Board Diversity and Firm Performance: The Role of Contextual Variables
| Published date | 01 October 2023 |
| Author | Nitesh Pandey,H. Kent Baker,Satish Kumar,Prashant Gupta,Searat Ali |
| Date | 01 October 2023 |
| DOI | http://doi.org/10.1111/1467-8551.12675 |
British Journal of Management, Vol. 34, 1920–1947 (2023)
DOI: 10.1111/1467-8551.12675
Board Diversity and Firm Performance: The
Role of Contextual Variables
Nitesh Pandey,1,6 H. Kent Baker,2Satish Kumar,1,3 Prashant Gupta4
and Searat Ali5
1Department of Management Studies, Malaviya National Institute of Technology, Jaipur, 302017, India,
2Kogod School of Business, American University, Washington, DC, 20016, USA, 3School of Business,
Swinburne University of Technology, Kuching, 93350, Malaysia, 4Indian Institute of Management,
Tiruchirappalli, 620021, India, 5School of Business, University of Wollongong, Wollongong, NSW, 2522,
Australia, and 6Amrita School of Business, Amrita Vishwa Vidyapeetham, Coimbatore, 641112, India
Corresponding author email: skumar.dms@mnit.ac.in
We examine the dynamic relationship between board diversity and rm performance in
an Indian context using a systems generalized method of moments and control function
approach. Our baseline analysis shows that board diversitypositively inuences account-
ing performance but negatively affects market performance. Additional analysis reveals
that contextual variables, including board independence, rm size, rm age, promoter
shareholdings, industry sector, women’sparticipation in STEM education and the work-
force and gross domestic product moderate this relationship signicantly. We also nd
improved marketperformance after enacting the Companies Act 2013. Overall, these re-
sults highlight the critical role of performance measurement and contextual variables in
the diversity–performance nexus.
Introduction
The board of directors is critical in providing
internal governance. As a rm’s highest decision-
making body, the board monitors management
activities and provides counsel (Adams and Fer-
reira, 2007; Aggarwal, Jindal and Seth, 2019).
The agency theory view of the board stresses the
importance of independence in improving the
monitoring function. However, independence, as
currently described in academia, is awed. It only
considers the absence of board members’ material
interests in the rm (Pandey, Andres and Kumar,
2022), thus ignoring the effect of interpersonal
relationships with executives affecting director be-
haviour. A solution to this situation is to focus on
board diversity as an alternative to independence.
The idea is that a group which is not part of the
‘old boy network’is more likely to be indepen-
dent (Abdullah et al., 2016; Adams and Ferreira,
2009). The ‘old boy network’refers to the group
of people, often elderly males, used to select board
members. Although fullling the prerequisite for
independence (i.e. having no material interest in
the rm), the individuals present in such networks
are still unmotivated to monitor their choices care-
fully due to their interpersonal relationships with
CEOs. Board members with diverse backgrounds,
who are often excluded from these networks, can
thus serve as active monitors due to the lack of
interpersonal relationships with CEOs.
Compared to studying board composition,
studying board diversity is a more recent phe-
nomenon, only gaining attention since the pas-
sage of laws mandating board gender diversity
in 2008 (Baker et al., 2020). Research focusing
on the consequences of such legislative actions,
like laws requiring quotas, can have unintended
consequences. For example, in a Norwegian con-
text, Bøhren and Staubo (2014) nd that rms
changed to different and comparatively inefcient
organizational forms to avoid mandatory gender
© 2022 British Academy of Management.
The Role of Contextual Variables1921
requirements to increase diversity. In a more re-
cent example in California, Greene, Intintoli and
Kahle (2020) report an adverse stock market reac-
tion to signing a bill creating gender quotas. How-
ever,these effects ofsuch legislative action are less
harmful to rms in industries with more female tal-
ent. The policy debate on whether legislative ef-
forts should promote board diversity iscomplex
and requires a thorough understanding of the link
between board diversity and rm performance.
Further, as a business proposition, diversity
needs to align better with a rm’s strategic objec-
tives (Robinson and Dechant, 1997). Ethical jus-
tications exist for more afrmative action, but
some economic value results from board diversity
to justify the legislative measures takento promote
it. Questions about the justications of such leg-
islative actions are relevant. Therefore, examining
the business case for board diversity is important.
What is the association between board diversity
and rm performance?
Many studies have examined the inuence of
board gender diversity on rm performance.How-
ever, the results are mixed, ranging from positive
(Campbell and Mínguez-Vera, 2008; Galbreath,
2018; Reguera-Alvarado, Fuentes and Laffarga,
2017; Ujunwa, 2012) to negative (Adams and Fer-
reira, 2009; Rose, 2007) to insignicant (Carter
et al., 2010; Chapple and Humphrey,2014; Guest,
2019).1In an attempt to resolve the conicting re-
sults, Abdullah et al. (2016) use a sample of rms
from the emerging market of Malaysia and show
that the effect of female directors on rm per-
formance is contingent upon performance mea-
surement (accounting or market), ownership and
board structure. Similarly, Post and Byron’s (2015)
meta-analysis documents that the impact of fe-
male directors on rm performance depends upon
the legal/regulatory and socio-cultural context and
performance measurement.
Few studies examine whether other aspects of
board diversity beyond gender affect rm perfor-
mance. For example, Bernile,Bhagwat and Yonker
(2018) use a multidimensional measure of board
diversity, including gender, age, number of board
seats, ethnicity, education and expertise. The au-
thors show that greater board diversity improves
1Duppati et al. (2020) show that gender diversity has a
positive and signicant impact on nancial performance
but not on market performance of Indian rms.
performance in US rms. However, this bene-
cial effect declines signicantly in highly volatile
market-wide conditions requiring swift board de-
cisions. In an Indian study, Aggarwal, Jindal and
Seth (2019) report that board diversity (i.e. gen-
der, age, education and tenure) has a signicantly
negative effect on performancefor group-afliated
rms but a signicantly positive impact on stand-
alone rms. Overall, these studies highlight the im-
portance of considering contextual factors in ex-
amining the association between board diversity
and rm performance.
Building on the above literature streams, we
use a sample of 1197 Indian rms to test the
relationship of board diversity, including board
gender, age, tenure, education and profession,
with rm accounting and market performance
between 2008 and 2013. We study the dynamics
of this relationship by considering a range of
contextual variables, including board characteris-
tics, rm characteristics, the industrial sector and
the economic environment. We also use various
econometric approaches to address the endo-
geneity issues originating from omitted variables,
reverse causality and dynamic endogeneity (Win-
toki, Linck and Netter, 2012). Besides a two-step
generalized method of moments (GMM), our pri-
mary methodological contribution concerns using
correlation random effect(CRE) and control func-
tion (CF) approaches (Wooldridge, 2015). These
methods can handle the initial condition problem
(Heckman, 1981) and solve reverse causality and
dynamic endogeneity issues.
Our study offers two main ndings. First, our
baseline results show that the effect of board di-
versity on rm performance depends on the per-
formance measurement and level. Specically, our
GMM and CF approaches revealthat board diver-
sity positively inuences accounting performance
but negatively affects market performance. These
results highlight the difference between the actual
improvements to rm performance and investor
perception of it regarding diverse boards (Abdul-
lah et al., 2016). Moreover, our decile regression
approach shows that the effect of board diversity
on rm performance is stronger in rms with bet-
ter performance.
Second, our study reveals several contextual
variables that affect board diversity and rm
performance. Specically, the positive inuence
of board diversity on accounting performance
© 2022 British Academy of Management.
Get this document and AI-powered insights with a free trial of vLex and Vincent AI
Get Started for FreeStart Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting