Does Board Ethnic Diversity Impact Board Monitoring Outcomes?
| Date | 01 January 2019 |
| DOI | http://doi.org/10.1111/1467-8551.12299 |
| Author | Paul M. Guest |
| Published date | 01 January 2019 |
British Journal of Management, Vol. 30, 53–74 (2019)
DOI: 10.1111/1467-8551.12299
Does Board Ethnic Diversity Impact Board
Monitoring Outcomes?
Paul M. Guest
Surrey Business School, University of Surrey, Guildford GU2 7XH, UK
Corresponding author email: p.guest@surrey.ac.uk
This study investigates whether board ethnic diversity is associated with stronger board
monitoring outcomes. We explore a range of outcomes – CEO compensation, account-
ing misstatements, CEO turnover–performance sensitivity and acquisition performance
– but find no evidence to support this. We also find no evidence that boardethnic diversity
improvesoverall firm performance, even for those firms with higher agency problems. Our
results are robust across dierent methodologies and have important practical implica-
tions, by informing the current public policy debate on board ethnic diversity.
Introduction
Since the financial crisis of 2008 there has been an
increased call for diversityon corporate boards, re-
flecting a frequently made claim that lack of diver-
sity was partly to blame forthe crisis. For example,
the UK Corporate Governance Code states that:
Essential to the eective functioning of any board is
dialogue which is both constructive and challenging.
The problems arising from ‘group-think’ have been
exposed in particular as a result of the financial crisis.
One of the ways in which constructive debate can be
encouraged is through having sucient diversity on
the board. This includes, butis not limited to, gender
and race. (Financial ReportingCouncil, 2016, p. 2)
The argument that gender and ethnic diversity will
improve the key board role of oversight or moni-
toring of executive management has been made in
many quarters. For example, the institutional in-
vestor TIAA-CREF invests on this basis, arguing
I would like to thank Nihat Aktas, Andy Cosh, Alex Ed-
mans, Marc Goergen, Marco Nerino, Ian Tonks, Burcin
Yurtoglu, three anonymous referees, and seminar par-
ticipants at the WHU - Otto Beisheim School of Man-
agement for helpful comments and suggestions. I am
also grateful to Dirk Jenter, Fadi Kanaan, Florian Peters
and Alexander Wagner for making their data on CEO
turnover available.
that ‘a diverse board is less likely to be beholden
to management’ (Carleton, Nelson and Weisbach,
1998, p. 1343), whilst board diversity proponents
have argued that diverse directors are individually
stronger monitors (e.g. Ramirez, 2004).
Board gender diversity has received by far the
most attention from academia and policy-makers.
Board gender quotas have been implemented in
several countries and there is evidence that gender
diversity results in stronger oversight(Larcker and
Tayan, 2016). For example, female directors are
more likely to sit on key monitoring committees,
and are associated with lower director compensa-
tion, enhanced CEO turnover–performance sensi-
tivity,improved performance for firms with agency
problems (Adams and Ferreira, 2009), improved
stock price informativeness (Gul, Srinidhi and Ng,
2011), better earnings quality (Gul, Srinidhi and
Tsui, 2011) and the restraint of CEO overconfi-
dence (Chen et al., 2016).
In contrast to gender diversity, there is a paucity
of such knowledge on racial and ethnic diversity.
This is despite the importance to both firms and
policy-makers. In their 2016 annual survey report,
Spencer Stuart reported that 55% of respondents
indicated that recruiting ethnic minority (hence-
forth in this paper minority refers specifically to
ethnic minority) directors was a priority. Further-
more, in response to low ethnic board diversity in
C2019 The Author.British Journal of Management published by John Wiley & Sons Ltd on behalf of British Academy
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54 P. M. Guest
the UK, the Parker review (Parker, 2017) recom-
mended that each FTSE 100 board should have at
least one minority director by 2021. In this study
we fill what we consider to be an important gap in
the literature: an empirical examination of board
ethnic diversity and the key board roleof monitor-
ing executive management.
From a theoretical perspective, the eect of eth-
nic diversity on monitoring could be positive,neu-
tral or negative.Board monitoring may be stronger
if ethnically diverse boards have more information
and make better monitoring decisions, or if minor-
ity directors are stronger individual monitors due
to higher independence (due to their ethnic dier-
ence) and higher director quality (due to discrimi-
nation). However, such dierences maynot hold in
practice. Minority directors are typically selected
after a very thorough vetting, and subsequently
may be similar in terms of perspectives to Cau-
casians. Additionally, being in a minority may cre-
ate pressure to conform and not behave dierently.
Thus, monitoring outcomes could be no dierent
for ethnically diverse boards. Alternatively, dier-
ences could be such that they result in conflict and
less ecient monitoring decisions.
A small number of empirical studies have exam-
ined the impact of board ethnic diversity on overall
firm performance, the results of which are mixed
(Larcker and Tayan, 2016). Carter, Simkins and
Simpson (2003) find a positive relation between
minority directors and Tobin’s Q, as do Miller
and Triana (2009) for profitability, yet Carter et al.
(2010) find no association with either measure.
Two other papers include ethnic diversity within
a broader measure of board diversity, which is
associated with positive firm performance out-
comes. Anderson et al. (2011) examine race, gen-
der,age, education and occupation together, whilst
Erhardt, Werbel and Shrader (2003) consider mi-
nority and gender diversity together. These stud-
ies tell us little about board monitoring outcomes,
since stronger monitoring could improve firm per-
formance by reducing agency costs (Hermalin and
Weisbach,2003) or lower overall firm performance
due to weaker board advising and greater man-
agerial myopia(Adams and Ferreira, 2007; Faleye,
Hoitash and Hoitash, 2011).
Further, firm performance outcomes may also
reflect other (i.e. non-monitoring) eects of board
ethnic diversity, such as the advisory role of the
board (Adams, Hermalin and Weisbach, 2010) (i.e.
more diverse viewpoints leading to better board
decisions) or providingaccess to external resources
(Pfeer and Salancik, 1978) such as minority con-
sumers and employees. Minority directors may
provide advice about such groups, communicate
with them and/or signal legitimacy to them. Miller
and Triana (2009) show that ethnic diversity posi-
tively impacts firm performance via two mediating
variables (innovation and reputation), suggesting
an improvement in both these roles.
Monitoring strength may manifest itself in
terms of board task outcomes and firm perfor-
mance, the latter being positively moderated by
agency costs. Our empirical approach examines
each, ensuring that, as the first study to examine
this issue, our conclusions are based on a wide
range of potential impacts. Given that firm perfor-
mance is noisy, determined by many factors and
at best bears a distal relation to board diversity,
we respond to observers’ encouragement to exam-
ine more direct organizational outcomes (Adams
et al., 2015; Ferreira, 2010, 2015; Hillman, 2015;
Nielsen and Huse, 2010; Zona and Zattoni, 2007).
Identifying causal impacts is likely confounded
to some degree by endogeneity problems, as-
sociated with unobservable omitted variables
and reverse causality (Abdallah, Goergen and
O’Sullivan, 2015; Bettis et al., 2014; Ferreira,
2010). The appointment of outside directors is en-
dogenous to firm performance (Adams, Herma-
lin and Weisbach, 2010; Hermalin and Weisbach,
1988), and minority director appointments could
be endogenously caused by firm characteristics
which could be invariant or variant with time, ob-
servable or unobservable. With reverse causality,
the presence of minority directors could be de-
termined by past or expected firm performance
and/or monitoring strength.1
In our setting there are no obvious quasi-natural
experiments or shocks to facilitate causal infer-
ence. We instead employ firm fixed eects and in-
strumental variable analysis, each of which has
limitations (Bettis et al., 2014; Semadeni, Withers
1For example, underperforming firms, or firms with weak
governance,may appoint minority directors (perhaps due
to pressure to improvetheir governance). Alternatively, if
firms appoint minority directors as tokens, they may do
so only when they are performing (or expecting to per-
form) well and can thus aord to do so (Ferreira, 2010).
Alternatively, CEOs could be rewarded with higher com-
pensation for achieving diversity. Anecdotal evidence of
this is provided by Broome, Conley and Krawiec (2011a,
p. 798) and Barbaro (2004).
C2019 The Author.British Journal of Management published by John Wiley & Sons Ltd on behalf of British
Academy of Management.
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