1. Introduction
This paper addresses the question if the degree of diversity in the executive board and the board of directors can be linked to firm performance. In this paper, new evidence with regard to this relationship will be provided through analyzing and comparing firms from six North-European countries over a period of five years. The time frame of this research is 2010 to 2014 and the reasoning is two-folded. First, this period is post-crisis. Therefore, effects on firm performance that are caused due to the crisis are expected to be predominantly disappeared. Secondly, the last decade firms experienced vast public attention and pressure related to boardroom diversity. Consequently, new dimensions of diversity in board composition are emerging and firms as well as the general public are particularly curious if the effects of boardroom diversity are the same as is widely expected. The diversity issue is an often addressed subject in governance literature and has been frequently linked to the agency theory. This theory implies that managers will not act to maximize the returns to shareholders unless appropriate governance structures are implemented to safeguard the interests of those shareholders (Jensen and Meckling, 1976). As the highest internal governance mechanism in a firm, the board of directors is expected to fulfill a monitoring and advising role to mitigate agency cost and maximize shareholder return. On the contrary, the executive board is responsible for the day to day policy making and executive directors are generally the head of a specific department in the firm.
In addition to the diversity discussion, the importance of directors’ backgrounds and characteristics beyond independence is increasingly being acknowledged (Hillman et al., 2000, 2002). Last decade, an intensifying recognition of the value of boardroom diversity can be observed (Robinson and Dechant, 1997). Consequently, this resulted in a greater pressure to increase diversity on corporate boards (Daily et al., 2003). A foreigner or a women entering a corporate board may for example bring different perspectives, skills and knowledge, but also different values, norms and understanding (Ruigrok et al., 2007).
general agreement with regard to the optimal diversification of a board, this paper contributes to existing literature by reviewing the effects of both the fraction directors with different nationalities and the fraction female directors on firm performance. The research question this paper seeks to answer is as follows:
‘’To what extend does board room diversification result in improved firm performance?’’
Where firm performance will be measured by using two separate variables, Tobin’s Q and ROA. Tobin’s Q is a market based measurement for firm performance that indicate how firms are valued by the market and is the primary measure for performance used in governance literature (Rose, 2007). ROA is an accounting based measurement that indicates how effective boards make use of their assets. Since more diversity in boards is linked to an increase in perspectives and discussion, it is expected that diverse boards will use their assets more effectively.
2. Literature review
This part will provide an overview of the main concepts used in this research, followed by a review of the outcomes of previous research on the relationship between board diversity and firm performance.
2.1 Agency theory
Agency theory can help explain why diversity in boardrooms is expected to have an effect on firm performance. Agency theory argues that in the modern corporation (in which share ownership is widely held) managerial actions depart from those required to maximize shareholder returns (Zeckhauser and Pratt, 1985). Managers do not always act in the best interest of the shareholder, instead managers act out of self-interest in order to gain reputation or higher compensation. To minimize these agency costs of a firm, the board of directors is responsible for addressing issues regarding the separation of ownership and control (Fama and Jensen, 1983). In order to be able to influence management behavior, the board controls management compensation and replaces managers who are unable to add value for the shareholders (Carter et al., 2003). In other words, the objective of the board is to ensure that management actions are in the best interest of the shareholders.
eventually result in increased firm performance. Principally, it can be argued that boards should be structured in a way that is considered optimal by the shareholders. In other words, boards should consist of the best directors for the job, despite of gender or nationality. From another perspective, it can be argued that boards should be a representation of the employees and customers of the firm. Since only in a likewise situation, a board will be able to effectively address the demands of all stakeholders and all changes in the firm’s environment.
As is mentioned, foreign and female board members will add different perspectives and knowledge to discussions in the board. The consequence of more heterogeneity in boards is an increase in points of view and therefore results in a comprehensive set of problem solving ideas, leading to increased quality in board decision making (Deszö and Ross, 2012). Foreign board members are able to add foreign knowledge as coping with another culture to board discussions. Masulis et al. (2012) for example found that with an increased fraction of foreign board members, firms seem to make better cross-border acquisitions. Moreover, Ferreira (2010) found that more internationalized groups foster creativity and produce a greater range of perspectives and solutions to problems. The impact of female board members especially concerns insights related to female consumers, employees and trading (Daily et al., 1999). Moreover, female directors are more likely to positively affect participation of employees through sharing power and information (Deszö and Ross, 2012). According to Van Knippenberg et al. (2004), an increase in boardroom diversity (both with female and foreign directors) will essentially result in higher quality decisions.
therefore do not have the same job prospects as can be provided in white male networks.
2.3 Tokenism and Quota
Diversity in board rooms is not always positively related to firm performance and improved quality of a boards advice. Foreign directors could for example lack knowledge about tax regulations or country specific practices of the firm, which would decrease the quality of their advice. Diversity could also be associated with the possibility of communication breakdowns within the board (Ferreira, 2010). However, the concepts tokenism and gender quotas can explain a major part of this phenomenon.
Tokenism, which is introduced as a theory by Kanter (1977), implies that firms add female directors to their boards without the ability to significantly influence decision making. Firms’ reasoning behind adding these ‘’tokens’’, is to avoid public pressure and to be able to market themselves as progressive and social firms. Since in the case of tokenism the effect of female board members on board effectiveness is little, the increased diversity of these firms cannot be related to firm performance.
Increasing gender diversity in boards may have a negative impact on firm performance if the decision to appoint female board members is motivated by societal pressure for greater equality of the sexes. This is shown in the research of Ahern and Dittmar (2012), who found that the introduction of a new law that required 40% of Norwegian firms’ directors to be women caused a significant drop in value for those companies. Based on these findings, one could say that restrictions regarding the composition and/or structure of the board force shareholders to structure the boards in a suboptimal manner (hence the drop in value). Based on the previous example, it can be expected that when shareholders are free of restrictions, they will structure their boards optimally. 2.4 Evidence from previous research Since corporate governance literature related to diversity is relatively rich, this part will structure and discuss the outcomes of several previous researches. First, a table containing the main topics and results of several studies on board diversity is presented. Secondly, the outcomes will be discussed in detail and related to this research.
Table 1: Overview of previous research on board diversity
Author(s) Central topic Results
Masulis et al. (2012) Effects of foreign directors on corporate governance and firm performance. - Firms with foreign directors make better acquisitions in the home country of the foreign directors. - Foreign independent directors (FID’s) have a relative low attendance rate at board meetings. - The degree of FID’s is positively related to CEO payment and financial misreporting. - When a firm is not active in a FID’s home country, the degree of FID’s is negatively related to firm performance. Oxelheim and Randøy (2003) The impact of foreign board member on firm value - The value of firms (Tobin’s Q) with foreign board members is significantly higher. - Having a foreign board member can be considered a signal to the market that the firm is transparent and open to foreign investments. - The positive effect of foreign board membership on firm value is stronger for bigger and older firms. 2.4.1 Gender diversity Based on the research of Adams and Ferreira (2009) and Adams and Funk (2012), it can be stated that female directors have different characteristics compared to male directors. According to Adams and Funk (2012) the priorities between men and woman differ significantly, which suggests they behave differently. Therefore, firms with a relative high fraction of female board members will function differently and an effect on firm performance can be expected. However, conflicting results in previous research can be observed. While Adams and Funk (2012) found that female directors are more risk loving when compared to male directors, Dohmen et al. (2005) provided evidence that females are relatively risk averse when compared to males. Nevertheless, these conflicting results can be partly explained by a theory of Croson and Gneezy (2009), who state that female managers are more risk loving when compared to the female population. Moreover, Adams and Funk (2012) suggest that female board members are risk loving, since there exists a very specific characteristic selection for women who make it into the boardroom. Based on these researches, it can be expected that female board members are relatively more risk-loving and therefore the degree of female board members will affect firm performance.
greatest (Common Law of Anglo Saxon Countries). While the effect is positive when firms have relative weak shareholder rights (French and German Civil Law). Marinova et al. (2015) found no results. However, they suggest not only Tobin’s Q, but also ROA as measurement for firm performance. Moreover, they advise to make use of panel data. Deszö and Ross (2012) found a positive relationship between gender diversity and firm performance, with a firms’ strategy as moderating effect. Only when a firm is focused on innovation the effect seems to be positive, otherwise the effect is negligible. The moderating role of a firms’ strategy could also be linked to female directors’ characteristics. Since female directors are found to be more risk loving, it can be suggested that firms with a relative high fraction of female directors are willing to invest more in innovation. Apparently, the risk loving attitude is on average beneficial for firms who are focused on innovation. Despite different outcomes, based on previous research it can be stated that gender diversity has an influence firm performance. 2.4.2 Nationality diversity Both Masulis et al. (2012) and Oxelheim and Ranøy (2003) found a relationship between foreign board members and firm performance. Masulis et al. (2012) provides evidence of a positive relationship between FID’s and firm performance, under the circumstance that the firm makes an acquisition in the FID’s home country. On the contrary, if firm’s do not make an acquisition in the FID’s home country, foreign members in a board seem to decrease firm performance. Moreover, foreign board members are associated with low attendance rates, financial misreporting and a higher CEO compensation. Therefore, it can be suggested that foreign board members are weaker monitors when compared to national board members. On the contrary, Oxelheim and Ranøy (2003) show that foreign board members are related to a significantly higher firm value. Moreover, they argue that the effect seems stronger if a firm is bigger and older.
internationalized benefit form a higher fraction of foreign directors. When compared to US firms, Nordic firms are more dependent on international markets. Consequently, Nordic companies are able to gain more from the benefits of having a foreign director. Since this research is focused on European companies, it can be expected that the positive effects of having foreign board members are greater compared to research based on US firm data.
3. Methodology
In order to be able to assess if boardroom diversification results in improved firm performance, it is essential to define how to measure the concept boardroom diversification and the concept firm performance. Since diversification in this research is focused on gender and nationality, the fraction of female directors in the boardroom and the fraction of foreign directors in the boardroom will be used as variables to measure diversity. In order to represent firm performance in the analysis, an approximations of Tobin’s Q and ROA will be used. Tobin’s Q is a market based performance measure and is commonly used as proxy for firm performance in literature on the effects of diversity (Carter et al., 2003; Deszö and Ross, 2012; Marinova et al., 2015). When Tobin’s Q is between 0 and 1 the firm is undervalued, since the firms value is lower than the costs to replace its assets. A firm with a value of Tobin’s Q higher than 1 is considered overvalued since the firms’ worth is higher than the costs to replace its assets. ROA is an accounting based measure for firm performance (Adams and Ferreira, 2009), and is calculated as follows: ROA =3,,4 5167' ,/ (,(16 188'(8&'( )*+,-' .'/,0' (12 (1) The higher the ROA the better a firm can convert investments into revenues. In the case a firm does not generate net income, but instead generates a loss, ROA can be negative. Comparisons of means and regressions are used in this research to examine the influence of boardroom diversity on firm performance. Diversity in this research consists of two concepts, gender diversity and nationality diversity. To be able to test if these concepts individually influence firm performance, the following hypotheses need to be tested: H1: The degree of women in the board is positively related with firm performance.
H2: The degree of foreigners in the board is positively related with firm performance.
Furthermore, when the coefficient is negative, adding foreign or female directors could even be negatively related to firm performance. With respect to the first hypothesis, the following regressions will be estimated: 𝑇𝑜𝑏𝑖𝑛>𝑠 𝑄 = 𝛼0+ 𝛼1𝐹𝑟𝑎𝑐𝑡𝑖𝑜𝑛𝑊𝑜𝑚𝑒𝑛 + Σ𝛼𝑥 + 𝜀 (2) ROA = 𝛼0+ 𝛼1𝐹𝑟𝑎𝑐𝑡𝑖𝑜𝑛𝑊𝑜𝑚𝑒𝑛 + Σ𝛼𝑥 + 𝜀 (3) Where Tobin’s Q and ROA are the measurements for firm performance and 𝑥 represents control variables. OLS regressions will enable this research to observe if a relationship between the independent and the dependent variables exist and what the magnitude of this relation is. Moreover, all regressions in this research will be estimated in EViews 9.5. With respect to the second hypothesis, the following regressions will be estimated. 𝑇𝑜𝑏𝑖𝑛>𝑠 𝑄 = 𝛼0+ 𝛼1𝐹𝑟𝑎𝑐𝑡𝑖𝑜𝑛𝐹𝑜𝑟𝑒𝑖𝑔𝑛𝑒𝑟𝑠 + Σ𝛼𝑥 + 𝜀 (4) ROA = 𝛼0+ 𝛼1𝐹𝑟𝑎𝑐𝑡𝑖𝑜𝑛𝐹𝑜𝑟𝑒𝑖𝑔𝑛𝑒𝑟𝑠 + Σ𝛼𝑥 + 𝜀 (5)
In order to be able to gain a greater understanding of the effect of diversity on firm performance, a diversity dummy variable will be used to estimate the effect of the presence of both foreigners and women in the boardroom. The equation of this diversity dummy variable is estimated as follows: 𝑇𝑜𝑏𝑖𝑛>𝑠 𝑄 = 𝛼0+ 𝛼1𝐷𝑖𝑣𝑒𝑟𝑠𝑖𝑡𝑦𝐷𝑢𝑚𝑚𝑦 + Σ𝛼𝑥 + 𝜀 (6) ROA = 𝛼0+ 𝛼1𝐷𝑖𝑣𝑒𝑟𝑠𝑖𝑡𝑦𝐷𝑢𝑚𝑚𝑦 + Σ𝛼𝑥 + 𝜀 (7) In the diversity dummy variable, both the presence of foreign directors and the presence of female directors is taken into account. However, it could be the case that the fraction foreigners seem to influence the fraction women, or that the fraction women seem to influence the fraction foreigners. Therefore 2 OLS equations will be estimated in order to control for this possible effect:
FractionForeigners = 𝛼0+ 𝛼1𝐹𝑟𝑎𝑐𝑡𝑖𝑜𝑛𝑊𝑜𝑚𝑒𝑛 + 𝜀 (8) FractionWomen = 𝛼0+ 𝛼1𝐹𝑟𝑎𝑐𝑡𝑖𝑜𝑛𝐹𝑜𝑟𝑒𝑖𝑔𝑛𝑒𝑟𝑠 + 𝜀 (9) Finally, in order to address the endogeneity issue when examining boardroom diversity and firm performance, the following equations will be estimated: DiversityDummy = 𝛼0+ 𝛼1𝑅𝑂𝐴 + Σ𝛼𝑥 + 𝜀 (10) DiversityDummy = 𝛼0+ 𝛼1𝑇𝑄 + Σ𝛼𝑥 + 𝜀 (11)
These equations control if firm performance affects diversity. If this is the case, the outcomes of the estimations that test the influence of diversity on firm performance can be biased.
3.1 Control variables
In the estimations of this research, multiple control variables that are applied in various studies will be incorporated. The reasoning behind incorporating these variables, is that it very well could be the case when looking at the effect of diversity on firm performance, the performance variables are also correlated with unobserved factors. In this paper, next to the diversity variables, there could be other variables related to Tobin’s Q and ROA. Therefore, we use control variables to account for possible biases of the variables.
A second control variable is firm size, measured as the logarithm of sales. A large firm has proven to be able to grow and to survive, through for example making successful investments and attracting the best professionals. Therefore, it could be expected that firm size positively influences firm performance. Moreover, according to Adams and Ferreira (2004), large firms experience more public pressure and are relatively more active in multiple countries. Therefore, it can be suggested that firm size positively affects boardroom diversity.
The last control variable is directors average age. On average, an older board might have a different view in comparison with a younger board. These different views can have consequences for the monitoring and advising roles of the board. Moreover, according to Marinova et al. (2015), younger boards will be less involved in the ‘’Old boys network’’ and therefore more open to appoint women or directors with different nationalities. In line with this reasoning, a negative influence of directors age on diversity can be expected.
3.2 Research quality
In order to be able to ensure high research quality, issues regarding sample selection bias, omitted variables and reverse causality should be addressed. Regarding the sample selection bias, all listed companies from six different countries are included in the sample. Thereby increasing the quality of the coefficients when compared to studies that only select firms that are represented on a countries main index (for example DAX, AEX, CAC). As a consequence of this approach, not every country is being represented by the same fraction of firms in the sample. Meaning that German and UK firms are a significantly larger fraction of the dataset when compared to firms from Luxembourg. It could also be argued that the choice for only listed firms instead of both listed and unlisted firms makes the coefficients prone to sample selection bias. However, in contrast to unlisted firms, all listed firms from the six countries in this research are obliged to present their annual reports according to the International Financial Reporting Standards (IFRS). Therefore, the quality of the variables as firm size, ROA and Tobin’s Q can be guaranteed. Moreover, another way we address possible biased outcomes is through using both ROA and Tobin’s Q to proxy firm performance as is suggested by Marinova et al. (2015).
out of the model influence the variables in the model. In order to deal with the omitted variable bias, control variables are added to the equation since they are expected to both influence the dependent and the independent variable. The control variables chosen in this research are commonly used in governance literature and there exists evidence that they have an influence on both the dependent as the independent variable. As an additional check on the effect of the control variables, an OLS regression of only the independent variables on the dependent variables will be added to section B of the Appendix.
Furthermore, the direction of causation should be addressed in order to deal with reverse causality. If the results show that boardroom diversity is positively related to firm performance, one should ask if the causation could be reverse: does exceptional firm performance cause boardroom diversity? A logical line of reasoning is as follows; the issues a male board has to address are the same as a female board addresses, the way these issues are resolved determine the performance of a firm. Since male and female board members show diverging behavior, one could state that the board composition influences performance. However, in order to check for reverse causality, the influence of firm performance and the control variables on board composition are presented in Appendix B.
4. Data
The initial sample of this research consisted of a balanced panel of financial and director level data for all listed companies from the United-Kingdom, France, Germany, Belgium, Luxembourg and the Netherlands for the period 2010-2014. This dataset was retrieved from Orbis and contained 13,440 observations from in total 2,688 firms. The sample contained director level information as board sizes, appointment dates, date of resigning and directors age, gender and nationality. In order to represent the degree of foreign directors in the board, this paper uses the percentage of directors with a nationality that is not similar to the country of origin of the firm. A higher percentage depicts a more internationally diverse board. For example, when there are five Germans, two Mexicans and three Belgians in a board of a German company, the percentage of foreign directors will be 50% because there are five board members with a non-German nationality in a board of ten people. The degree of foreign directors is an independent variable and ranges from 0% to 100%, where 0% means that there are no foreign directors present in the board and 100% means that all directors have a different nationality.
of financial and director level data in 9,228 observations, obtained from 2,040 firms. Table 2 presents a summary statistics of the variables. Table 2: Summary statistics The sample consists of an unbalanced panel of 9228 observations from 2040 firms in the period 2010-2014 and the data is obtained from Orbis. The foreign and female dummy variables are dummy variables. The foreign dummy variable is one if at least one director in a firm is a foreigner and female dummy variable is one if at least one director in a firm is female. The diversity dummy is a dummy variable which is one if a board consists of at least one female and one foreigner (one foreign female also counts as one), otherwise the value of the dummy is zero.
Variable Obs Mean Std. Dev. Min Max
4.1 Characteristics of diverse firms vs non-diverse firms
Do diverse firms differ from firms with no or low diversity? It could for example be argued that younger boards hold more foreign and female board members since diversity is already more common in their culture. Moreover, it can be argued that larger firms operate in different countries and therefore they also are in need of more diverse leadership in order to represent the workforce and market of the different countries. In order to examine these assumptions, table 3 presents a comparison between firms with at least one female director and firms without a female director. Furthermore, the differences between firms with at least one foreign director and firms without foreign directors are also presented in table 3.
Table 3: Comparison of firms with female/foreign directors and without female/foreign directors.
both ROA and Tobin’s Q seem to be higher on average when firms are more diverse. Especially when comparing the ROA of firms with female directors to firms without female directors.
Average board size and directors average age also seems to be higher in the situations that firms are more diverse. Lastly, it can be seen that firms with female directors tend to also hold a higher percentage of foreign directors in their boardroom when compared to boards without female directors. Moreover, firms with foreign representatives seem to hold a higher percentage of women in the boardroom compared to firms without foreign board members.
4.2 Country specific characteristics
Table 4: Comparison of country specific firm and board characteristics
Country specific firm- and board characteristic means of firms are presented. In total 9228 different observations over a period from 2010 to 2014 are shown in table 4.
Firm / board
Characteristics Mean Belgium Mean France Mean Germany Mean Luxembourg Mean Netherlands Mean United
representation of diverse boards can be observed in Germany, 3.5% of all German firms in the dataset hold both a foreign and a female board member.
4.3 The development of diversity over time
Diversity is still a frequently addressed issue by governments. In boardrooms and as well as in the popular press a recurrent point of discussion. Especially gender diversity gained a lot of attention and in some cases countries even established gender quota’s that need to be adhered by firms. Because of this attention for diversity, it can be expected that over time an increase in boardroom diversity can be observed. In order to be able to discuss this assumption and to examine other potentially changed firm- and board characteristics, the means of these characteristics over time are presented in table 5. Table 5: Firm- and board characteristics presented per year
The dataset presents firm- and board characteristics over the period 2010-2014. The means of the variables per individual year are presented in table 5.
Firm / board
Characteristics Mean 2010 Mean 2011 Mean 2012 Mean 2013 Mean 2014
5. Results
This part of the paper shows the results of the equations that are presented in the methodology and addresses the hypotheses. First the effects of gender diversity on firm performance will be presented, followed by nationality diversity and finally both effects will be combined.
5.1 Gender diversity
Table 5 presents the outcomes of OLS regressions regarding the influence of gender diversity on firm performance. The female dummy variable represents if there is at least one female present in the firm, while the fraction of female directors represents the percentage of female board members. The effects of these variables on ROA and Tobin’s Q are separately estimated.
completely support H1, a more extended sample would be necessary. As an important note, the outcomes of the regression stress the importance of measuring firm performance with multiple variables. If firm performance was only measured with ROA instead of ROA and Tobin’s Q, H1 would be accepted.
From table 6 it can be observed that board size negatively influences ROA. Despite the relatively weak influence of board size on ROA, the effect is significant. Previous research (Hermalin and Weisbach, 2001; Yermack, 1996) found a negative relationship between board size and Tobin’s Q. However, it appears that board size is, to a limited extend, positively related to Tobin’s Q. An explanation for this contradicting result could be because the data used in this research is post crisis data. Since 2011 an upward in stock prices can be observed which can be directly linked to the market capitalization factor, which is used in the calculation of Tobin’s Q (See equation 12). If firms do not invest in assets at the same rate their market capitalization grows, the Tobin’s Q will show an upward trend over time. This increase in Tobin’s Q, because of the post effects of the crisis, could bias the outcome of the regression. This line of reasoning is supported by the fact that table 5 shows an upward trend of Tobin’s Q from firms, being undervalued in 2011 to being overvalued in 2014. Important to note is that despite the suggested positive effect of board size on Tobin’s Q, the effect is not significant at the 0.1 level. Directors age appears to have a relatively minor impact on firm performance.
Based on the available data, H1 cannot be fully supported. However, gender diversity has a significantly positive impact on ROA, meaning that firms with a more gender diverse boards are relatively good at converting investments into revenues. These results are in line with theory suggesting that heterogeneity in boards increases the quality of the boards advising- and decision making roles. Moreover, negative effects due to quota or tokenism are not observed. However, these effects could be incorporated in the data since firms from Germany were expect to abide to a gender quota in the period 2010-2014. Within this line of reasoning it could be suggested that the coefficient of gender diversity should even be higher, meaning that the positive effect of female board members on firm performance is possibly stronger than presented in table 6.
5.2 Nationality diversity
Table 7: Relationship between foreign board members and firm performance The table presents the outcome of an OLS regression which indicates the effect of the variables in the most left column on the dependent variables ROA and Tobin’s Q. Data is firm- and director level data over a period from 2010-2014 of 2040 firms. The asterisks represent the significance of the coefficient at 0.01 (***), 0.05 (**) and 0.1 (*) significance level. ROA Tobin’s Q Fraction foreign directors -3.218*** 0.073 Foreign dummy -2.628*** 0.161*** Firm size 5.14*** 5.2*** -0.311*** -0.318*** Board size -0.095** -0.027** 0.047*** 0.041*** Age -0.04 -0.034 -0.015*** -0.015*** Observations 9228 9228 9228 9228 R-squared 0.133 0.135 0.06 0.062 Table 7 suggests that the effect of foreign directors in the board on ROA is negative and statistically significant, since both the fraction foreign directors and the foreign dummy show a negative coefficient at a 0.01 significance level. This would imply that adding more foreigners to the board would result in a lower ROA. However, this could possible related to country specifics. From table 4 it can be observed that firms from the Netherlands, Belgium and Luxembourg have a relatively high fraction of foreigners in the board and also have a relative high ROA. On the contrary, firms from France and Germany have a relative low fraction of foreign directors and have a relatively low ROA. These observations would suggest that the fraction of foreign board members is positively related to ROA. Nevertheless, almost 50% of the dataset is represented by firms from the United Kingdom. Therefore, these firms have a big impact on the results. Quite the reverse, firms from Belgium, Luxembourg and the Netherlands are only represented in around 10% of the dataset. Table 4 shows that the boards of firms from the United Kingdom on average consist of a higher percentage of foreign directors when compared to Germany and France, yet UK firms on average have a significant lower ROA.
5.3 The effect of diversity on firm performance.
Table 8: OLS regression of ROA and Tobin’s Q on diversity.
The sample consists of data from 2040 firms, based in 6 countries and over the period 2010-2014. Diversity dummy represents the firms with at least one foreign- and one female director. ROA and Tobin’s Q are regressed on the variables in the first column using OLS in EViews 9.5. The asterisks represent the significance of the coefficient at 0.01 (***), 0.05 (**) and 0.1 (*) significance level. ROA Tobin’s Q Diversity dummy -1.691*** 0.196*** Firm size 5.145*** -0.317*** Board size -0.061 0.039*** Age -0.043 -0.015*** Observations 9228 9228 R-squared 0.132 0.062
6. Conclusion
According to previous research, there exists a continuing debate about the effects of board diversity on a firm’s functioning and performance. In this research, issues concerning both the impact of gender diversity and of nationality diversity on firm performance have been addressed. More boardroom diversity is expected to increase the quality of a boards advise to managers and strategic decision making. However, academics are still searching for a comprehensive agreement, since results from multiple studies are contradicting. Therefore, this research provides valuable insights to increase the understanding of the effects of boardroom diversity on firm performance. The hypotheses state that gender diversity has a positive influence on firm performance and that nationality diversity has a positive influence on firm performance. Since corporate governance literature also discusses the appropriate measurement for firm performance, we use both an accounting based measurement (ROA) as a market based measurement (Tobin’s Q). The dataset includes firm level data from six different European countries, since most research is based on US firm level data. Moreover, in our sample we use panel data from 2010 to 2014, which enables the observation of trends.
The results show a positive relationship between gender diversity and firm performance. Therefore, it can be stated that indications exist of a positive relationship between gender and firm performance. Especially the effect on ROA appeared to be strong and significant. This result supports the reasoning that, because of the different perspectives in the board, firms with a diverse board are able to make better investments. Furthermore, the fraction foreign board members and the diversity dummy are both positively related to Tobin’s Q. This positive relationship stresses that more diversity in boards leads to better performance. However, we found a negative relationship between foreign board members and ROA. Moreover, the diversity dummy is also negatively related to ROA. This contradicts the reasoning that heterogeneity in boards improves the quality of a board’s advising and decision making.
observe the comparisons in table 4 between countries with relatively weak shareholder protection (Belgium, France, Luxembourg and the Netherlands), the relationship between the fraction foreigners and the diversity dummy appears positive. It can be concluded that gender diversity does have a positive effect on firm performance. However, the influence of nationality diversity on firm performance cannot be stated with certainty.
Not including shareholder protection is a limitation of this research, since we found proof that shareholder protection does influence the relationship between the dependent and the independent variable. A second limitation of our research is our estimation of nationality diversity. Nationality diversity is measured as the fraction of board members who do not have the same nationality as the firms’ country of origin. However, differences between foreign directors are neglected in this method. For example, adding an Afro-American or an Asian director to a Dutch or Belgian board will result in more boardroom heterogeneity compared to adding a German director. A German is considered a foreigner in a Belgian or Dutch board, however the cultural, historical and linguistic differences between Germans, Belgians and the Dutch are relatively small.
7. References
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8. Appendix
A: Data cleaning
In the Orbis data that is used in this research, several issues concerning director and financial level data were addressed.
Age: For some directors age was unavailable. Therefore, the directors age was left out of the determination of the the mean age of the board. Another issue concerning age, the Orbis data only provided the age of the directors in 2014. In order to construct the sample the age of the directors was adjusted. For example, a 50 year old director was added to the 2011 data as a 47 year old director. Appointment date: The Orbis data contains information about the appointment dates of the directors. In order to create the sample, the year of appointment was used as the year the director was active in the board. For example, when a director is appointed at 11/08/2012, the data was added to the dataset of 2012. Gender: Retirement: The retirement data of directors was often given in the Orbis datafile. In the case that the retirement date was missing, it was assumed that the directors was not yet retired. In the case that a director was retired, the year of retirement was used as the year from which the director was not active in the board anymore.
Double Directorships: The Orbis datafile contained information about the different boards, committees and management level directors were active in. However, some directors were not only active in the executive board, but also in the board of directors. Therefore, some directors appeared multiple times in the data. In cases this double counting of directors occurred, the double data was eliminated.
B: Additional statistics
Table 9: Cross effects of female directors and foreign directors
The sample consists of data from 2040 firms, based in 6 countries and over the period 2010-2014. The fraction female- and foreign directors are regressed on each other using OLS in EViews 9.5. The asterisks represent the significance of the coefficient at 0.01 (***), 0.05 (**) and 0.1 (*) significance level. It appears that the two concepts are positively related. However, the results are insignificant at the 10% significance level. Moreover, the R-squared of the coefficients is relatively low. Therefore, it can be suggested that the fraction female- and foreign directors are uncorrelated.
Fraction female directors Fraction foreign directors
Fraction female directors 0.005
Fraction foreign directors 0.002
Observations 9228 9228
R-squared 1e-5 1e-5
Table 10: Cross effects of Tobin’s Q and ROA
Table 11: OLS estimation to control for endogeneity
The sample consists of data from 2040 firms, based in 6 countries and over the period 2010-2014. Diversity dummy, fraction female directors and fraction foreign directors are regressed on each variable in the first column using OLS in EViews 9.5. The asterisks represent the significance of the coefficient at 0.01 (***), 0.05 (**) and 0.1 (*) significance level. It can be observed that Tobin’s Q is positively related to the dependent variables. However, similar to ROA, the coefficients are relatively low. On the contrary, firm and board size appear to influence the dependent variables with a relatively higher magnitude. This observation is in line with the theory that larger firms experience more pressure to diversify their boards. The coefficients of the independent variable age are small. Therefore, it can be suggested that age has a minimal impact on the dependent variables.
Diversity dummy Fraction female
directors Fraction foreign directors
Tobin’s Q 0.011*** 4e-5 0.002 ROA -0.001*** 2.95e-4*** -0.001*** Firm size 0.048*** 0.048*** 0.001*** 0.006*** 0.022*** 0.026*** Board size 0.042*** 0.042*** 0.011*** 4.96e-4*** 0.012*** 0.012*** Age 0.001* 0.001 -0.001 2.74e-4*** 0.001*** 0.001*** Observations 9228 9228 9228 9228 9228 9228 R-squared 0.232 0.232 0.071 0.072 0.05 0.053
Table 12: Effect of diversity variables on firm performance, without control variables.
Table 13: Effect of diversity variables on firm performance in 2014
