Master thesis
Msc. International Business and Management Msc. Economics and Business
_________________________________________
Board Diversity and Firm Performance:
Evidence from Dutch and Swedish
Board of Directors
_________________________________________
Rijksuniversiteit Groningen Faculty of Economics & Business
Landleven 5 9747 AD Groningen The Netherlands & Uppsala Universitet Department of Economics P.O. Box 513 SE-751 20 Uppsala Sweden Groningen, 4th May 2011
Orlando dos Santos Supervisor: Dr. N. Brunia, Ing.
Student Number: 1823833
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Abstract
The purpose of this thesis is to explore the relationship between the board demographic diversity, thus gender, age, ethnicity, and the financial performance of Swedish and Dutch companies. The measures for the financial performance are Tobin‟s Q and ROA. From the model analysis, it can be seen that diversity measures affects Tobin‟s Q but only to a certain extent. Only the Percentage of Ethnic Minority Directors has a strong influence on Tobin‟s Q. On the other hand, the Percentage of Female Directors has a negative influence on the Tobin‟s Q. This is also the case with ROA. From the analysis I can conclude that diversity of the Board of Directors based on gender, ethnic minority and age does have a positive effect on the firm‟s financial performance but to certain extent.
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Table of Contents
1 Introduction ... 4
2 Literature Review... 8
Resource Dependence Theory ... 8
Agency Theory ... 9
Empirical Perspective on Board Diversity and Firm‟s Performance ... 10
3 Hypothesis ... 15
4 Methodology ... 15
Dependent Variables ... 15
Independent Variables ... 16
Control Variables ... 17
Sample and Method ... 19
5 Results ... 21
6 Conclusion and Discussion ... 30
References ... 32
Appendix 1 Codebook and Description of Variables ... 36
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1 Introduction
Diversity in the boardroom and in top executive positions has been the focus of public debate, academic research, government considerations and corporate strategy for more than a decade now. Previously considered a social issue and an issue of image, board diversity is increasingly approached as a value-driver in organisational strategy and corporate governance (Marinova et al, 2010). This increase in board diversity can be seen in the different corporate governance legislation that has been taken recently. Rose (2007) reports a significant interest in Scandinavian countries 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 (Rose, 2007). The Higgs Report, commissioned by the British Department of Trade and Industry, suggests that demographic diversity increases board effectiveness and recommends that more women be included on boards (Derek Higgs, 2009). Hillman, Cannella, and Harris (2002) states 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. Also they report that board diversity implies that a higher number of women in corporate top positions or on board of directors will relate to increased firm productivity and profitability
Among the first to formulate and support the diversity in the board of directors, specifically gender diversity, in top management were the researchers from Catalyst (2004), who showed that more diverse companies achieve better financial results. Since then, in order to increase board diversity, recruiting, developing and advancing women has been growing. Several research and advisory organizations are active in promoting board diversity. Catalyst is represented in the US, Canada and Switzerland and works with partner organizations on several continents, while the European Professional Women‟s Network (EuropeanPWN) carries out Europe-wide initiatives. Despite debates, action programs and media attention, however, women in the EU represent only 11% of boards of directors and supervisory boards (Desvaux et al, 2008).
Page | 5 understanding of the nature of any relationship that may exist between the diversity of the board of directors and firm‟s financial performance has important implications for both public policy and the governance of firms. If there is no difference between competent women, ethnic minority directors and other qualified directors so that the diversity of the board does not influence firm governance or performance, then the desirability of gender and ethnic minority diversity is primarily a public policy issue. However, if there is a positive relationship between the diversity of the board and firm performance, the economic implications of board diversity are important. If the relationship is negative, the cost of inclusion of women or ethnic minority director is a factor to be considered. Theories from economics, organization behaviour, and social psychology provide some understanding of the nature of the link between the diversity of the board and firm financial performance but the empirical evidence on the link is mixed and limited.
Empirical evidence on the relationship between Board diversity and firm‟s financial performance within the European context is rather thin. As a result, the business case argument for diversity, suggesting that diversity translates into better decisions and ultimately in better performance, is seldom made on the basis of firm, scholarly research. In order to contribute to the scientific debate, this thesis addresses the question about the effect of the board diversity on the firm‟s financial performance, using data for 49 listed firms observed from 2005 to 2009, of which 25 Dutch and 24 Swedish companies.
Berkelaar & Crol (2006) present in their study „De Onbekende Commisaris‟ Sweden as best practice country for the Netherlands in terms of board diversity. They explain that Sweden is used to boards of directors with younger members, more female board members, transparent appointment procedures, external influences on the selection and women in the role as chairman of board of directors. However, does this diverse board of directors translates into better firm‟s financial performance? Is Sweden still the best practice country for the Netherlands if board diversity is linked to the financial performance of the company?
Page | 6 board, ratifying managerial decisions, providing advice, as well as adopting the company‟s annual accounts (Corporate Governance Committee 2003; Committee on Corporate Governance 2005). One of the differences between the corporate governance systems in the two countries is that in Sweden a number of employee representatives may sit on supervisory boards, while the employees‟ role in Dutch boards is indirect, through the works councils.
The EuropeanPWN observed in its fourth bi-annual European Board Women Monitor 2010 that in the 300 largest companies in Europe the overall progress of women to the boardrooms has been growing compared to 2008. According to the Monitor, the average European board consists of 11.7 members, of which 1.4 are women (EuropeanPWN 2010).
Furthermore, in the same study it is concluded that there are on average more ethnic minority directors than female directors and the average age of the board members fluctuates between 53.6 years and 58.6 years. In terms of board gender diversity in Europe in 2010 Sweden and the Netherlands occupy the second and fourth place, respectively (EuropeanPWN 2010). In Sweden the share of women on board of directors was 29% in 2010, as compared to 27% in 2008, while in the Netherlands women‟s representation on board of directors increased from its 12.3% in 2008 to 15% in 2010 (EuropeanPWN 2010). On average in Sweden, the share of ethnic minority directors is equal to the share of women on the board of directors. However, in the Netherlands the share of ethnic minority directors is more than double the share of women in the Dutch board of directors.
Page | 7 than other aspects of the demographic diversity of corporate directors, possibly because of the availability of data. As the empirical analysis of board diversity and firm performance has progressed, more and more sophisticated analytical methods are being applied with new data sets. Most of the previous empirical research that could have been found, used the percentage of women and/or percentage of ethnic minorities on the board as the independent variable of interest. This is also the case in this thesis. Last but not least, two stage least squares analysis will be applied.
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2 Literature Review
Within the corporate governance framework, the composition of corporate boards is vital to align the interest of management and shareholders, to provide information for monitoring and counselling, and to ensure effective decision-making (Becht, Bolton and Röell 2002; Hermalin and Weisbach 2003). Gender diversity, board size, age dispersion, educational background, all relate to board decision-making process which ultimately has an influence on firm‟s financial performance. (Bøhren and Strøm 2007).
From summaries of existing literature, which can be seen in this section, I can conclude that the relationship between diversity and financial performance is generally positive correlated while few studies show that there is none or negative relationship between board diversity and financial performance. From these studies, relevant theories are discussed.
Resource Dependence Theory
Resource dependency theory addresses how a board might facilitate access to valuable resources.. Boards of directors perform a service task and are supposed to bring different types of resources to the firm, such as advice and counsel on the one hand and external legitimacy and networking on the other (Hillman and Dalziel, 2003). Advice and counsel refers to the boards‟ active evaluation and selection of strategic alternatives developed by top managers and the supply of suggestions to improve the quality of strategic decision-making. With respect to external legitimacy and networking, the boards of directors usually co-opt outside directors to increase a firm‟s legitimacy in its environment (Zahra and Pearce, 1989) and to improve relationships with relevant stakeholders (Pfeffer and Salancik, 1978).
Page | 9 Diversity holds the potential to improve the information provided by the board to managers due to the unique information held by diverse directors. (Carter et al, 2010). Differences in gender and ethnicity will very likely produce unique information sets that are available to management for better decision making. Furthermore, diverse directors provide access to important constituencies in the external environment (Carter et al, 2003). The creation of this important link is crucial because over half of the pool of human capital available to the firm is composed of women and ethnic minorities. As a result, diverse organizations have access to more talent. Board diversity sends important positive signals to the labour market and product market.(Carter et al, 2003).
It should be noted that the type of diversity that will be important in a particular country or culture may vary widely. We observe that gender diversity is emphasized in Scandinavian countries and some other countries in Europe such as Spain, possibly because of greater ethnic homogeneity. However, some European countries are experiencing increasing ethnic diversity as well. Other types of demographic diversity, including religion and age, may have more importance in different national and cultural settings.
AgencyTheory
The agency approach is amongst the most recognized theoretical frameworks in finance and economics to understand the link between board characteristics and firm value (Carter et al., 2003). Agency theory is based on the assumption that agents (managers) are opportunistic and strongly motivated to take profit from the information asymmetry between them and their principals (owners) (Donaldson and Davis, 1991).
Page | 10 which will have an ultimate impact on the financial performance of a company (Randoy et al, 2006, Carter et al., 2003).
Empirical Perspective on Board Diversity and Firm’s Performance
Diversity on boards of directors is a well-researched topic. From my summary of empirical research it appears that results differ, although more positive relationships are found in recent studies (Terjesen et al., 2009). For instance, Erhardt et al. (2003), Carter et al. (2002), Carter et al (2007), Marimuthu (2009), Catalyst (2004) and Lukerath-Rovers (2010) proposed that board diversity has a positive effect on firm performance. Other scholars and studies, e.g. Marinova et al (2010) and Randoy (2006) no significant effect between board diversity and firm‟s financial performance. One study found a negative relationship between the two variables (Adams et al, 2009)
Page | 11 on ROS and 66 % on ROIC (Catalyst, 2004). In addition, Smith et al. (2006) show that the proportion of women CEOs and women directors tends to have a positive effect on firm performance.
In contrary, some researchers report a U-shaped or negative correlation between gender diversity and firm performance (e.g.Frink et al., 2003; Adams and Ferreira, 2009). Other scholars suggest there is no relationship (Randoy et al., 2006; Rose, 2007). In the study of Frink et al. (2003), an inverted U-shaped relationship was detected, with the peak at approximately 50 percent female participation. Thus, organizational performance is growing with increases in gender composition up to 50 percent female board members, beyond which further increases in the number of women on boards is associated with decreases in organizational performance (Frink et al., 2003). The scholars base their proposed inverted U-shaped relation on the one hand on the resource based view of value in diversity. On the other hand, they support the argument for diminishing returns to organizational performance as the proportion of women increases. They explain that more women in higher managerial positions lead to a concentration of power in the hands of the remaining few males. The restriction in the use of power may lead to lost opportunities to utilize this power for the good of the company and hence affect firm performance negatively (Frink et al., 2003). Adams and Ferreira (2009) draw the conclusion that the positive correlation found in the literature between gender diversity and firm‟s financial performance (Tobin‟s Q, ROA) is not robust to any method of addressing the endogeneity of diversity.
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Researchers Sample Size Research
Period
Study focus & findings Independent variables Dependent Variables
Positive Relationship Between Board of Directors and Financial Performance
Erhardt, Werbel & 127 large US Companies 1993 & 1998 The relationship between demographic The percentage of women ROA & ROI Shrader (2003) diversity on boards of directors and minorities
with firm financial performance;
board diversity is positively associated with these financial indicators of firm
performance
Marimuthu (2009) 100 non-financial Malaysian 2000 to 2005 The relationship between ethnic Ethnic Diversity on Board of ROA companies diversity on boards of directors with firm Directors
financial performance; ethnic diversity enhances firm financial performance
Carter, Simkins & 637 Fortune 1000 Companies 1997 Examines the relationship between board Percentage of women Tobin's Q & ROA Simpson (2002) diversity and firm value; Percentage of ethnic
significant positive relationships between minorities the fraction of women or minorities on the
Firm value
Carter, Simkins, Fortune 500 companies 1998-2002 The relationship between the gender and ethnic minority diversity of the board of
Percentage Female Directors Percentage Etnic Minirioty,
ROA, Total Assets, Tobin's Q
Simpson,, D'Souza directors and the financial performance of the firm performance of the firm; board
Director
(2007) diversity has a positive effect on financial performance as measured by Tobin's Q
Catalyst (2004) 353 Fortune 500 Companies 1996-2000 Examine the relationship between No. of Female Directors ROE and Total
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board gender diversity and firm performance;
Return on Shareholers
The group of companies with the highest representation of women on their top management experienced better financial performance than the group of companies with the lowest representation of women
Luckerath-Rovers 99 Dutch listed companies 2005-2007 This study addresses the research question of McKinsey, Catalyst method ROE, ROS, ROIC, (2010) whether companies with female directors on and relative diversity TSR
the board have a higher average performance measure than companies with no female directors;
There is a positive relation between the number of women and firm's financial Performance
Adams & Ferreira (2009)
Standard & Poor‟s(S&P)500
S&P MidCaps, and S&P small
Cap firms
1996-2003 Examines the impact of women directors on corporate governance and performance; the average effect of gender diversity on firm performance is negative
Female Directors Stock Performance
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Researchers Sample Size Research
Period
Study focus & findings Independent variables Dependent Variables
No Relationship Between Board of Directors and Financial Performance
Marinova, Plantenga 186 listed firms, of which 2007 The impact of board gender diversity on Share of women's on Board Tobin's Q & Remenry (2010) 102 Dutch and 84 Danish firm performance; of Directors
there is no effect of board
gender diversity on firm performance
Randoy, Oxelheim 500 largest companies in 2005 Analyze board diversity and its impact on No. of women, No of foreign ROA, Tobin's Q &Thomsen (2006) Denmarkt, Sweden & corporate performance; directors, Age deviation,
Norway no significant diversity effect of gender, age, Diversity Index and nationality on stock market performance
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3
Hypothesis
As summarized in the literature review on corporate governance theories, resource dependence theory and agency theory, the results about the impact of diversity of the boards of directors firm‟s financial performance are mixed. In particular, resource dependence theorists argue that directors with diverse background and from different constituencies facilitate the acquisition of critical resources for the organization which ultimately has a positive impact on the firm‟s financial performance (Sai Fan, 2004) On the other hand, the agency theorists does not offer a clear prediction of the effect of board directors and firm‟s financial performance. One explanation is insufficient development of testable theory. Hermalin and Weisbach (2001) comment that board-specific phenomena are not quite explained by principal agent models and note that current theoretical framework, agency theory, does not provide clear-cut prediction concerning the link between board diversity and firm‟s financial performance.
Therefore, this study takes a resource dependence theory approach and expects that a diverse board of directors has a positive impact on the firm‟s financial performance. Furthermore, going with the conclusion of most of the empirical research I expect in this study that a diverse board of directors has a positive effect on the financial performance of the company. Consequently, I propose the following hypothesis;
H1: A diverse board of directors, based on gender, ethnic minority and age, has a positive effect on the firm’s financial performance
4 M
ethodology
Dependent VariablesPage | 16 assets (ROA), return on equity (ROE) and return on sales (ROS). According to Dalton et al. (1998) “there appears to be no consensus regarding the efficacy of reliance on one set of indicators (accounting-based) or another (market-based)” (Dalton et al., 1998, p. 275).
The market-to-book ratio, Tobin‟s Q and ROA are the variables most often used in measuring firm‟s financial performance (e.g. Fich and Shivdasani, 2006; Ferris et al., 2003; Sarker and Sarker, 2009; Jackling and Johl, 2009). In gender diversity studies on boards of directors ROA and Tobin‟s Q are the most frequently used variables indicating firm‟s financial performance (e.g. Shrader et al., 1997; Carter et al., 2003; Erhardt et al., 2003; Campbell and Minguez-Vera, 2007; Adams and Ferreira, 2009). I decided to use Tobin‟s Q (forward-looking) and ROA (backward-looking) as an indicator for firm performance as results are comparable to most of the existing research. To check for robustness of the results of ROA, ROE is set as a dependent variable in the correlation analysis
Independent Variables
One of the standard approaches to the measurement of board diversity is to calculate the percentage of female or ethnic minority directors on the board by dividing the number of female or ethnic minority directors by the total number of directors on the board (Carter et al, 2007). For descriptive statistical purposes, number of members in the board of directors has been used. Also the number of man and number of nationals has been used in order to get a total picture of the diversity of the board of directors.
In this study an ethnic minority directors is defined as a director on the board that is not of the same country as the company is listed. Per example, a British is considered an ethnic minority director if the company in which the director is part of is listed on the Dutch stock exchange.
According to Kim et al (2010), the relationship between age and firm performance is an empirical issue because age has two different perspectives: productivity and experience.
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between the youngest director and the oldest director. For statistical descriptive purposes, the board‟s average age has been included
Control Variables
Firm Size
Just like firm performance, firm size can be measured in multiple ways, e.g. through sales,assets, equity, market value or employment (Hopkins, 1988). This research uses total assets as a measure of a company‟s size. Scholars, such as Jiraporn et al. (2008), Sarker and Sarker (2009) or Jackling and Johl (2009) used total assets as well when investigating the link between busy boards and firm performance.
The reason for controlling for firm size is the direct effect it has on firm performance due to economies of scale and scope as well as on market power and access to resources (Pfeffer and Salancik, 1978). Ferris et al. (2003) argue that average firm size is a proxy for monitoring intensity required of a director. Larger firms might demand additional efforts and directors of a large firm are perceived to possess desirable qualities resulting from monitoring a major company (Ferris et al., 2003).
Firm Age
Theory is equivocal on the precise relationship between firm age and performance. Older firms are more productive and less profitable (Majumdar, 1997), as older firms may become more lax or be at a point on their product life cycle with declining earnings (Lipczinsky and Wilson, 2001). Younger firms on the other hand are expected to have smaller earnings than older ones, because they have less experience in the market, are in a phase of building up their market position. They normally have relatively higher capital costs as compared to older firms (Lipczinsky and Wilson, 2001). Controlling for firm age is commonly used in research measuring the effect on firm performance (e.g. Fich and Shivdasani, 2006; Smith et al., 2005; Jackling and Johl, 2009). In this research, firm age is measured as the difference between the research year and year of foundation.
Board Size
Page | 18 were the first to hypothesize that board size is an independent control mechanism. Specifically, they argue that large boards may be less effective than small boards. The underlying notion is that large boards can make coordination, communication, and decision making more cumbersome than it is in smaller groups. . In accordance, Yermack (1996) finds evidence for an inverse association between board size and firm value. He investigates the monitoring and decision-making quality by the board of directors and finds that the largest fraction of lost value occurs as boards grow from small to medium size (Yermack, 1996). As shown by literature, I expect board size to have an impact on firm performance. Thus, a further control variable in this research is the total number of directors on board following the example of various busyness authors (e.g. Ferris et al., 2003; Carter et al., 2003; Fich and Shivdasani, 2006; Jiraporn et al., 2008 and 2009; Jackling and Johl, 2009). Since this number is subject to changes during the year, only the directors that were member of the board at the end of a company´s fiscal year are counted and utilized.
Industry
In accordance with Erhardt et al. (2003) and Smith et al. (2006), this paper includes an industry dummy to control for industry-specific effects on firm performance. Using the commonly known SIC code, firms are classified into seven industries:
SIC 0-1 = Agriculture, Forestry, Fishing and Mining SIC 2 = Construction
SIC 3 = Manufacturing
SIC 4 = Transportation, Communications, Electric, Gas & Sanitary SIC 5 = Wholesale and Retail Trading
SIC 6 = Finance, Insurance and Real Estate SIC 7 = Services
Finally, I will include a country dummy variable equal to 1 in case a company is Dutch, or zero otherwise.
Board Independence
Page | 19 monitoring and controlling tasks (Fama and Jensen, 1983). Outside (non-executive) directors differ from inside (executive) directors in terms of knowledge, skills, and network contacts. Boards with a high number of outside directors might be able to exercise better monitoring, demand accountability from managers and reduce agency costs (Jiraporn et al., 2008). Therefore, the percentage of independent board members is included as a control variable in accordance with Ferris et al. (2003), Fich et al. (2006), Jackling and Johl (2009), Jiraporn et al. (2008 and 2009) and Adams and Ferreira (2009).
Sample and Method
The sample comprised 49 listed companies, of which 25 Dutch companies listed on Euronext Amsterdam and 24 Swedish companies listed on OMX Nordic Exchange Stockholm. Also all data collected are from 2005 up to and including 2009. The reason for choosing listed companies is due to data availability considerations and the nature of our performance measure. Furthermore, only companies with large capitalization on the stock market have been chosen for the reason mentioned before. The main data source regarding board characteristics were companies‟ annual reports, supplemented by the AMADEUS database. Data on directors, however, refer only to directors currently in office, while I needed to obtain information from previous year. Due to this database limitation, each company‟s annual report was meticulously checked and data on each director were manually collected from the companies‟ websites. Other public internet sources were used as supplementary sources.
With respect to variable financial performance, the main source was Amadeus as well. However, not all data was available in the database. Other databases that have been used are Reuters and Bloomberg Businessweek.
Page | 20 and to be able to interpret results correctly, two-stage least-square (2SLS) estimation was applied.
Following Carter et al. (2003), it has been estimated the below-given system of simultaneous equations (1) and (2):
where x and z are vectors of control variables.
I have two financial performance variables and I will perform 2SLS model for each performance variables. In the first model the dependent variables are Tobin‟s Q (1) and board diversity, in terms of age; gender and ethnicity, will be used, in the second model the ROA (2) is being utilized. At the end, I will compare the two models‟ results with each other.
Page | 21 Table 5.1 Descriptive Statistics of 49 Companies
5 Results
Table 5.1 displays the descriptive statistics of the 49 companies from 2005-2009, which includes all control variables, dependent and independent variables.
From the above table, we can see that there is a discrepancy in firm size with the company with the smallest total assets of Euro 463 Millions and the biggest company with a total asset of more that Euro 128,000 Million Euros. Furthermore, firm‟s age is on average 83 years, with the oldest one being 363 years old and a young company of 5 years old. Analyzing the board characteristics, we can see that on average there is at least 1 woman on the board of directors. Also the average age of the board of directors is 60 years with the youngest one of 48 years and the oldest of 69 years. Looking at the table 5.1, it can be seen that the average age dispersion in the board of directors is 10 years with the biggest difference of 38 years old. I can conclude that the companies are positive to ethnic minority directors with an average of 3 ethnic minority directors on the board of directors. Second, a comparison of Dutch and Swedish board of directors will be given. From table 5.2, I can conclude that Swedish companies have more women on the board of directors with an average of two women on the Swedish board of directors.
Mean Std Dev Minimum Maximum
Number of man 7 3 3 14
Number of women 1 1 0 5
Board Average age 60 5 48 69
Age Dispersion (years) 10 7.8 5 38
Number of Nationals 7 3 0 14 Number of Ethnic Minority 3 2 0 9 ROA 0.09 0.21 -0.32 2.54 ROE 0.18 0.21 -1.7 0.88 Tobin’s Q 2.5 2.6 0.10 18.56
Firm Size (Mln Euros) 11, 675 17,943 463 128,938 363
Firm age (years) 83 68 5 363
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Table 5.2 Comparison between Swedish and Dutch Board of Director
Mean Std. Dev Minimum Maximum
Dutch Swedish Dutch Swedish Dutch Swedish Dutch Swedish
Number of man 6 9 2 3 3 3 13 14
Number of women 1 2 1 1 0 0 4 5
Board Average age 62 58 3 4 50 48 69 67
Age Dispersion (years) 15 25 5.7 6 5 16 28 38
Number of Nationals 4 9 1 3 0 0 9 14
Number of ethnic minorities 3 2 2 2 0 0 8 9
ROA 0.1 0.068 0.31 0.27 -0.31 -0.24 2.54 0.28
ROE 0.17 0.18 0.24 0.14 -1.6 -0.22 0.84 0.88
Tobin’s Q 2.72 2.39 2.5 2.72 0.1 0.11 18.56 16.13
Firm Size(Mln Euros) 16,300 6,847 2,388 6,640 463 1571 128,938 36,118
Firm age (years) 90 76 85 46 5 7 363 156
Board size 7 11 2 3 3 5 14 17
Page | 23 Also the Swedish board of directors is relatively young compared to its Dutch counterparts with an average age of 58 years. However, the Dutch board of directors is more diverse based on the category of nationality. Dutch board of directors has on average more ethnic minority directors than the Swedish board of directors with 3 ethnic minorities on the Dutch board of directors compared to 2 directors on the Swedish board of directors. The Dutch companies are 14 years older than the Swedish companies. Also it can be seen that Swedish board of directors has larger age dispersion, hence more diverse. The Swedish board of directors is bigger in size compared to the Dutch board of directors. Remarkably, the Dutch board of directors is 100% independent from the executive due to the fact the Dutch Corporate Governance is based on a two-tier board system. A comparison between the two countries indicates that Sweden appears to have both larger boards of directors and on average more women on board. These results seem in line with Randøy et al. (2006) who argue that the regulation regarding employee representation in the Nordic countries adds to both board size and board diversity. Also Swedish board of directors is more diverse regarding age.
Now we will compare the Dutch board of directors with the Swedish board of directors by looking at each of the five years and we can see how the board structure has evolved throughout the years. Figure 5.3 0 0.5 1 1.5 2 2.5 2005 2006 2007 2008 2009
Average Number of Women on Board
of Directors (2005-2009)
Page | 24 It can be seen from figure 5.3 that in both countries the average number of women on the board of directors has been increasing since 2005. However, since 2006 there has been a big growth on the average number of women on the Dutch board of directors. On the other hand in Sweden the growth was low. But seeing the high average number of women on Swedish board of directors it can be concluded that Sweden was earlier in adopting the policy of diversifying its board of directors. Figure 5.4 shows the average number of ethnic minorities on the board of directors from 2005 until 2009. Sweden had an increase in the number of ethnic minority directors on their board of directors. On the other hand, the Dutch is not very keen to diversify their board of directors based on nationality. According to the figure the number of ethnic minority directors of the board of directors stayed around 2.5. On the following figure, 5.5, we can see that the average age of Dutch board of directors did not increase from 2005-2009. The average age stayed around 62 years. Remarkably, the Swedish board of directors is older since 2005. The average age increase from 57 years to around 60 years.
50 55 60 65 2005 2006 2007 2008 2009
Average age of Board of
Directors
Sweden Netherlands 0 0.5 1 1.5 2 2.5 3 3.5 2005 2006 2007 2008 2009Average Number of Ethnic
Minority on Board of Directors
Netherlands Sweden
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Correlation analysis
The Pearson correlation coefficients presented in Table 5.6 indicates correlation among the dependent variables ROA, ROE and Tobin‟s Q, the independent variables and the control variables for all companies retrieved from 2005-2009. The second column of Table 5.6 reports the correlation between the dependent variable ROE and all the residual independent and control variables. The third column shows the correlation between Tobin‟s Q and all other variables.
We can see that among the independent variables there is no significant correlation except for ROE and Tobin‟s Q (r= .249, p<0.01). This result can be explained due to fact a higher ROE has a positive effect on the share price of the company which ultimately will drive up Tobin‟s Q. Furthermore, it can be seen that ROA does not have any significant correlations with the other variables. Looking at the column of ROE and Tobin‟s Q, ROE does have a positive correlation with Firm age (r=. 153) and Tobin‟s Q has a negative correlation with No of man (r=-.152), No of Nationals (r= -.165), Total Asset (r= .137) and Board size (r=-.152).
Looking at the intra-correlations of the independent variables, some very high and significant correlation appear e.g. between No. of Nationals and No. of Man (r=. 788), Age Dispersion of No. of Man (r=.491). It may concluded that higher the number of man on the board of directors, the higher the number of nationals on the board. Also the higher the number of man, the bigger the difference between the youngest board member and the oldest board member is. This will not have an influence on the model because I will not use these two data in the two stages least squared analysis.
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ROA ROE Tobin’s Q No of
Man No of Woman Average age of Board Age Dispersion of Board Members No of Nationals No. of Foreigners Total Assets (in Mln Euro's) Firm age Board size ROE 0.115 Tobin’s Q 0.122 .249** No. of Man -0.045 -0.005 -.152* No of Woman -0.089 0.037 -0.05 .213** Average age of Board 0.028 -0.004 0.072 -.144* -.126* Age Dispersion of Board Members -0.051 0.012 -0.008 .491** .351** -.383** No. of Nationals -0.12 -0.009 -.165** .788** .464** -.170** .505** No. of Foreigners 0.087 0.018 0.069 .225** 0.091 0.097 0.02 -.262** Total Assets (in Mln Euro's) -0.058 -0.073 -.137* 0.093 -0.05 .257** -0.05 -0.013 .139* Firm age -0.084 .152* -0.033 0.043 .131* 0.091 -0.097 0.023 0.085 -0.103 Board size -0.072 0.011 -.152* .926** .566** -.168** .549** .843** .226** 0.06 0.088 Board Independence 0.056 -0.011 0.022 -.218** -.246** .434** -.411** -.356** .177** .174** 0.075 -.275** Table 5.6 Pearson’s Correlations
Table 5.6 shows the correlation of all dependent variables, independent and control variables. The sample consists data of 245 observations over a 5 years’ time period. Correlation coefficients with a negative sign in front indicate a negative correlation between the variables, a positive sign in front of the number means the variables are
positively correlated.
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Model Analysis
Tables 5.7 and 5.8 indicates that the estimated coefficients for Percentage of Ethnic Minority Directors and Age Dispersion are positive for the two financial performance measures, but is statistically insignificant except for Percentage of Ethnic Minority Director. However, in the tables there is a negative relationship between Percentage of Female Directors and Tobin‟s Q and ROA. Looking at the column of ROA, it can be concluded that only the variable Percentage of Ethnic minority Director is statistically significant. In addition, looking in table 5.8, column Percentage of Ethnic minority Director, the variable Percentage of Ethnic minority Director is not statistically significant in relation to ROA. This confirms that the diversity of the board of directors in terms of nationality has an influence on the performance of the company. This observation is in line from what has been seen in recent literature. Campbell and Minguez Vera (2008) found that a more diverse board in terms of gender affects the firm financial performance and not the opposite. The reason for this lack of observation of causalities in both directions is that according to Marinova et al (2010) the issue of joint endogeneity of the variables board diversity and firm performance has not been taken into consideration in many earlier studies. Looking at the table 5.7, looking at the column Tobin‟s Q, only Firm Size and Board size is statistically significant. The variable Firm Size has a negative coefficient with the variable Tobin‟s Q. This indicates that small companies have a better financial performance than bigger companies. However, the impact of the variable firm size is very small. In table 5.8, however, in the column of ROA, firm size is not statistically significant.
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The standard errors are reported in parentheses and ***, **, * denote significance at the 1%, 5% and 10% levels, respectively.
Tobin's Q Percentage of Percentage of Age
Female Director Ethnic minority
Director
Dispersion
Constant 2.65(3.59) -0.46 -.347 (.292) 36.003 (7.77)
Percentage of Female Director -0.010 (1.519) .308 (.122) - 1.386 (3.432)
Percentage of Ethnic Minority Director 2.22*** (.787) .088*** (.033) (-).455 (1.81) Age Dispersion 0.0404(.29) .011 (.004) .0001 (.0001) Firm Size -0.00002* (0.0001) -.000006** (.0001) .0000008 (.0001) .00004* (.0001) Firm Age -0.0008 (.003) .0001*** (.0001) .0001 (.0001) -.004 (.006) Board Size -0.135* (.078) .0001 (.005) .006 (.006) .462*** (.176) Board Independence -0.0005 (.037) .002 (.002) .005 (.003) -.170 **(.082)
Nationality Dummy 1=Dutch 0.083 (.641) - .124*** (.027) .148 **(.051) - 7.875*** (1.354)
Tobin's Q .001 (.003) .015** (.005) .207 (1.47)
F-Statistics 2.85 10.05 5 27.03
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ROA Percentage of Percentage of Age
Female Director Ethnic minority
Director
Dispersion
Constant .003 (.282) .176 (.154) -.314 (.293) 36.84 (7.78)
Percentage of Female Director -.103 (.119) .327* (.123) - 1.349 (3.452)
Percentage of Ethnic minority Director .129** (.063) .089*** (.034) -.065 (1.806)
Age Dispersion .0001 (.002) .0001 (.001) -.00008 (.002) Firm Size -.000001 (.0001) .0000008** (.0001) -.000001 (.0001) .00004 (.0001) Firm Age .0001 (.0001) .0001*** (.001) .0001 (.0001) -.004 (.006) Board Size .004 (.006) -.001 (.003) .003 (.006) .436 (.176) Board Independence .0001 (.003) .0001 (.002) .005 (.003) -.172 (.082)
Nationality Dummy 1=Dutch .040 (.050) - .125*** (.026) .144* (.052) - 7.94*** (1.36)
ROA -.031 (.036) .156 (.067) .483 (1.882)
F-Statistics 1.56 7 4.63 26.57
The standard errors are reported in parentheses and ***, **, * denote significance at the 1%, 5% and 10% levels, respectively.
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6 Conclusion and Discussion
This study explores the relationship between firm performance and board diversity for a sample of quoted Swedish and Dutch firms using two performance measures: Tobin‟s Q and Return on Assets (ROA).
Previously, I proposed the following hypothesis;
H1: A diverse board of directors, based on gender, ethnic minority and age, has a positive effect on the firm’s financial performance
From the model analysis, it can be seen that diversity measures affects Tobin‟s Q but only to a certain extent. Only the Percentage of Ethnic Minority has a strong influence on Tobin‟s Q. On the other hand, Percentage of Female Director has a negative influence on Tobin‟s Q. This is also the case with ROA. From the analysis I can conclude that diversity of the Board of Directors based on gender, ethnic minority and age does have a positive effect on the firm‟s financial performance but to certain extent. This can be either market-based measure or accounting-based measure.
Comparing the Swedish and Dutch firm with each other, I can come with the following conclusion: In general Swedish boards of directors are more diverse. This can be seen at the number of women on the board of directors which is higher than Dutch firms. The Swedish board of directors is on average younger than the Dutch board of directors. However looking at the age dispersion of the board members, the difference between the youngest and oldest board member is larger in the Swedish firms than the Dutch firms. But on the other hand Dutch firms are more open to ethnic minority board members than Swedish firms. This may be explained by the fact that the Dutch economy in general is more exposed to international trade.
As with any research project there are a number of limitations to this research project. Seeing the bidirectional relationship between Tobin‟s Q and board diversity, more research will be necessary to explain this phenomenon.
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Appendix 1
Variable Code Description
Year Year 2005
2006 2007 2008 2009
No. of Firm Firm_No Range between 1 and 49
No. of Man No_Man Number of Men on the board of a particular year No. of Women No_Women Number of Women on the board of a particular year Percentage of Women Women% Number of Women divided by total board members Average age of Board Average_age Sum of age of all board member divided by number of
board members
Age Dispersion Age_Dispersion Difference between the youngest and oldest member on the board
No. of Nationals No_Nationals Number of members that are from the same country where the company is listed
No of Ethnic Minority No_EthnicMinorit y
Number of members that are not from the same country where the company is listed
Percentage of Ethnic Minority
EthnicMin% Number of Ethnic Minority Directors divided by total board members
ROA ROA Return on Assets
ROE ROE Return on Equity
Tobin's Q TobinsQ Market Capitalization of the Firm/Total Asset Value Firm Size Firm_Size Total Assets in a particular year
Firm Age Firm_Age Difference between the year of research and the year of foundation of the company
Board Size Board_Size The sum of all members on the board of directors Industry Indsutry 1= Agriculture, Forestry and Mining
2= Construction 3= Manufacturing
4= Transportation, Communication, Electric, Gas and Sanitary
5= Wholesale and Retail
6= Finance, Insurance and Retail Estate 7=Services
Nationality Firm_Nationality 1= Dutch 0=Swedish
Board Independence Board_Ind Number of independent members divided by number of board members.
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Appendix 2
1 Aegon N.V. 2 Koninklijke Ahold N.V. 3 Akzo Nobel N.V. 4 Arcadis N.V. 5 ASML Holding N.V. 6 Bam Groep N.V. 7 Boskalis Westminster N.V. 8 Corio N.V. 9 CSM N.V. 10 Crucell N.V, 11 Delta lloyd N.V. 12 Koninklijke DSM N.V. 13 Eurocommercial Properties N.V. 14 Fugro N.V. 15 Heineken Holding N.V. 16 Imtech N.V. 17 ING Groep N.V. 18 KPN N.V.19 Koninklijke Philips Electronics N.V. 20 Randstad N.V. 21 SBM Offshore N.V. 22 SNS Reaal N.V. 23 TNT N.V. 24 Tomtom N.V. 25 Unilever N.V. 26 Alfa Laval AB 27 Assa Alboy AB 28 Atlas Copco AB 29 Boliden AB 30 Hexagon AB 31 Holmen AB 32 Lindab International AB
33 Lundin Mining Corporation SDB 34 Millicom International Cellular S.A. 35 NCC AB
