competent women and ethnic minority

directors are not substitutes for traditional corporate direc-

tors with identical abilities and talents but qualif‌ied women

and ethnic minority directors have unique characteristics

that create additional value.1The business case for board

gender and ethnic diversity is a subset of the larger issue of

good international corporate governance.

A realistic understanding of the natureof any relationship

that may exist between the gender and ethnic diversity of

the board and f‌irm f‌inancial performance has important

implications for both public policy and the governance of

business f‌irms. If there is no difference between competent

women and ethnic minority directors and other qualif‌ied

directors so that the gender and ethnic diversity of the board

does not inf‌luence f‌irm governance and performance, then

the desirability of gender and ethnic minority diversity is

primarily a public policy issue. However, if there is a posi-

tive relationship between the gender and ethnic diversity of

the board and f‌irm performance, the economic implications

of board diversity are important. To the contrary, if the rela-

tionship is negative, the costs of inclusion of women and

ethnic minority directors become a factor to be considered.

Contingency theory (Fiedler, 1967; Lawrence & Lorsch,

1967) suggests a more complex link between the gender and

ethnic diversity of the board and f‌irm performance in that

certain aspects of board diversity may be desirable in some

organizations, and not others, and under different circum-

stances at different times.2Theories from economics, organi-

zation behavior, and social psychology provide some

understanding of the nature of the link between the gender

and ethnic minority diversity of the board and f‌irm f‌inancial

performance but the empirical evidence on the link is mixed

and limited.

The purpose of this empirical analysis is to explore the

relationship between the gender and ethnic minority diver-

sity of the board and the f‌inancial performance of the f‌irm.

Our research is unique because we consider both ethnic

diversity and gender diversity in this analysis that is not

common in the literature. We could locate only one other

empirical investigation that directly considered the link

between the ethnic minority diversity of the board and

f‌inancial performance of the f‌irm. The empirical relationship

between the gender of corporate directors and f‌inancial per-

formance has received much more attention in the literature

than other aspects of the demographic diversity of corporate

directors, possibly because of the availability of data.

However, we believe that gender diversity and ethnic diver-

sity are not the same phenomenon and will not affect the

f‌irm in identical ways. We base this conjecture on the follow-

ing: (1) previous empirical evidence on the nature of board

diversity (Hillman et al., 2002; Peterson & Philpot, 2007;

Peterson, Philpot, & O’Shaughnessy, 2007); (2) theory, espe-

cially resource dependence theory and human capital

theory, which suggests signif‌icant differences between

women directors and ethnic minority directors; and (3) the

evidence presented in this analysis which suggests a differ-

ence between women directors and ethnic minority direc-

tors. Furthermore, our study is unique because we explore

the relationship between the gender and ethnicity of the

members of important board committees and f‌inancial per-

formance which has not been done before. We investigate

the hypothesis of Klein (1998) that an analysis of committee

membership and f‌inancial performance provides a different,

and perhaps stronger, test of the link between board diver-

sity and f‌irm performance. Our third contribution is that we

implement econometric approaches that have not been used

extensively in previous investigations. As the empirical

analysis of board diversity and f‌irm performance has pro-

gressed, more and more sophisticated analytical methods

are being applied with new data sets. Our research contrib-

utes to this research stream by using improved statistical

tests and variables.All of the previous empirical research we

could f‌ind uses the percentage of women and/or percentage

of ethnic minorities on the board as the independent variable

of interest. Our investigation uses the number of women

directors and the number of ethnic minority directors. We

implement a f‌ive-year panel of data and associated panel

data methodology. We use a f‌irm f‌ixed effect methodology

that has only been used once in previous research. Our sta-

tistical models tested a lagged relationship between diver-

sity measures and f‌inancial performance that is rare in

previous investigations.

The paper is organized as follows. We review applicable

theory in the f‌irst section. In the second section, we discuss

some of the previous evidence on the link between board

diversity and the f‌inancial performance of the f‌irm. We

present the hypotheses tested in the third section and

discuss our sample, data, variables, and statistical methods

in Section 4. We present the results of the statistical analysis

in section f‌ive and provide concluding comments in the last

section of the paper. The research is conducted with data

BOARD DIVERSITY AND FINANCIAL PERFORMANCE 397

Volume 18 Number 5 September 2010© 2010 Blackwell Publishing Ltd