Abstract
Organizational boards of directors are one of the most important subgroups within most modern organizations, performing critical advisory, monitoring and resource dependence roles. This paper investigates the crucial question of whether the stock market values ethnic and gender diversity within organizational boards. We find that board diversity is positively associated with market valuation. We distinctively demonstrate further that ethnic diversity is valued more highly by the stock market than gender diversity. By contrast, we do not find any evidence of a significant non-linear link between board diversity and market valuation. Our findings are robust across a number of econometric models that deal with different types of endogeneities and market valuation measures. Overall, our results are consistent with agency and resource dependence theoretical predictions.
Similar content being viewed by others
Notes
As will be discussed further, some of the reforms set specific targets of non-white (i.e., people of Black African, Chinese, Indian and Mixed Race backgrounds) board representation for organizations to comply with. For example, the 1998 Employment Equity and 2003 Black Economic Empowerment Acts set aspirational (not legally enforceable) target of 40 to 50% non-white senior management and/or board membership.
This implicitly suggests that the average SA organizations should ideally have a workforce consisting of about 80% non-whites and 20% whites at all levels of the organizational hierarchy, including the board of directors in order to reflect the ethnic diversity and composition of the SA populace.
Board diversity has been broadly defined as the various attributes that may be represented among directors in the boardroom in relation to board process and decision-making, including age, gender, ethnicity, culture, religion, constituency representation, independence, knowledge, educational and professional background, technical skills and expertise, commercial and industry experience, career and life experience (van der Walt and Ingley 2003, p. 219). In this paper, we focus only on ethnic and gender aspects of the board.
This also suggests that the association between board diversity and organizational value can be non-linear, whereby initial increases in ethnic and gender board representations lead to declines in market valuation up to a point, beyond which additional increases in diversity improve market valuation (Roberson and Park 2007). Therefore, we investigate whether there is a curvilinear relationship between board diversity and market valuation, as part of our robustness analyses.
Organizational board decisions take time in order to be reflected in market value (Guest 2009; Ntim et al. 2012). Thus, to circumvent potential endogenous relationship between board diversity and market valuation, we introduce a one year lag between board diversity and market valuation such that this year’s organizational value depends on last year’s governance structure similar to Yermack (1996) and Ntim et al. (2012), as specified in equation (1). The sample also starts from 2002 for two reasons. First, King II came into operation in 2002, and secondly, data coverage in Perfect Information/DataStream on SA listed organizations is very limited until 2002. The sample ends in 2007 because it is the year for which data is available.
Due to insufficient number of observations in 3 industries, namely health care, oil and gas, and telecoms industries with three, one and three listed organizations, respectively, were merged with the closest remaining five major industries. Consequently, the three health care organizations were included in the consumer services industry, the one oil and gas organization was added to the basic materials industry, whilst the three telecoms organizations were also shared out to the technology industry.
However, we note that our choice is between random and fixed-effects estimation techniques. Therefore, to ensure that fixed-effects model is appropriate, we first carry out Hausman (1978) specification test by estimating both fixed and random-effects models for the BDIV proxies separately using Eq. (1) and comparing their respective coefficients. Under the null hypothesis of consistent random unobserved organizational-level heterogeneity (i.e., unobserved organization-specific effects or the regressions errors are uncorrelated with the independent variables), random-effects estimates will be both consistent and efficient, whilst fixed-effects coefficients will be consistent, but inefficient (Hausman 1978; Wooldridge 2010). In contrast, if the null hypothesis is rejected, then the fixed-effects approach will provide both consistent and efficient estimates, whereas random-effects estimates will be both inconsistent and biased (Hausman 1978; Gujarati 2003). The test consistently rejects the null hypothesis of consistent random effects for both models at the 1% level, providing further empirical support for our decision to rely primarily on fixed-effects models.
We carried out similar non-monotonic examination for the BDIVE, BDIVG and BDIVGNW measures and found statistically insignificant non-linear association between board diversity and market valuation. We further investigate other forms of non-linear transformations, such as cubing the variables (i.e., BDIVE, BDIVG, BDIVGNW and BDIV), but we found statistically insignificant link between board diversity and market valuation.
As estimating a lagged structure will jeopardise the validity of the Durbin-Wu-Hausman test (Gujarati 2003; Wooldridge 2010), we estimate Eq. (2)) as un-lagged structure. An additional advantage is that it allows us to ascertain the robustness of our results against estimating an un-lagged structure.
References
Abdullah, S. N. (2013). Causes of gender diversity in Malaysian firms. Journal of Management and Governance. (Forthcoming).
Adams, R. B., & Ferreira, D. (2009). Women in the boardroom and their impact on governance and performance. Journal of Financial Economics, 94, 291–309.
Adler, R. D. (2010). Women in the executive suite correlate to high profits. Glass Ceiling Research. Available at: http://www.women2top.net/download/home/adler_web.pdf. Accessed 30 December 2011.
Amankwah-Amoah, J., & Debrah, Y. A. (2010). The protracted collapse of Ghana Airways: Lessons in organizational failure. Group and Organizational Management, 35, 635–665.
Andreasson, S. (2013). Understanding corporate governance reforms in South Africa: Anglo American divergence, the King reports and hybridization. Business & Society. (Forthcoming).
Ashant, A. G. (2006). Annual report. Johannesburg: AngloGold Ashanti Group Ltd.
Armstrong, P., Segal, N., & Davis, B. (2006). Corporate governance in South Africa’. In C. A. Mallin (Ed.), Handbook on international corporate governance. Cheltenham: Edward Elgar Publishing.
Arnegger, M., Hofmann, C., Pull, K., & Vetter, K. (2013). Firm size and board diversity. Journal of Management and Governance. (Forthcoming).
Aspen Pharmacare Holdings. (2006). Annual report. Johannesburg: Aspen Pharmacare Holdings Group Ltd.
Baranchuk, N., & Dybvig, P. (2009). Consensus in diverse corporate boards. Review of Financial Studies, 22, 715–747.
Barr, G., Gerson, J., & Kanto, B. (1995). Shareholders as agents and principals: The case for South Africa’s corporate governance system. Journal of Applied Corporate Finance, 8, 18–31.
Bart, C., & McQueen, G. (2013). Why women make better directors? International Journal of Business Governance and Ethics, 8, 93–99.
Baysinger, B., & Hoskisson, R. E. (1990). The composition of boards of directors and strategic control: Effects on corporate strategy. Academy of Management Review, 15, 72–87.
Baysinger, B. D., & Butler, H. N. (1985). Corporate governance and the board of directors: Performance effects of changes in board composition. Journal of Law, Economics and Organization, 1, 101–124.
Beiner, S., Drobetz, W., Markus, M., & Zimmermann, H. (2006). An integrated framework of corporate governance and firm valuation. European Financial Management, 12, 249–283.
Bilimoria, D., & Piderit, S. K. (1994). Qualifications of corporate board committee members. Group and Organization Management, 19, 334–362.
Brammer, S., Millington, A., & Pavelin, S. (2007). Gender and ethnic diversity among UK corporate boards. Corporate Governance: An International Review, 15, 393–403.
Burges, Z., & Tharenou, P. (2002). Women board of directors: Characteristics of the few. Journal of Business Ethics, 37, 39–49.
Campbell, K., & Minquez-Vera, A. (2008). Gender diversity in the boardroom and firm financial performance. Journal of Business Ethics, 83, 435–451.
Carter, D. A., D’souza, F., Simkins, B. J., & Simpson, W. G. (2010). The diversity of corporate board committees and firm financial performance. Corporate Governance: An International Review, 18, 396–414.
Carter, D. A., Simkins, B. J., & Simpson, W. G. (2003). Corporate governance, board diversity, and firm value. Financial Review, 38, 33–53.
Catalyst. (2007). The bottom line: corporate performance and women’s representation on boards. New York, US: Catalyst.
Dale-Olsen, H., Schone, P., & Verner, M. (2013). Diversity among Norwegian boards of directors: Does a quota for women improve performance. Feminist Economics. (Forthcoming).
Dobbin, F., & Jung, J. (2011). Corporate board gender diversity and stock performance: The competence gap or institutional investor bias? North Carolina Law Review, 89, 809–838.
Du Plessis, J. A. (2008). Ethical failure under the agency logic: Grounding governance reform in a logic of value. Group and Organization, 33, 781–804.
Dwyer, S., Richard, O. C., & Chadwick, K. (2003). Gender diversity in management and firm financial performance. Journal Business Research, 56, 1009–1019.
El Mehdi, I. K. (2007). Empirical evidence on corporate governance and corporate performance in Tunisia. Corporate Governance: An International Review, 15, 1429–1441.
Erhardt, N. L., Werbel, J. D., & Shrader, C. B. (2003). Board of director diversity and firm financial performance. Corporate Governance: An International Review, 11, 102–111.
Farrell, K. A., & Hersch, P. L. (2005). Additions to corporate boards: The effect of gender. Journal of Corporate Finance, 11, 85–106.
Francoeur, C., Labelle, R., & Sinclair-Desgagné, B. (2008). Gender diversity in corporate governance and top management. Journal of Business Ethics, 81, 83–95.
Gilbert, J. A., & Stead, B. A. (1999). Stigmatization revisited: Does diversity management make a difference in applicant success? Group and Organization Management, 24, 239–256.
Goodstein, J., Gautum, M. E., & Boeker, W. (1994). The effect of board size and diversity on strategic change. Strategic Management Journal, 15, 241–250.
Guest, P. M. (2009). The impact of board size on firm performance: evidence from the UK. European Journal of Finance, 15, 385–404.
Gujarati, D. N. (2003). Basic econometrics. New York, USA: McGraw-Hill.
Hausman, J. A. (1978). Specification tests in econometrics. Econometrica, 46, 1251–1271.
Hillman, A. J., Shropshire, C., & Cannella, A. A. (2007). Organizational predictors of women of corporate boards. Academy of Management Journal, 50, 941–952.
Ho, C.-A., & Williams, S. M. (2003). International comparative analysis of the association between board structure and the efficiency of value added by a firm from its physical capital and intellectual capital resources. International Journal of Accounting, 38, 465–491.
Gold, Harmony. (2006). Annual report. Johannesburg: Harmony Gold Group Ltd.
Jensen, M. C. (1993). The modern industrial revolution, exit, and the failure of internal control systems. Journal of Finance, 48, 831–880.
Johnston, D., & Malina, M. A. (2008). Managing sexual orientation diversity: The impact on firm value. Group and Organisation Management, 33, 602–625.
Kang, H., Cheng, M., & Gray, S. J. (2007). Corporate governance and board composition: Diversity and independence of Australian boards. Corporate Governance: An International Review, 15, 194–207.
Kesner, I. F. (1988). Directors’ characteristics and committee membership: An investigation of type, occupation, tenure, and gender. Academy of Management Journal, 31, 66–84.
King Committee. (1994). King reports on corporate governance for South Africa. Johannesburg, South Africa: Institute of Directors.
King Committee. (2002). King reports on corporate governance for South Africa. Johannesburg, South Africa: Institute of Directors.
Krishman, H. A., & Park, D. (2005). A few good women: On top management teams. Journal of Business Research, 58, 1712–1720.
Kyereboah-Coleman, A., & Biekpe, N. (2006). The relationship between board size, board composition, CEO duality and firm performance: Experience from Ghana. Corporate Ownership and Control, 4, 114–122.
Kyereboah-Coleman, A., Adjasi, C., & Abor, J. (2006). Corporate governance and performance of Ghanaian listed firms. Corporate Ownership and Control, 4, 123–132.
Lincoln, A., & Adedoyin, O. (2012). Corporate governance and gender diversity in Nigerian boardrooms. World Academy of Science, Engineering and Technology, 71, 1853–1859.
Lipton, M., & Lorsch, J. (1992). A modest proposal for improved corporate governance. Business Lawyer, 48, 59–77.
Luckerath-Rovers, M. (2013). Women on boards and firm performance. Journal of Management and Governance, 17, 491–508.
Mahadeo, J. D., Soobaroyen, T., & Oogarah-Hanuman, V. (2012). Board composition and financial performance: Uncovering the effects of board diversity in an emerging market. Journal of Business Ethics, 105, 375–388.
Mangena, M., & Chamisa, E. (2008). Corporate governance and incidences of listings suspension by the JSE Securities Exchange of South Africa: an empirical analysis. International Journal of Accounting, 43, 28–44.
Ntim, C. G. (2011). The King Reports, independent non-executive directors and firm valuation on the Johannesburg Stock Exchange. Corporate Ownership and Control, 9, 428–440.
Ntim, C. G. (2012). Director shareownership and corporate performance in South Africa. African Journal of Accounting, Auditing and Finance, 1, 359–373.
Ntim, C.G. (2013). Corporate ownership and market valuation in South Africa: Uncovering the effects of shareholdings by different groups of corporate insiders and outsiders. International Journal of Business Governance and Ethics. (Forthcoming).
Ntim, C. G., & Osei, K. A. (2011). The impact of corporate board meetings on corporate performance in South Africa. African Review of Economics and Finance, 2, 83–103.
Ntim, C. G., & Soobaroyen, T. (2013a). Black economic empowerment disclosures by South African listed corporations: The influence of ownership and board characteristics. Journal of Business Ethics, 116, 121–138.
Ntim, C. G., & Soobaroyen, T. (2013b). Corporate governance and performance in socially responsible corporations: New empirical insights from a neo-institutional framework. Corporate Governance: An International Review, 21, 468–494.
Ntim, C. G., Opong, K. K., & Danbolt, J. (2012). The value relevance of shareholder versus stakeholder corporate governance disclosure policy reforms in South Africa. Corporate Governance: An International Review, 20, 84–105.
Petersen, M. A. (2009). Estimating standard errors in finance panel data sets: Comparing approaches. Review of Financial Studies, 22, 435–480.
Pfeffer, J. (1973). Size, composition, and function of hospital boards of directors: A study of organization-environmental linkage. Administrative Science Quarterly, 18, 349–364.
Roberson, Q. M., & Park, H. J. (2007). Examining the link between diversity and firm performance: The effects of diversity reputation and leader racial diversity. Group and Organization Management, 32, 548–568.
Rose, C. (2007). Does female board representation influence firm performance? The Danish evidence. Corporate Governance: An International Review, 15, 404–413.
Rossouw, G. J., Watt, A. V., & Malan, D. P. (2002). Corporate governance in South Africa. Journal of Business Ethics, 37, 289–302.
Ryan, M. K., & Haslam, S. A. (2007). The glass cliff: Exploring the dynamics surrounding women’s appointment to precarious leadership positions. Academy of Management Review, 32, 549–572.
Sanda, A., Mikailu, A. S., & Garba, T. (2010). Corporate governance mechanisms and firm financial performance in Nigeria. Afro-Asian Journal of Finance and Accounting, 2, 22–39.
Shrader, C., Blackburn, V., & Iles, P. (1997). Women in management and firm financial performance: An exploratory study. Journal of Managerial Issues, 9, 355–372.
Singh, V., & Vinnicombe, S. (2004). Why so few women directors in top UK boardrooms? Evidence and theoretical explanations. Corporate Governance: An International Review, 12, 479–488.
Singh, V. (2007). Ethnic diversity on top corporate board: A resource dependency perspective. International Journal of Human Resource Management, 18, 2128–2146.
Sonnenfeld, J. A. (2002). What makes great boards. Harvard Business Review, 80, 106–113.
Sunday, K. O. (2008). Corporate governance and firm performance: The case of Nigerian listed firms. European Journal of Economics, Finance and Administrative Sciences, 14, 16–28.
Swartz, N.-P., & Firer, S. (2005). Board structure and intellectual capital performance in South Africa. Meditari Accountancy Research, 13, 145–166.
Triana, M. C., Miller, T. L., & Trezebiatowski, T. M. (2013). The double-edged nature of board gender diversity: Diversity, firm performance, and the power of women directors as predictors of strategic change. Organization Science. (Forthcoming).
Truworths International. (2006). Annual report. Johannesburg: Truworths International Group Ltd.
Ujunwa, A. (2012). Board characteristics and the financial performance of Nigerian quoted firms. Corporate Governance, 12, 656–674.
Ujunwa, A., Okoyenzu, C., & Nwakoby, I. (2012). Corporate board diversity and firm performance: Evidence from Nigeria. Review of International Comparative Management, 13, 605–620.
Van Der Walt, N., & Ingley, C. (2003). Board dynamics and the influence of professional background, gender and ethnic diversity of directors. Corporate Governance: An International Review, 11, 218–234.
Watson, W. E., Kumar, K., & Michaelsen, L. K. (1993). Cultural diversity’s impact on interaction process and performance: Comparing homogeneous and diverse task groups. Academy of Management Journal, 36, 590–602.
Welbourne, T. M., Cycyota, C. S., & Ferrante, C. J. (2007). Wall Street reaction to women in IPOs: An examination of gender diversity in top management teams. Group and Organization Management, 32, 524–547.
Wellage, N. H., & Locke, S. (2013). Corporate governance, board diversity and firm financial performance: New evidence from Sri Lanka. International Journal of Business Governance and Ethics, 8, 116–136.
West, A. (2009). The ethics of corporate governance: A South African perspective. International Journal of Law and Management, 51, 10–16.
Westphal, J. D., & Bednar, M. K. (2005). Pluralistic ignorance in corporate boards and firms’ strategic persistence in response to low firm performance. Administrative Science Quarterly, 50, 262–298.
Wiersema, M. F., & Bantel, K. (1992). Top management demography and corporate strategic change. Academy of Management Journal, 35, 91–121.
Wooldridge, J. M. (2010). Econometric analysis of cross section and panel data. Cambridge, MA: MIT Press.
Yang, Y., & Konrad, A. M. (2011). Understanding diversity management practices: Implications of institutional theory and resource-based theory. Group and Organization Management, 36, 6–38.
Yermack, D. (1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 40, 185–211.
Zahra, S. A., & Stanton, W. W. (1988). The implication of board of directors’ composition for corporate strategy and value. International Journal of Management, 5, 229–236.
Acknowledgement
The author gratefully acknowledges the insightful and timely suggestions by the Editor-in-Chief, Professor Roberto Di Pietra, and two anonymous reviewers. However, I am solely responsible for any remaining omissions and commissions.
Author information
Authors and Affiliations
Corresponding author
Appendix
Appendix
See Table 5.
Rights and permissions
About this article
Cite this article
Ntim, C.G. Board diversity and organizational valuation: unravelling the effects of ethnicity and gender. J Manag Gov 19, 167–195 (2015). https://doi.org/10.1007/s10997-013-9283-4
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10997-013-9283-4