Is there a business case for board diversity? An investigation of UK’s FTSE 100 companies

Abstract

BACKGROUND:

This paper examines the effects of a board’s diversity on firm financial performance using a sample of 76 companies listed on FTSE100 over the period 2010–2015. This period reflects the years following the financial crisis of 2008 when mounting criticism emerged that weak corporate governance partly explained The Financial Crisis. It is suggested that the Board of Directors’ composition may have played a pivotal role in the Crisis and that Boards that better reflect society perform better.

OBJECTIVE:

This research examines the impact of gender, age, nationality, and presence of independent directors on firm performance.

METHODS:

Data on board characteristics were collected from Hemscott, as well as information from the companies’ annual reports and financial database FAME. Using the Generalized Method of Moments, the data were assessed to examine board diversity and firm financial performance.

RESULTS:

This study consists of 456 observations from 76 listed FTSE 100 companies during the period 2010–2015. Twenty-four companies were excluded due to missing data that related to directors’ attributes after controlling for firm characteristics, board structure, and potential endogeneity issues, the findings support the business case for gender and nationality board diversity. However, no significant associations were found between firm financial performance and board age diversity or board independence.

CONCLUSION:

This study, although British based, joins a growing global body of evidence that more diverse boards improve firm performance. It is incumbent on practitioners, decision-makers, and politicians to educate and persuade firms’ directors of the merits of more diverse boards.

Keywords

Board diversity corporate governance board characteristics financial performance

Keith Halcro currently leads Glasgow Caledonian University’s Professional Doctorate. His research has examined areas of the organization in the context of strategy and learning, most recently on ideas involving part time doctoral students and implications for the student and the organization. He is actively involved in collaborating with various commercial, charitable and higher education organizations to research and develop better organizational practice.

Tarek Ben Noamene received his Ph.D. in Business Administration with a concentration in Corporate Governance from the University of Nice-Sophia Antipolis (France). Currently, he is an Assistant Professor of Management at the Higher Colleges of Technology in the United Arab Emirates. His current research focuses on corporate diversity and its application to corporate governance and organizational development.

Dorsaf Chaher is a Ph.D. student in Business Management at the Higher Institute of Management of Sousse (Tunisia) and a member of the Laboratory of Management Innovation and Sustainable Development (LIMITED). She is also assistant teaching at the University of Economic Sciences and Management of Sousse. Her current research focuses on the synergy between corporate social responsibility, quality management and Performance.

Ayman Talib, is an Assistant Professor of Business and Management at the Higher Colleges of Technology in the United Arab Emirates. He received his Ph.D. in business administration with a concentration in management information systems from Argosy university –Chicago –USA. His current research interest is in data analytics, deep learning and machine learning.

1 Introduction

The appeal of a just society repeatedly emerges throughout history. However, its pursuit has often triggered a clash between a society’s ethics and the reality of individuals pursuing policies and practices that benefit the individual at the expense of society or an organization. Enron, Parmalat, and Royal Bank of Scotland stand testimony to these realities. The claim is that the Board of Directors’ composition may have played a role in these firms’ troubles, a feature which may also explain the 2008 Global Financial Crisis [66, 90]. There is compelling evidence that greater board diversity can impact positively on firm performance, as demonstrated through variables such as gender, age, nationality, and independent directors. This approach finds expression in documents such as the UK’s updated Code of Corporate Governance (2018), which incorporates ideas found in The Davies Report (gender) and The Parker Review (ethnicity). Arguably, these policies reflect the societal desire for a more inclusive, socially just society, a premise further articulated in the Code’s requirement to better evidence diversity in terms of the Directors’ ages and independence (The Financial Reporting Council, 2018).

Yet to date, no research has considered the presence of these variables on the performance of UK FTSE 100 companies in the wake of the 2008 Global Financial Crisis. The 2008 Global Financial Crisis has influenced firm, industry, and societal thinking and practice, although it is acknowledged, the effects of this crisis still reverberate more than a decade later [58]. The Crisis led to the global recession in 2009 and influenced significant, political, and economic upheaval in the years 2010–2015, e.g., Arab Spring, Occupy Wall St, European Debt Crisis, the rise of populist nationalism. It is therefore illuminating to examine the effect of board diversity on UK FTSE 100 firms and their performance during this turbulent period.

A generation of articles has examined the effect of the corporate board on firm performance, notably through the characteristics of the directors, such as gender, age, nationality, and number of independent directors [1 , 87].

The evidence highlights the benefits of board diversity, arguing that more diverse directors expand the board’s pool of knowledge, encourage innovation and lead to better strategic decisions [14 , 68]. Nonetheless, the literature also evidences either negative or non-significant association between board diversity and firm outcomes [45, 57]. The contradictions have variously been ascribed to methodological limitations [87], contingent factors issues [2], and the non-consideration of multidimensional diversity on boards [15].

This paper aims to assess whether there is a business case for board diversity amongst UK FTSE 100 companies by focusing on the years 2010–2015, a period marked by considerable financial turbulence in the UK. It employs multiple measures of board diversity; specifically, it draws on the UK’s 2018 Code of Corporate Governance to focus on the following: gender, age, nationality, and board independence. The research addresses common methodological limitations by mitigating the potential endogeneity using a solution based on the Generalized Methods of Moments (GMM) and, by controlling for firms and corporate governance specificities. From a theoretical perspective, the research invokes both Agency and Resource Dependence paradigms to argue businesses benefit from board diversity [14 , 51].

This study has practical and theoretical implications. First, it contributes to the literature by arguing for the business case for board diversity. Second, it informs business decision-makers and politicians on current and future corporate governance policies. It challenges the belief that government and policymakers should not interfere in the Boardroom, by arguing that many Boards are self-sustaining cliques, often unreflective of society and arguably underperforming [74]. If firms are keen to improve performance and use resources more efficiently and effectively to benefit directly the firm, and indirectly society [7], it appears sensible to access society’s full demographic resources.

2 Literature review and hypotheses

Research on board diversity and firm performance has identified different theories and paradigms, including managerial, economic, and socio-psychological theories (see Post and Byron, [74] for a review). This study chooses agency and resource dependence theories [51 , 72–73] as this framework offers a better understanding of the relationship between board diversity and firm financial performance [1, 55]. Resource Dependence Theory suggests that an organization’s performance depends on its ability to access resources, often ones in the hands of another entity [73] and, fundamentally, organizations seek to secure these critical resources to improve their performance [3 , 73]. Resource dependence theorists propose that firm performance, in part, is predicated on a Board’s composition to access scarce critical resources, including its directors’ ability to lever resources out of other stakeholders [51].

Thinking suggests the greater the Board’s diversity, the higher the access to scarce critical resources. Ferreira [36], p.227 argues the benefits of board diversity can be summed up in its capacity to bring creativity and different perspectives, through access to resources and connections. Indeed, directors are viewed as significant players in connecting the firm to key stakeholders [25]. Moreover, with diverse directors on boards, firms are more likely to develop human capital, access new market segments, and expand internationally ([1]). Similarly, Carter et al., [25], p.398 highlight, “Diversity holds the potential to improve the information provided by the board to managers due to the unique information held by diverse directors.” The argument follows that diversity will encourage a broader range of views and perspectives; for instance, they are more likely to have different problem-solving approaches and suggest new managerial methods [36].

Hillman et al. [52] concur that diverse boards benefit from a larger pool of knowledge and expertise, which should make them better equipped to handle internal and external challenges.

The directors’ actions can be viewed through the prism of Agency Theory [34, 77], suggesting board members should minimize agency conflicts and reduce costs through efficient and effective managerial monitoring [54]. However, Fama and Jensen [34] posit that when the principal (shareholders) and agents (managers) have unaligned goals, it results in financial losses for the principal. Agency theorists contend that diversity on boards increases its independence [36] and therefore improves monitoring. In the same vein, Hillman and Dalziel [51] suggest the extent to which diversity on boards is beneficial will depend on how it contributes to the enhancement of its monitoring duties, namely, monitoring and directing managers and monitoring regulatory compliance. In summary, both agency and resource dependence theories provide economic arguments to justify greater social diversity on boards of directors ([1 , 24]. This research, therefore, assess whether gender, age, nationality, and board independence impact firm financial performance.

2.1 Directors’ gender

The literature reports that more gender-diverse boards are more likely to function better than less diverse ones [1 , 74]. Indeed, female directors are variously believed to expand the board’s pool of knowledge [74], elevate the quality of the decision making [55], reduce agency costs through stricter monitoring [1] and offer better access to information [13, 14]. Adams and Ferreira [1] also believe female directors engage more willingly with board meetings and oversight committees, which would result in better discussion and decision making, and ultimately ensure better firm performance [22 , 81]). Other research echoes these observations and indicates gender diversity positively influences firm performance [9 , 82].

The results, in part, explain the introduction of mandatory policies in France, Norway, and Italy, requiring more equitable gender representation on boards [23]. Other countries, such as Australia, the USA, and the UK, have preferred more flexible strategies, focusing instead on encouraging firms to voluntarily pursue more inclusive Boards of Directors [87]. Yet, despite the considerable evidence, doubts still linger that gender-diverse boards improve performance. Indeed, there is evidence of either a negative [4, 19] or a non-significant relationship between gender-diverse boards and firm performance [26]. Most explanations revolve around concerns that boards lose their cohesiveness [55], which results in poorer communication between the management and the board [2, 14]. Some research also reports negative effects on creativity and organizational culture [14 , 83]. It is acknowledged that the evidence is contradictory, but much of the literature supports the business case for gender diversity. Therefore, the hypothesis is:

Women directors have a positive impact on firm financial performance.

2.2 Directors’ age

It is similarly contended that the presence of young directors enhances performance because they are more innovative in thought and action [6], more willing to initiate strategic change [17, 43] and prepared to make risky decisions [6, 55]. These characteristics, combined with the expertise, experience, networks, and risk averseness of older directors [17] make boards more balanced and more efficient. Additionally, intergenerational boards prevent groupthink, promote debate and creativity [6], and develop abilities to solve complex problems [55]. Ali and Kulik [3] claim young directors have better academic qualifications and better technological skills, which make them shrewder advisors on tech-oriented projects [55, 63] In contrast, older directors provide boards with invaluable expertise, experience, and networks that allow the firm to access scarce resources [3, 67]. Combining the benefits of old and young board directors should result in significant benefits for the organization [24 , 56].

However, the business case for age diversity on Boards of Directors appears inconsistent [3, 17]. For instance, Mahadeo et al. [64] reported a positive relationship between age-diverse boards and firm financial performance. Correspondingly, Kim and Lim [60] found that greater board age diversity is associated with a higher firm value measured as Tobin’s Q. Studying a sample of Indonesian companies Darmadi [27] suggested that heterogeneous boards are associated with higher firm value. Nevertheless, studies also report either a non-significant [57] or negative [47] association between diverse age boards and firm performance. Bonn et al. ’s [17] study of Australian and Japanese firms identified a negative relationship between the average age of board directors and firm financial performance. In the same guise, Ali and Kulik, [3] reported a negative linear relationship between age diversity and return on assets and an inverted U-shaped curvilinear relationship between age diversity and return on assets. Based on the reviewed arguments, there is weak support for a significant relationship between board age diversity and firm performance. Therefore, the following is proposed:

There is no association between board age diversity and firm performance.

2.3 Directors’ nationality

Foreign directors are reported to have different viewpoints and cognitive perspectives on the board’s functions. It is suggested they bring different monitoring techniques and methods ([6]), as well as providing the Board with better experience and knowledge about the international environment, systems, and legislation [86]. Indeed, Johnson et al., [55] postulate that foreigners’ social connections should enable the Board to more easily access foreign markets, capital, and technology. Moreover, it is argued that foreign shareholders prefer foreign directors to protect their interests [70]. In this regard, Garcia-Meca et al., [41] stated that “diversity on boards may reduce information asymmetry and the associated agency costs; improve the financial flexibility of domestic firms by increasing the pool of potential investors and financing opportunities and expand cross-border flows of knowledge and technology.”

To date, empirical studies are contradictory regarding the presence of foreign directors and firm financial performance [35]. For instance, Oxelheim and Randoy [70] report that foreign directors are associated with higher firm value in Scandinavian countries. A view mirrored in Carter et al.’s [24] research reporting that the percentage of ethnic minorities on boards is positively linked to Tobin’s Q. However, subsequently, Carter et al. [25] found no association between board nationality diversity and financial performance. The same outcome has recently been documented by Guest (2019) and Zaid et al., [89]. Overall, the existing literature tends to support the positive effects of board nationality diversity on firm outcomes. Consequently, the following is hypothesized:

There is a positive association between the presence of foreign directors and firm financial performance

2.4 Independent director

A Board’s composition in terms of the executive (inside) and non-executive (outside) directors have long attracted scrutiny because of its impact on a firm’s performance. For example, O’Sullivan [71], writing about events in the 1990s, highlighted how a board’s composition influenced remuneration levels and recruitment. Executive directors represent functions of the firm, while non-executive directors are independent of the firm. Therefore, they are regarded as more individualistic than executive directors and are in a better position to effectively control managerial behaviour [34, 77]. Agency theorists argue the more diverse the directors, the more effective the monitoring because it encourages a willingness to question ([1, 51]). A feature, Johnson et al. [55] highlighted, “Diverse directors are less likely to be beholden to managers.” (p399). Several studies have found a positive relationship between board independence and firm financial performance [12 , 65] Conversely, a negative or no significant relationship has been documented in other studies [61, 76]. Nonetheless, the majority of research findings indicate that boards with a high proportion of independent directors perform better and consequently improve firm financial performance.

Therefore, we consider the following hypothesis:

The proportion of outside directors on the boards is positively linked to financial performance.

3 Methodology and variables definition

3.1 Sample construction

This study consists of 456 observations from 76 listed FTSE 100 companies during the period 2010–2015. Twenty-four companies were excluded due to missing data related to directors’ attributes. This period, 2010–2015, reflects the years immediately following the financial crisis of 2008 when mounting criticism emerged that weak corporate governance in part explained the financial crisis. It is suggested that the Board of Director’s composition may have played a pivotal role in the crisis.

Data on board characteristics were collected from Hemscott, which offers information on board directors’ characteristics and identities, such as gender, age, nationality, and background [33]. Further information was collected manually from the companies’ annual reports. Data on firm characteristics and firm financial performance were collected from the financial database FAME.

Consistent with the literature, we consider that the relationship between board diversity and firm financial performance is endogenous [1, 25]. Thus, we control for endogeneity using the Generalized Method of Moments (GMM) as a technical solution [48]. In panel data analysis, the GMM system holds one additional advantage over the standard difference approaches because GMM deals with endogeneity in the data, and it offers robust measures, especially when the estimated variables are highly persistent ([8]). The GMM system has been proved to be efficient and appropriate for endogeneity issues and has been applied in multiple research on firm performance and corporate governance [14 , 78].

3.2 Variable definition (Table 1)

3.2.1 Financial measures

Drawing on previous literature [1 , 55], we employ two types of financial indicators. First, the accounting performance is captured through two variables: Return on Equity (ROE = Net income/shareholders equity) and Return on Assets (ROA = Net income/total assets). Second, market performance is measured through Tobin’s Q (Total market value/Total asset value).

Table 1
Variable definition

Measures

Dependent variables: Financial performance

ROA Return on Assets: Net income/total assets

ROE Return on Equity: Net income/shareholders’ equity

Tobin’s Q Total market value / Total asset value

Independent variables: Board Diversity

Gender diversity Number of women directors/board size

Age diversity Age band (1–6): Variable takes value 1, 2, 3, 4, 5, 6 if in age band 1; age band 2-age band 3-age band 4-age band 5-age band 6

Nationality diversity The proportion of foreign directors: Number of non-British directors/Board size

Board Independence The proportion of Independent Non-Executive Directors (INED)

Control variables

Firm size Total assets

Leverage Total financial debt/Total assets

Industry Value 1 if the company is in production and value 2 if the firm is in services

Sales growth Percentage of sales growth over the years

Board size Number of board directors

CEO duality Dummy variable with value 1 if the CEO is simultaneously the board chair, 0 otherwise

	Measures
Dependent variables: Financial performance
ROA	Return on Assets: Net income/total assets
ROE	Return on Equity: Net income/shareholders’ equity
Tobin’s Q	Total market value / Total asset value
Independent variables: Board Diversity
Gender diversity	Number of women directors/board size
Age diversity	Age band (1–6): Variable takes value 1, 2, 3, 4, 5, 6 if in age band 1; age band 2-age band 3-age band 4-age band 5-age band 6
Nationality diversity	The proportion of foreign directors: Number of non-British directors/Board size
Board Independence	The proportion of Independent Non-Executive Directors (INED)
Control variables
Firm size	Total assets
Leverage	Total financial debt/Total assets
Industry	Value 1 if the company is in production and value 2 if the firm is in services
Sales growth	Percentage of sales growth over the years
Board size	Number of board directors
CEO duality	Dummy variable with value 1 if the CEO is simultaneously the board chair, 0 otherwise

3.2.2 Board diversity measures

To assess the effects of board diversity on firm performance, we employ three major demographic dimensions: gender, age, and directors’ nationality. We also consider the degree of board independence by including the proportion of independent non-executive directors. We measure gender diversity through the proportion of women directors (Number of women directors/Board size). In line with the literature and relying on the study of Mahadeo et al., (2012), age is banded as follows: band 1 (director under 36); band 2 (director between 36 and 45); band 3 (director between 46 and 55); band 4 (director between 56 and 65); band 5 (director between 66 and 75) and band 6 (director over 75). Nationality diversity is measured through the proportion of foreign directors on boards (Number of Non-British directors/Board size). Board independence will be measured by the proportion of Independent Non-executive (INED) (Number of independent non-executive/board size) ([14 , 64].

3.2.3 Firm characteristics

In line with previous studies, we control for a set of variables related to firm characteristics such as firm size (Total assets). The approach aligns with previous studies (e.g., Guest, 2019; [24, 32] using Standard Industrial Classification codes (SIC). Erhardt et al.’s., [32] study used SIC classification to demonstrate that firms operating in the service industry are more diverse than those operating in the manufacturing sector. Therefore, the industry will be measured as follows: firms in manufacturing were coded as 1, and firms in services were coded 2. We consider a risk indicator measured by the firm leverage (total financial debts/total assets), and finally, a sales growth indicator [14, 55].

Board size: The literature argues that a large number of directors provides boards with a pool of skills and knowledge which should translate into a better board functioning. We consider the number of directors within the board as a measurement to capture the board size [1 , 59].

CEO duality: The CEO duality structure is defined as a dependent leadership where the CEO is the same person chairing the board of directors [75]. CEO duality is captured through a dummy variable that takes the value 1 if the CEO is board chair 0 otherwise [9 , 55].

3.3 Descriptive analysis (Tables 2, 3, 4)

Descriptive statistics (Table 2) indicate that, on average, the sampled boards comprised 11.38 members. The proportion of females on boards was 19.7% (21.8%, according to Davies Review [28]. As reported by official figures, there has been a significant increase in the proportion of female directors on FTSE’s100 boards since the establishment of the Davies Target in 2011 (from 12.5% in 2011 to 21.8% in 2014). Although, at that point in time, it was lower than France, Norway, and New Zealand [28].

Table 2
Variable study

Mean Std. Dev Min Max Obs

1 Return on Equity 30.34 46.54 –98.74 457.41 456

2 Return on Assets 8.46 8.86 –17.37 53.66 456

3 Tobin’s Q 1.12 1.34 0 11.08 456

4 Female% 19.7 .089 0 58.98 456

Age (1–6) 2.75 0.904 2 4 456

5 Age¹ 61 .44 26 75 456

6 Nationality% 30.5 .27 0 78.13 456

7 INED% 60.01 .52 48.21 91.03 456

8 Board Size 11.38 2.53 5 22 456

9 CEO duality .0034 .012 0 .001 456

10 Leverage % 27.12 11.32 0 67 456

11 Industry 1.03 2.35 .900 4 456

12 Sales growth % 11.78 2.98 –17.12 190.095 456

13 Firm size (Billion) 5.82 13.08 0.12 270.12 456

		Mean	Std. Dev	Min	Max	Obs
1	Return on Equity	30.34	46.54	–98.74	457.41	456
2	Return on Assets	8.46	8.86	–17.37	53.66	456
3	Tobin’s Q	1.12	1.34	0	11.08	456
4	Female%	19.7	.089	0	58.98	456
	Age (1–6)	2.75	0.904	2	4	456
5	Age¹	61	.44	26	75	456
6	Nationality%	30.5	.27	0	78.13	456
7	INED%	60.01	.52	48.21	91.03	456
8	Board Size	11.38	2.53	5	22	456
9	CEO duality	.0034	.012	0	.001	456
10	Leverage %	27.12	11.32	0	67	456
11	Industry	1.03	2.35	.900	4	456
12	Sales growth %	11.78	2.98	–17.12	190.095	456
13	Firm size (Billion)	5.82	13.08	0.12	270.12	456

¹We calculate the average age of directors for descriptive analysis purposes.

Table 3

Age bands across companies

	Frequency	Percentage
Within 1 age band	0	0
Across 2 age bands	45	59.21%
Across 3 age bands	20	26.31%
Across 4 age bands	11	14.47%
Across 5 age band	0	0
Across 6 age band	0	0
Total	76	100%

The data shows that 30.5% of board directors are foreigners (32%, according to Stuart 2014). Official reports argue that the UK Boards have high levels (compared to other countries) of foreign nationals and suggest that practice is aligning to guidelines, e.g., Parker Review (Nationality Diversity of the UK Boards). An examination of Table 4 shows that most of the sampled firms (59.21%) have directors that fall across two age bands. Only 26.31% of companies report having directors across three age bands, and none of the companies have directors across five age bands. In Mahadeo et al. ‘s., [64] study, boards were qualified as age-diverse when 40% of firms’ directors belong to 4 different age bands. Therefore, relying on Mahadeo et al. ‘s argument, our findings suggest that the sampled firms have low age-diverse boards.

Table 4

Matrix of correlations

		1	2	3	4	5	6	7	8	9	10	11	12	13	14
		ROA	ROE	T.Q	Gendr	Age	Nationality	NED	INED	B.Sz
1	ROA	1
2	ROE	.051	1
3	T.Q	.032	.094	1
4	Gender	.253^**	.314^**	.207^**	1
5	Age (1–6)	–.070	–.012	–.019	–.231^**	1
6	Nationality	.289^**	.159^**	.290^**	–012	.090	1
7	INED	–.009	–.061	–.001	–.025	–.070	–.013	.002	1
8	Board Size	.001	.003	.082	.211^**	–.013	.272^**	.–012	.020	1
9	CEO duality	–.003	–.019	–.020	.062	.010	.031	.072	.075	.051	1
10	Leverage	–.043	–.031	–.279^**	.064	.068	.028	.052	.027	.003	–.083	1
11	Industry	–.011	–.085	–.013	.012	024	.092	.072	.014	.005	.022	.048	1
12	Sales growth	–.010	–.002	–.092	.035	.065	.072	.053	.003	.020	.063	.025	.003	1
13	Firm Size	–.090	–.014	–.090	.090	.011	.152	.007	.081	.009	.099	.082	–.013	–.051	1

^*Significant at the 5% level (2-tailed); ^**significant at the 1% level (2-tailed).

Additionally, as reported in Table 2, the average age of board directors is 61 years. This finding compares favourably with the results by Bonn et al. [17] reported an average age of 59.25 for Japanese directors and 56.71 for the Australian ones. Our finding is also consistent with official data pointing to the increasing average age of FTSE board members (according to Stuart (2018) the FTSE’s 100 board average age is 60.3 years, up from 57.9 ten years ago). Information reported on CEO duality shows a feeble presence of the CEO duality structure (.0034). Similar findings have been reported in Spencer Stuart’s report of 2014. This low rate indicates most FTSE 100 firms comply with the UK’s various reports and codes of corporate governance on splitting the Chief Executive Officer and Chairman’s roles.

The descriptive statistics also show a high proportion of independent directors (64.01%). This result compares positively with the findings reported by Est $\overset{´}{e}$ lyi and Nizar, [33] (level of board independence is 59% in the UK). Similar results have also been reported by Mahadeo et al., [64] and Carter et al., [24] that diverse boards tend to appoint more non-executive (outside) directors.

Table 4 shows the bivariate correlation analysis matrix of all variables used in this study. The findings reveal gender and nationality variables are significantly correlated with performance measures. Independent variables are not mutually correlated, which excludes multicollinearity issues (below the critical threshold 0.6) (Garcia Meca et al., 2015). Board size is correlated with the proportion of women directors and board nationality. This is consistent with the literature suggesting that larger boards tend to have greater gender and nationality diversity [24]. Moreover, as can be noted from the table, gender diversity is negatively correlated with age diversity. This suggests that firms might be inclined to satisfy quota requirements for gender at the expense of age. Indeed, Mahadeo et al. [64] argue that, in their effort to deal with legislation, firms might decide in favour of one type of diversity at the expense of another.

3.4 Regression analysis (Tables 5, 6, 7)

Examining the effects of board directors on firm financial performance indicate a positive and significant relationship between board nationality and ROE (0.048**). However, the coefficient estimates, although positive, are not significant for ROA and Tobin’s Q. Gender diversity is positively linked to ROE (0.041**), ROA (0.061*), and Tobin’s Q (0.087*). Thus, our findings confirm H1 and H3 predicting a business case for gender and nationality board diversity. These findings are consistent with theoretical predictions underpinning resource dependence and agency perspectives and many previous empirical studies supporting the business case for board diversity [9 , 87].

Table 5
ROE regression model

Coef. Std. Err. z P-value [95% Conf. Interval]

L1. .158432 .1374131 1.15 0.249 –.1108886 .4277609

Industry –28.5375 15.48965 –1.84 0.065^* –58.89665 1.821655

Board Size 22.4876 13.94302 1.61 0.070* –49.81549 4.84016

INED –.153636 11.55917 –0.01 0.269 –22.50191 22.8092

Gender diversity 951.3369 526.4561 1.81 0.041 ^ 1983.17 80.49818

Firm Size –.000265 .0003204 –0.82 0.410 –.0003642 .0008918

Age diversity –58.1064 24.9149 –2.33 0.220 –106.9388 –9.274165

Nationality diversity 7.55707 4.374953 1.73 0.048 ^ –1.01771 16.13179

CEO duality –2.3022 5.319265 –0.43 0.665 –12.7278 8.123331

Leverage –2.9731 3.981 –0.713 0.871 –78.082 .0912

Sales Growth –8.3612 2.1101 –0.621 0.621 –0.971 1.3091

_cons 512.8317 182.4334 2.81 0.005 155.2689 870.3946

	Coef.	Std. Err.	z	P-value	[95% Conf.	Interval]
L1.	.158432	.1374131	1.15	0.249	–.1108886	.4277609
Industry	–28.5375	15.48965	–1.84	0.065^*	–58.89665	1.821655
Board Size	22.4876	13.94302	1.61	0.070*	–49.81549	4.84016
INED	–.153636	11.55917	–0.01	0.269	–22.50191	22.8092
Gender diversity	951.3369	526.4561	1.81	0.041 ^**	1983.17	80.49818
Firm Size	–.000265	.0003204	–0.82	0.410	–.0003642	.0008918
Age diversity	–58.1064	24.9149	–2.33	0.220	–106.9388	–9.274165
Nationality diversity	7.55707	4.374953	1.73	0.048 ^**	–1.01771	16.13179
CEO duality	–2.3022	5.319265	–0.43	0.665	–12.7278	8.123331
Leverage	–2.9731	3.981	–0.713	0.871	–78.082	.0912
Sales Growth	–8.3612	2.1101	–0.621	0.621	–0.971	1.3091
_cons	512.8317	182.4334	2.81	0.005	155.2689	870.3946

Wald chi2(10) = 26.19/Prob > chi2 = 0.003. Arellano-Bond test for AR(1) in first differences: z = –3.70 Pr > z = 0.000. Arellano-Bond test for AR(2) in first differences: z = –3.87 Pr > z = 0.000. Sargan test of overid. restrictions: chi2(14) = 11.55 Prob > chi2 = 0.643. Sargan test excluding group: chi2(2) = 2.07 Prob > chi2 = 0.356. Difference (null H = exogenous): chi2(12) = 9.48 Prob > chi2 = 0.661. ^*p < 0.10, ^**p < 0.05, ^***p < 0.01.

Table 6

ROA Regression Model

	Coef.	Std. Err.	z	P-value	[95% Conf.	Interval]
ROA
L1.	.6738	.1169334	5.76	0.000	.4446386	.903009
Industry	–2.3027	1.914751	–1.20	0.029**	–6.055642	1.450044
Board Size	–3.3827	1.734495	–1.95	0.151	–6.78234	.0167552
INED	–.15292	1.536323	–0.10	0.921	–2.858212	3.164065
Gender diversity	64.1972	58.92043	1.09	0.061*	–179.6792	51.28466
Firm Size	–.00004	.0000388	–1.24	0.094*	–.0000278	.0001242
Age diversity	–8.7187	4.702821	–1.85	0.164	–17.93607	.4986486
Nationality diversity	.41942	.7796963	0.54	0.141	–1.108755	1.947598
CEO duality	–.3067	.6192599	–0.50	0.620	–1.520444	.9070102
Leverage	–6.2891	.5712	–1.95	0.812	–1.621	.6912
Sales growth	–.00021	.5801	–1.002	0.071*	–.1093	.9713
_cons	74.5857	23.81504	3.13	0.002	27.90912	121.2624

*p < 0.10, **p < 0.05, ***p < 0.01. Arellano-Bond test for AR(1) in first differences: z = –3.46 Pr > z = 0.001. Arellano-Bond test for AR(2) in first differences: z = –1.59 Pr > z = 0.111. Sargan test of overid. restrictions: chi2(14) = 12.36 Prob > chi2 = 0.577. Sargan test excluding group: chi2(2) = 9.67 Prob > chi2 = 0.008. Difference (null H = exogenous): chi2(12) = 2.70 Prob > chi2 = 0.997. Wald chi2(10) = 74.39. Prob > chi2 = 0.00.

Table 7

Tobin’s Q Regression Model

	Coef.	Std. Err.	z	P-value	[95% Conf.	Interval]
Tobin’sQ
L1.	.8183	.0967724	8.46	0.000	.6286298	1.007971
Industry	–.1695	.1694269	–1.00	0.317	–.5016067	.1625346
Board Size	.2528	.2077309	1.22	0.064*	–.154332	.6599581
INED	–.1436	.1239026	–1.16	0.246	–.3864992	.0991899
Gender diversity	5.6510	5.195741	1.09	0.087*	–4.531582	15.83535
Firm Size	–.000015	9.90e–06	–1.59	0.111	–.0000352	3.63e–06
Age diversity	–.2369	.5450863	–0.43	0.664	–1.305267	.831432
Nationality diversity	.02439	.0582408	0.42	0.75	–.0897559	.1385439
CEO duality	–.1027	.0791569	–1.30	0.194	–.0524	.2578895
Leverage	.–9823	.1031	–1.01	0.081*	–.6290	7.0981
Sales growth	–.1002	.0021	–921	12.09	–.392	.1910
_cons	–.7422091	3.460764	–0.21	0.830	–7.525182	6.040763

*p < 0.10; **p < 0.05, ***p < 0.01; Arellano-Bond test for AR(1) in first differences: z = –5.45 Pr > z = 0.000; Arellano-Bond test for AR(2) in first differences: z = –1.73 Pr > z = 0.084. Sargan test of overid. restrictions: chi2(14) = 55.04 Prob > chi2 = 0.000; Sargan test excluding group: chi2(2) = 15.43 Prob > chi2 = 0.000; Difference (null H = exogenous): chi2(12) = 39.61 Prob > chi2 = 0.00; Wald chi2(10) = 507.18; Prob > chi2 = 0.00.

Est $\overset{´}{e}$ lyi and Nizar [33] report foreign directors are likely to improve the board’s monitoring function and bring extensive networks that lead to more geographical product diversification. They suggest, “there is a strong likelihood that firms with diverse ethnic boards that successfully make inroads into other countries’ product and customer markets will have a greater chance of delivering value.” Foreign directors’ contacts and connections are a part of their social capital [33, 62]. Bringing such capital to boards would increase the firm’s ability to access new markets, acquire new assets, and develop a competitive advantage [33].

The proportion of women directors is reported to be positively associated with accounting and market performance ratios, a feature of the extant literature. Indeed, scholars tend to support the business case for gender diversity from both resource dependence and agency perspectives [9 , 46]. Researchers concur women directors bring a different decision-making perspective, arguing women have specific expertise in fields such as marketing and communication, which should help boards better understand the market [74]. Moreover, female directors are more likely to have different networks and ties than their male counterparts leading to more opportunities [25]. Furthermore, their presence on boards reduce information asymmetry and provide specific information for better managerial control.

In the case of directors’ age, analysis shows it is not significantly linked to firm performance (therefore, H3 indicating a non-association is confirmed). These results do not contradict the literature, although the limited research on board age is controversial as to whether intergenerational boards contribute to better firm outcomes [25]. Mahadeo et al. [64] reported a positive relationship between board age diversity and ROA; however, Bonn et al. (2004) have found a negative association between the average age of board directors and firm financial indicators. This paper’s findings indicate there is low age diversity on UK’s boards, but as explained previously, it is difficult to capture its impact on the firm’s bottom-line [17].

Descriptive statistics show that the UK corporate boards sampled have a low age diversity, and most of the sampled firms list older directors (average age is 60 years). A possible rationale is that UK boards are looking for advisors rather than specialists, but may also reflect the reality of the UK’s aging population (ONS, 2018). Indeed, the head of the UK Board Practice at Spencer Stuart told the Financial Times, “Despite boards finding themselves increasingly in need of the experience of younger generations as they face emerging issues such as the impact of AI and automation, and cybersecurity, the trend appeared to be moving in the opposite direction” (FT, Dec 19, 2017). Moreover, old directors tend to use their connections to hire new ones. Such domination often referred to as the “Old boys’ club” hinders young directors’ selection. The inference is UK firms cannot capitalize on the benefits of intergenerational boards. Therefore initiatives similar to those implemented for gender and nationality diversity might be a solution.

Control variables indicate a negative association between leverage and Tobin’s Q. This finding is consistent with the results of Gonzales (2013), who argue that high leverage leads to lower market performance. Firm size is surprisingly negatively linked to accounting performance (ROA), which contradicts the rule that large companies generate more substantial profit. However, this result is in line with those found by Vafei et al., [87] that smaller firms are more driven to grow than larger ones.

The last significant link to emerging related to board size and performance measures (ROE and Tobin’s Q). The association is positive, confirming the resource dependence argument that larger boards provide more insights, advice, and counsel that should lead to better quality decisions [1, 51]. However, this contradicts Vafei et al.’s [87] belief that large boards are often associated with poor communication and coordination, which consequently impacts firm performance.

In the case of board independence, the findings reveal a non-significant relationship between the fraction of independent directors and financial measures. Therefore, we reject the prediction that board independence has a positive impact on financial performance (H4). One possible explanation is that independent directors are not selected for their potential contribution to firm performance, but rather to fulfil legal requirements [64]. Therefore, the concern is that independent directors may not be fulfilling effectively one of their fiduciary roles: monitoring firm performance on behalf of shareholders. Furthermore, the definition of “independent director” as adopted by UK corporations seems to be questionable. Indeed, one of the issues raised in the UK’s updated 2018 Code of Corporate Governance is that independent executive directors dominate most boards to the detriment of independent non –executive directors. Such imbalance leads to groupthink and consequently affects the quality of decision-making. As reported by the UK’s code of corporate governance (2018. p.6) “The board should include an appropriate combination of executive and non-executive (and, in particular, independent non-executive) directors, such that no one individual or small group of individuals dominates the board’s decision-making.”

3.5 The business case for board gender and nationality diversity

The results above report the positive effects of diversity in terms of gender and nationality on a firm’s financial performance. Such diversity is believed to create boards that are better at monitoring and counselling, and in turn, positively impact the firm’s bottom-line [1, 51]. Our research supports Bernile et al.’s [15] contention that greater board diversity results in better performance and lower volatility. It also lends weight to Gul et al. ’s [44] assertion that more diverse boards may encourage a more entrepreneurial culture through more significant investment in research and development, thus securing greater competitive advantage. These characteristics give credence to the earlier argument that more diverse boards enable better access to scarce, valuable resources. The UK’s voluntary policies in terms of board diversity, namely gender and nationality diversity, have led to significant increases in the representation of female and foreign directors on boards of listed companies. We speculate that such improvement (even though slow) seems to reflect positively on firm financial performance.

4 Conclusion

Various UK Governments, Industry bodies, and society, in general, have encouraged greater Board diversity through hard and soft mechanisms, whether in the form of legislation or voluntary codes, although arguably these practices have been framed within a robust moral framework. Some sceptics argue, however, that better evidence is needed to support the above actions. The extant literature underpins the belief that greater Board diversity creates sustainable firm value and enhances the firm’s competitive advantage — an argument supported by both agency and resource dependency theories. Using a sample of seventy-six FTSE 100 listed companies over the period 2010–2015, we investigated whether boards with diverse teams in terms of gender, age, nationality, and independence created more added value to firms. We controlled for the board and firm characteristics and used a technical solution for the potential endogeneity concerns. The results support the business case for gender and nationality diversity, suggesting that more women and foreign directors on boards lead to better accounting and market performance. However, there is no relationship between age diversity and market performance, nor did the presence of independent directors improve a firm’s financial performance.

This study, although British based, joins a growing global body of evidence that more diverse boards improve firm performance. The core of the firm’s existence and more widely society is arguably to develop a competitive advantage. Therefore it is incumbent on practitioners, decision-makers, and politicians to consider strategies that promote competitive advantage, such as greater corporate board diversity. The focus should be on push initiatives that educate and persuade directors of the merits of more diverse boards, mainly using data that demonstrates improved firm performance as a result of greater board diversity. The cost of generating and analysing this data is minimal, as many societies already possess this relevant information.

Further practical solutions may lie in offering longer tenure to directors who are younger, female, foreign and/or independent. This would provide these directors with the opportunity to develop their skills and knowledge. To accommodate this practice, it may be sensible to increase the Board’s size in the short to medium term.

There are some limitations to this study. First, the sample was restricted to FTSE 100 companies. Therefore their market value, coupled with their size and scope of activities, means the findings may not reflect the realities of other firm characteristics within the UK, e.g., Small-Medium Sized Enterprises (SMEs). A more promising angle may be to test the findings to a sample of SMEs, both in the UK and a comparably structured economy, such as France. Additionally, research that includes non-financial variables such as Organizational Innovation, Research and Development [88], and Social performance [49] would provide more insights into the relationship between board diversity and firm performance.

Moreover, a study that investigates the effects of board diversity across industries (e.g., finance, retail industry, pharmaceutical) would provide more insights into how business segments interact with board diversity. Indeed, research suggests that the relationship between board diversity and firm performance may not be stable across industries [14, 26], arguing that the predisposition of firms to have diverse boards may depend on their sector of activity [1]. For instance, Campbell and Minguez-Vera, [21] argue that the finance sector is more predisposed to hiring women on boards. Finally, a qualitative study involving CEOs and directors’ perceptions about board diversity would provide a better understanding of what influences the relationship between board diversity and firm outcomes.

Footnotes

Acknowledgments

N/A.

Author contributions

Authors contributed equally to the work.

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