Types of director, board diversity and firm performance

• Pages: 324-342
• DOI: https://doi.org/10.1108/CG-03-2019-0096
• Date: 17 January 2020
• Published date: 17 January 2020
• Author: Miguel A. Fernández-Temprano,Fernando Tejerina-Gaite
• Subject Matter: Corporate governance,Strategy

Types of director, board diversity and

f‌irm performance

Miguel A. Fernández-Temprano and Fernando Tejerina-Gaite

Abstract

Purpose –The purposeof this paper is to investigate the effect of board diversity on firm performance.

Design/methodology/approach –From different theories perspective and based on data collected

about the composition of board of directors in Spanish non-financial firms, the paper determines

statisticallythe relationship between board diversityand performance for the period 2005-2015.

Findings –The results reveal differences between inside and outside board members in terms of the

performance impact of board diversity. Thus, while age diversity has a positive effect on firm

performancein both, insider and outsider directors,nationality mix is associated withhigher performance

levels just in the case of insiders. In addition, educational diversity seems to have a negative effect on

performance for supervisory directors. On the contrary, the authors do not find any evidence about a

possibleinfluence of gender diversity on performance.

Research limitations/implications –The authors are just taking some board’s attributes, but the

conceptof board diversity is a very wide one. In this regard, less traditionalmethodologies that do not rely

on extant archival databasesmay be necessary to get a deeper understanding of the impact of boards

on firm’sperformance.

Practical implications –This study demonstrates that the claim of ‘‘one size fits all’’ often implicitly

stated by regulators and advisors is misleading. Board’s attributes analysis over the boardroom as a

whole turns out in too simplistic conclusions. This is particularly important for regulators: a rigorous

analysis shouldbe performed before including general recommendationsabout, for instance, the ageor

the boardtenure in corporate governance codes.

Social implications –As diverse boards contribute to a greater social value, the paper analyses the

performanceconsequences of demographic diversity.

Originality/value –The paper analyses the firm performance impact of diversity among insider

directors, on the one hand, and outsider directors, on the other. Although there is a clear difference

between the roles assignedto insider and outsider directors, to the authors’ knowledge,there has been

no analysis of the firm performanceeffect of the diversity of each type of directorusing the same sample

and methodology.

Keywords Firm performance, Board diversity, Outside directors, Executive directors

Paper type Research paper

1. Introduction

One of the topics most commonly addressed in the corporate governance literature is

board’s independence, which is recognised essential to its supervisory role, and its

influence on a range of firm variables relating to performance. This has led to the analysis of

variables such as the size of the board, the percentage of independent directors, the

separation of the roles of chairman and CEO or the frequency of board meetings (Hermalin

and Weisbach, 2003), all of which make up its so-called structuraldiversity.

More recently, many studies have related the recent financial crisis to governance failures

(Berglof, 2011;Van Den Berghe, 2009). Within this context, boards have been criticised for

having been unable to prevent the crisis, and this has opened new analysis perspectives.

Thus, growing attention has been paid, in both academic and regulatory spheres, to board

Miguel A. Ferna

´ndez-

Temprano is based at

Department of Statistics

and Operations Research,

Universidad de Valladolid,

Valladolid, Spain.

Fernando Tejerina-Gaite is

based at Department of

Financial Economics,

Universidad de Valladolid,

Valladolid, Spain.

Received 15 March 2019

Revised 10 October 2019

7 November 2019

2 December 2019

Accepted 5 December 2019

The authors acknowledge the

financial support from the

Spanish Government (Projects

ECO2017-84864-P and

MTM2015-71217-R).

PAGE 324 jCORPORATE GOVERNANCE jVOL. 20 NO. 2 2020, pp. 324-342, ©EmeraldPublishing Limited, ISSN 1472-0701 DOI 10.1108/CG-03-2019-0096

characteristics that might influence the effectiveness of the decision-making process, such

as the age, education, gender or nationality of the board members, grouped under the

heading of demographic diversity.The idea is to determine how these characteristics affect

board functioning and, in turn, firm performance. An in-depth review by Johnson et al.

(2013), while acknowledging theimportance of all these factors, draws attention to the need

to investigate the reasons for the varietyof findings.

The above motivates the following paper, which fits into the context of the literature on

boards of directors, and is aimed specifically at exploring one of the most habitual

questions emerging from that research, namely, what determines the board’s actions. As

noted by Adams et al. (2010, p. 59), “studies look at differences across boards and ask

whether these differences explain differences in the way firms function and how they

perform”. The underlying notion is that differences in board structure correlate with

differences in board conduct, and this may have repercussions for firm performance. We

are not able to capture such differencesin board conduct, as a detailed fieldwork would be

required, so we focus in the way profits vary with differences in board’s structure. Based on

complementary theoretical perspectives, the specific purpose of this paper is to contribute

to the body of knowledge concerning boards of directors by analysing the impact of the

diversity of the various types of boardmembers on firm performance.

The main contributions ofthe paper can be summed up as follows:

䊏Board composition has been extensively analysed as a part of good corporate

governance. While much of this research has focussed on size and independence,

there is a growing literature that analyses the composition of directors’ demographic

diversity. Furthermore, diversity has been the subject of active policy making which

makes it even more important to understand the role it plays. In this context, the present

paper contributes to this stream of literature analysing the influence of six directors’

diversity attributes on firm performance.

䊏It is a single study separately analysing the firm performance impact of diversity

characteristics among insider directors, on the one hand, and of outsider directors, on

the other. The main studies to date focus basically on the board as a whole, the top

management team (TMT) or on the CEO (Ararat et al., 2015;Johnson et al., 2013)[1].

Although there is a clear difference between the roles assigned to insider and outsider

directors, to our knowledge, there has been no analysis of the firm performance impact

of the diversity of each type of director using the same sample and methodology. Given

that their roles differ considerably, it would appear useful to make the distinction.

Particular attributes may be appropriate for the performance of some tasks, and

irrelevant for others.

䊏In contrast to most of the research on this topic, which is limited to countries with an

Anglo-Saxon financial system, our study analyses a sample of firms in a country with a

continental financial system and characterised by ownership concentration and

blockholders with strong board representation. In these environments, the board of

directors plays a key corporate governance role, given the nearly or totally non-existent

market for corporate control and poor protection of investors’ rights. The literature

highlights the predominance of blockholders with strong board representation in

management control tasks, while independent directors should focus on the protection

of minority interests.

It is required, therefore, to point out some of the features of board of directors in Spain,

where corporate governance is unitary, i.e. there is only one board of directors, just as in

countries such as the UK, Italy or Portugal. However, while Spanish boards have 11

members on average, in linewith other countries of a similar economic and social level,their

composition (Table I) keeps particularfeatures.

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