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Board diversity and financial Board

diversity
performance: empirical evidence
from the United Kingdom
Khaled Hosny and Adel Elgharbawy 561
Department of Accounting and Information Systems, Qatar University, Doha, Qatar
Received 20 February 2020
Revised 14 January 2021
15 September 2021
4 November 2021
Abstract 10 November 2021
Purpose – This study aims to investigate the relationship between board diversity and financial Accepted 16 November 2021
performance from a wide perspective, including multiple dimensions of board diversity.
Design/methodology/approach – The cross-sectional design of the FTSE 350 companies in the period
of 2013–2019 was adopted in this study. Data were collected using the Thomson Reuters Eikon and BoardEx
databases and analyzed via ordinary least Squares (OLS) regression.
Findings – Both gender and skill diversity positively affect financial performance. However, other
dimensions of diversity, including board tenure, education and network, have no significant influence
on financial performance. On the other hand, nationality diversity negatively affects financial
performance, and the gender diversity of executive directors negatively affects market-based
performance. The results remain unchanged after considering endogeneity concerns and using
alternative measures of financial performance.
Practical implications – This study provides useful insights into the importance of board diversity and
its implications for firm performance, which can help in the development of future regulations and policies,
such as female representation on the board. The findings can also guide companies toward the best way of
diversifying their boardrooms in different aspects.
Originality/value – This study extensively investigates board diversity, including gender, tenure,
skill and education, network and nationality, using the lens of the resource dependency theory. It also
extends the scope of the study to examine some characteristics of executive directors, including gender
and age. The evidence is provided from one of the leading countries in regulating corporate governance
(CG), i.e. the UK.

Keywords Financial performance, Board diversity, Gender, Tenure, Skill and education, Network,
Nationality, UK, Gender diversity, Network and nationality diversity, Skill educational diversity,
Tenure diversity
Paper type Research paper

1. Introduction
Board diversity is one of the hot topics and controversial issues in literature, business
and policymaking. It has gained considerable amount of attention since the latest
global financial crisis, and this amount of attention is still increasing, especially after
the negative impacts of COVID-19 on business and the global economy. During difficult
economic times, companies cherish every possible opportunity to improve their
financial performance. Extending board diversity beyond gender is key in facing these
challenges.
There is a growing concern in the literature on the level of diversity in boards of directors. Accounting Research Journal
The uneven distribution of the necessary talents, abilities and competencies between Vol. 35 No. 4, 2022
pp. 561-580
companies constrains their resources and limits their decisions to those made by particular © Emerald Publishing Limited
1030-9616
gender, races or backgrounds (Westphal and Milton, 2000). Boardroom performance largely DOI 10.1108/ARJ-02-2020-0037
ARJ depends on the experience, competencies, skills and ideas of board members. The wider the
35,4 pool of talents from which board members are selected, the more capable the board to make
decisions, which potentially improves firm performance (Nicholson and Kiel, 2004). However,
there is no widespread consensus in the literature on whether board diversity positively or
negatively affects firm performance (Nguyen et al., 2020).
This study contributes to the literature by analyzing the relationship between multiple
562 dimensions of board diversity (gender, tenure, skill and education, network and nationality)
and the financial performance of The Financial Times Stock Exchange 350 (FTSE 350)
companies. To the best of our knowledge, no previous studies have investigated all these
dimensions of board diversity together, especially with regard to their relationships with
financial performance. Furthermore, the study examines the impact of some characteristics
of executive directors, such as gender and age, on financial performance, which is a new
stream of literature. The findings of this study suggest that both gender and skill diversity
are positively associated with financial performance. However, board tenure, educational
and network diversity have no significant effect on financial performance. Moreover,
nationality diversity is negatively associated with financial performance. At the level of
executive directors, gender diversity is negatively associated with market-based
performance, whereas chief executive officer (CEO) age is negatively associated with
financial performance.
Gender diversity, in particular, is a highly relevant topic because of the pressure groups
that have been asking for equality between the rights of men and women since 1999 (Carter
et al., 2003). Studying the impact of gender diversity on performance is likely to be of interest
to a wide range of stakeholders. In addition, using the resource dependency theory
perspective could broaden our understanding of multiple aspects of board diversity. This
study provides useful insights for decision-makers into the selection of the best candidates
for board of directors.
The remainder of this paper comprises the following sections: Literature Review and
Hypotheses Development, Research Methodology, Data Analysis and Results and
Conclusion.

2. Literature review and hypotheses development

“Board diversity aims to cultivate a broad spectrum of demographic attributes and
characteristics in the boardroom” (ACCA, 2018, p. 2). In the past, diversity in the workforce
has primarily focused on gender. Over the years, diversity has expanded to include other
aspects bound to exist within the workforce, which is in the center of interest of
stakeholders.
We adopted the resource dependency theory, which assumes that firms operate within an
open system, where they need each other to exchange and/or obtain other resources to
continue. This establishes a dependency between firms and third parties (Pfeffer and
Salancik, 1978), whereby both parties are better off at the end. There are four main
advantages of having external linkages: providing information in the form of advice and
counsel, securing preferential access to resources, forming channels of communication with
significant parties and establishing legitimacy for the firm in the outside environment
(Pfeffer and Salancik, 1978). Thus, board diversity opens up different ways and channels of
communication, networks and links among corporations (Hillman et al., 2000). Thus,
networks to external resources help increase critical resourcing, which consequently
enhances firm performance (Reguera-Alvarado et al., 2015).
However, there is no consensus in the literature with regard to the scope of board diversity
and the impact of diversity on performance. The relationship is inconclusive due to inconsistent
findings, such as positive, negative, nonlinear or no relationship (Nguyen et al., 2020). In an Board
attempt to fill this gap, we address this issue by examining multiple dimensions of board diversity
diversity.

2.1 Gender diversity

Bringing female directors into the boardroom can diversify firms’ networks providing new
channels of communication with other corporations (Hillman et al., 2004), which facilitates
access to finance and other resources (Reguera-Alvarado et al., 2015). Previous studies
563
suggest a positive association between board gender diversity and firm performance.
Terjesen et al. (2016) examined this relationship in 3,876 firms in 47 countries and found a
positive association between gender diversity and the board’s effectiveness, which indirectly
enhances firm performance. In the UK, Mintah and Schadewitz (2019) examined the same
relationship in 63 financial institutions and concluded that the presence of females on the
board of directors has a positive association with firm value prior to the financial crisis
period. Further, Brahma et al. (2021) found a positive association between gender diversity
and firm performance in the FTSE 100 companies, especially when three or more females
are appointed.
On the contrary, Rose (2007) did not find any significant relationship between female
representation on the board and firm performance in Denmark in the period of 1998–2001. In
the US Fortune 500, Dobbin and Jung (2011) found that increasing board gender diversity
has no effect on subsequent profitability but significantly decreases stock value. In the UK,
Shehata et al. (2017) found a negative association between gender diversity and firm
performance in the SMEs in the period of 2005–2013.
In summary, previous studies provide divergent results for a number of reasons,
including inconsistent use of proxies to measure gender diversity and performance,
variation in the context and time interval and use of different combinations of independent
and control variables (Nguyen et al., 2020). However, the literature tends to support the
positive association between gender diversity and performance:

H1a. Board gender diversity is positively associated with firm performance.

The rationale for having gender diversity between executive directors is similar to the rationale
for having gender diversity in the boardroom. Although they have different roles and
responsibilities, female executive directors are expected to positively affect financial performance.
Liu et al. (2014) examined the effect of gender diversity of executive directors on firm performance
in China in the period of 1999–2011. They found that female executive directors have a stronger
positive effect on firm performance compared with female independent directors. Furthermore,
Amore and Garofalo (2016) provided empirical evidence from the US banks that female executive
directors increase bank financial performance when competition is low. In a recent report of S&P
Global, they found that stock prices for companies that appointed female CEOs outperformed
those that appointed men by 20% in the USA during the period of 2002–2019 (Sandberg, 2019):

H1b. The gender diversity of executive directors is positively associated with firm
performance.

2.2 Tenure diversity

Long board tenure enables board members to understand their business and company’s
specific operations, which increases their ability to assist executives and bring valued resources
to the firm (Daily et al., 2003). However, increased familiarity between the board and
ARJ management may compromise board independence (Huang and Hilary, 2018) and decrease the
35,4 motivation of board members to provide information and resources to management. On the
other hand, short board tenure entails less governance issues but also less understanding of the
firm’s business and consequently less ability to bring valued resources to the firm.
Studies examining the link between board tenure and firm performance are scarce. Some
of them focus on the average board tenure, such as that of Huang and Hilary (2018) who
564 found that the optimum length of board tenure, with respect to firm value, is between 8 and
11 years. Other studies focus on variation in the length of directors’ tenure on the ground
that boards with diverse tenure lengths can benefit from having both senior and junior
directors that lead to knowledge continuity, independence and decrease in the probability of
having group cohesiveness and groupthink (Li and Wahid, 2018). However, the empirical
evidence of the potential benefits of tenure diversity is inconsistent. Some studies found
limited benefits of tenure diversity (Carter et al., 2003), whereas others failed to find such
benefits (Gray and Nowland, 2017), especially in terms of effect on performance (Li and
Wahid, 2018). However, we assume that tenure diversity provides the right mix between the
knowledge and experience of senior members, as well as the ambition and the new ideas of
new members:

H2. Board tenure diversity has a positive association with firm performance.

2.3 Skill and educational diversity

It is important to ensure that board members are equipped with appropriate mix of skills
and to balance their financial/nonfinancial skills. Adams et al. (2018) distinguished between
20 categories of board skills, including finance, business, legal, governance and technology.
The lack of financial skills on boards may threaten the continuity of a business. Therefore,
the UK CG code requires at least one board member to have financial expertise. Lee et al.
(1999) found that appointment of outside directors with financial experience is associated
with positive abnormal returns, especially in small companies that need access to finance.
Similarly, Dionne and Thouraya (2005) reported that the financial knowledge and skills of
outside directors enhance firm value through the risk management control. They also found
that nonfinancial background of board members extend the company’s viewpoint and
prospects into broader context of the industry and business perspectives.
Skill diversity can add value to boards in terms of dealing professionally with external
parties. Board members usually bring unique human capital to their companies, as they
have different levels of education and experience, which may enhance decision-making
(Kesner, 1988). In summary, skills, experience and knowledge represent the human capital of
board members that facilitates the provision of advice, counsel and resources. Skill diversity
also determines board effectiveness at monitoring CEO, evaluating strategy implementation
and rewarding top management (Hillman and Dalziel, 2003):

H3a. Skill diversity in the board has a positive association with firm performance.
Bantel and Jackson (1989) argued that higher education improves individuals’ cognitive ability
and provides greater competency for high-quality decision-making. Furthermore, Bantel (1993)
found that more educationally diversified boards in the banking sector make better decisions in
the long term. Having an educationally diverse board helps in making faster and more thorough
assessments before making decisions. Similarly, Simons and Pelled (1999) found that the level of
educational and cognitive diversity in the board members positively affects firm performance due
to the improvement of decision-making. Mahadeo et al. (2012) also found a positive association Board
between educational diversity and firm performance: diversity
H3b. The educational diversity of board members has a positive association with firm
performance.

2.4 Network diversity 565

Board external network is the degree to which board members have outside contacts within
an institutional environment that link the firm to the external environment (Kim, 2005).
According to the resource dependency theory, one of the roles of the board of directors is to
span boundaries linking their firms to external environment as valuable boundary spanners
for scarce resources that are critical for the success of their firms (Pfeffer and Salancik, 1978).
Empirical evidence on the advantages of external networks to firms is limited. Kim
(2005) examined the effect of directors’ external networks on firm performance using a
sample of 199 Korean companies during the period of 1990–1999, suggesting a positive
association between external networks and firm performance. Shaw et al. (2016) investigated
the relationship between directors’ networks (based on interlocks) and financial performance
in the large Indian firms during the period of 2006–2012. They found that the networks of
independent directors are important channels of contact, expertise and legitimacy that
ultimately increase financial performance:

H4. The diversity of external network has a positive association with firm performance.

2.5 Nationality diversity

The nationality diversity of board members can enhance the competitive advantage of a
firm in terms of international networks and commitment to shareholder rights (Oxelheim
and Randøy, 2003). The presence of foreign directors with international expertise and
network adds value to the relational capital of the board and enhances resource provision
(Hillman and Dalziel, 2003).
Empirical studies that examine the relationship between board nationality diversity and
firm performance are rare, and their results are inconsistent. Estélyi and Nisar (2016) found
that boards with diverse nationalities are positively associated with firm performance in the
UK. Similarly, Oxelheim and Randøy (2003) found that the presence of Anglo-American
nationals in the boardrooms of Norwegian and Swedish firms positively affects firm
performance. However, Rose (2007) found no significant effect for the proportion of foreign
nationals on Tobin’s Q in Denmark. Furthermore, Diepen (2015) found a negative, nonlinear
relationship between nationality diversity and financial performance in Dutch companies.
We expect nationality diversity to enhance board ability to link companies to their external
environment, which facilitates the obtainment of critical resources and thereby improves
financial performance:

H5. The nationality diversity of board members has a positive association with firm
performance.

3. Research methodology
A cross-sectional design was adopted for a sample of 235 companies of the FTSE 350 during
the period of 2013–2019, excluding financial institutions, totaling 1,645 firm-year
ARJ observations. Financial institutions were excluded from the sample due to the special nature
35,4 of their operations, capital structure and regulations, which make them incomparable with
other nonfinancial companies. Table 1 distributes the sample over ten sectors.

3.1 Research context

The UK was selected as a context for this study because it is a leading country in the use of
566 the comply or explain approach and in the development of CG codes and best practices. In
addition, the London Stock Exchange is one of the most attractive and efficient stock
markets. Therefore, investors, creditors and other stakeholders would be interested to
understand how board diversity affects firm performance.
Further, there is also a growing call to increase board diversity and female representation
on boards. In 2016, the UK Government appointed Sir Hampton and Alexander to lead an
independent review to ensure the representation of talented women in leadership positions.
They requested all boards of the FTSE 350 companies to include at least 33% of female
members by 2020 (Hampton and Alexander, 2016). However, this context is under-
researched compared with North America and other countries in Europe, where most of
previous studies were conducted. In addition, previous studies in the UK (Martin et al., 2008;
Shehata et al., 2017; Brahma et al., 2021) did not draw enough conclusions.

3.2 Data collection and analysis

Data were collected from the Thomson Reuters and BoardEx databases and were analyzed
using the Stata software version 16 including descriptive statistics and OLS regression
analysis for the following model:
X
n
F P it ¼ a0 þ a1 BD it þ ai Controls it þ eit
i¼1

Return on assets (ROA) and Tobin’s Q are used as alternative measures of financial
performance (FP) (Brahma et al., 2021) to test the robustness of the results. ROA reflects past
or short-term FP, whereas Tobin’s Q reflects future or long-term FP. Board diversity
dimensions are measured as follows: gender diversity is measured using Blau’s index for
both board members (BGDI) and executive directors (EGDI) (Blau, 1977). Following Li and
Wahid (2018), tenure diversity is measured using the Herfindahl–Hirschman Index (THHI).
Skill diversity is measured using Blau’s index for the financial/nonfinancial skills of board

No. Category No. of companies

1 Materials 25
2 Health care 12
3 Consumer discretionary 32
4 Utilities 12
5 Energy 15
6 Consumer staples 26
7 Industrials 50
8 Communication services 17
Table 1. 9 Real estate 26
Sample classification 10 Information technology 20
by industry sector Total 235
members (BSDI), after classifying board members into members with financial or Board
nonfinancial expertise, according to the broad definition of accounting and finance expertise diversity
(Adams et al., 2018). Educational diversity is measured by the coefficient of variation (CV) of
number of qualifications (QLCV). Network diversity is measured using the CV of network
size (NETCV), which represents the total number of overlaps through employment, other
activities and education for a board member (BoardEx database). Finally, nationality
diversity is measured using Blau’s index of foreign and local board members (NTOI).
We included a number of control variables to control for potential omitted variable bias.
567
Controls at the board level include board size (BSIZ), board meetings (BMET), independent
nonexecutive directors (INED), CEO duality (DUL), CG committee (CGC), nomination
committee (NC) independence (NCI) and CEO age (AGCE). A large board size provides a wide
variety of expertise, knowledge in different fields and resources through the connections and
networks of board members. Frequent board meetings help board members discuss relevant
issues as well as engage more in and enrich the decision-making process. INED contribute to
board effectiveness, whereas CEO duality strengthens the CEO’s power at the expense of board
members giving rise to a weak board. The UK CG code requires companies to separate the two
positions and to have at least 50% INED in their boards. Two important subcommittees, i.e.
CGC and NC, in the board contribute to the selection of a diverse board and ensure board
effectiveness. Although CGC is one of the best practices that assist the board of directors in
fulfilling their oversight responsibilities, it is not required by the UK CG code and we measured
its presence using a dummy variable. However, NC with majority of independent directors is
required by the same code and we measure NCI by the percentage of INED in the NC. Finally,
CEO age has been found to negatively affect firm performance (Adams et al., 2018), especially
when there is no mandatory retirement policies to limit CEO entrenchment and mitigate the
underperformance of older CEOs (Cline and Yore, 2016).
Controls at the corporate level include company size (LGA), leverage (DTA), sales growth
(SLG), R&D (RDS) and capital expenditures (CAPEX). Large companies benefit from economies of
scale, market power and better access to resources. Conversely, small companies are more flexible
and have higher opportunities for growth compared with large companies (Guest, 2009). High
leverage can improve market performance by limiting management ability to extract “free cash
flows” (Ntim, 2015). However, leverage increases the risk of bankruptcy and interest expense that
negatively affect profit. High levels of investment in R&D help companies gain knowledge and
technological advantages over competitors, which may increase performance. However, the
capital-intensive nature of R&D activity may negatively affect performance (Ntim, 2012, 2015).
Similarly, the effect of CAPEX on performance depends on the quality of capital expenditure
decisions (Ntim, 2015). Given the conflicting theoretical expectations and contradictory findings of
empirical research, we cannot predict whether LGA, DTA, RDS and CAPEX positively or
negatively affect performance (Ntim, 2015). Finally, SLG would positively affect firm performance,
as companies with greater investment opportunities normally grow faster with better performance
(Ntim, 2012, 2015). Table 2 presents in detail the measurement of all variables as follows:

4. Empirical results
The data analysis and results include descriptive statistics and correlation analysis, as well
as OLS regression analysis, robustness and endogeneity checks.

4.1 Descriptive statistics

Descriptive statistics, as presented in Table 3, indicate the mean, median, minimum and
maximum values as well as the standard deviation of each variable.
ARJ Variable Measures Definition
35,4
Financial Tobin’s Q The sum of total liabilities and market value of equity, divided by total
performance assets
ROA (Profit before tax and interest/total assets)*100
Board diversity Pk
Board gender BGDI Blau Gender Index ¼ 1  2
i¼1 Pi where Pi is the percentage of
568 female board members and K is the number of distinguished
categories (males/females) P
k
Executive gender EGDI Blau Gender Index ¼ 1  2
i¼1 Pi where Pi is the percentage of
(male/female) ED and K is the number of distinguished categories
(males/females)
Board tenure THHI Tenure length of each director was sorted first into one of 10
categories based on deciles. the following equation is used for
Herfindahl Hirschman index:
HHI Tenure
P10Index
¼1 i¼1 ðTotal Dorectors
Pk in a category x =total directorsÞ2
Skill and education BSDI Blau Skill Index ¼ 1  i¼1 Pi 2
where Pi is the percentage of board
members with financial/non-financial skills and K is the number of
distinguished categories (financial/non-financial skills)
QLCV Coefficient of variation CV it ¼ s it = m it where mean m it and
standard deviation s it are based on the average number of
qualifications
Networks NETCV Coefficient of variation CV it ¼ s it = m it where mean m it and
standard deviation s it are basedPon the average network size
k
Nationality NTOI Blau Nationality Index ¼ 1  2
i¼1 Pi where Pi is the percentage of
foreigner board members and K is the number of distinguished
categories (foreigners/locals)
Controls (board)
Board size BSIZ Number of board members
Board meetings BMET Number of annual board meetings
Duality DUL Dummy variable, taking 1 when CEO is a chairman and 0 otherwise
Independent non- INED Percentage of independent NED to total number of board members
executive directors
Corp. governance CGC Dummy variable, taking 1 when a committee is present and 0
committee otherwise
Nomination NCI Percentage of independent NED to the total number of nomination
committee committee’s members
independence
Age of chief officer AGCE Age of the chief officer (CEO)
Controls (corporate)
Company size LGA Log total assets
Leverage DTA (Total debts/total assets)*100
Table 2. R&D expenditures RDS (Total R&D/Sales)*100
Measurement of Sales growth SLG ((Sales t – sales t-1)/sales t)*100
variables Capital expenditures CAPEX (Capital expenditures/sales)*100

Blau’s index of gender diversity, ranging from 0 to 0.5 for two categories, indicates that the
board members are more diverse in gender (BGDI 0.31) than executive directors (EGDI 0.21).
Boards on average are quite diverse in tenure (THH1 0.73) compared with the US companies
(THH1 0.67) (Li and Wahid, 2018). They are also diverse in terms of balancing financial and
nonfinancial skills (BSDI 0.47). Moreover, the majority of board members hold one or more
undergraduate/postgraduate degrees with not much variation in the number of qualifications
Variable N Mean Median SD Min Max
Board
diversity
Panel A: financial performance
Tobin’s Q 1645 2.081 1.546 1.701 0.216 18.606
ROA 1645 6.69% 6.09% 9.349% 58.3% 58.0%
Panel B: board diversity
BGDI 1645 0.311 0.350 0.140 0.00 0.50
EGDI 1645 0.212 0.240 0.174 0.00 0.50
569
THH1 1645 0.734 0.780 0.173 0.0 0.92
BSDI 1645 0.43 0.47 0.110 0.00 0.50
QLCV 1645 0.537 0.504 1.980 0.0 1.48
NETCV 1645 0.986 0.947 0.326 0.255 2.222
NTOI 1645 0.291 0.370 0.204 0.00 0.50
Panel C: controls (board)
BSZE 1645 9.19 9.0 2.436 1 22
BME 1645 8.19 8.0 2.369 1 20
INED 1645 72.04% 72.72% 12.09% 28.57% 100%
DUL 1645 0.08 0.0 0.273 0.0 1.00
CGC 1645 0.16 0.0 0.366 0.0 1.00
NCI 1645 92.62% 100% 10.88% 33.33% 100%
AGCO 1645 64.30 64.0 6.017 49.00 88.00
Panel D: controls (corporate)
LGA 1645 9.358 9.272 0.738 6.94 11.61
DTA 1645 23.10% 22.09% 20.21% 0% 223%
RDS 1645 2.76% 0.0% 29.02% 0% 930% Table 3.
CAPX 1645 8.43% 4.0% 30.9% 0% 1021% Descriptive statistics
SGR 1645 11.93% 4.0% 105.43% 1729% 1766% of the variables

(CV 0.53). Board members are well connected and diverse in terms of network size (CV 0.98).
Foreign directors are also well represented in boards (NTOI 0.29).
Furthermore, the board consists of nine directors and meet eight times (every 45 days) on
average, which is higher than what Guest (2009) observed in the UK (seven members). The
average debt ratio is 23%, which is close to what Brahma et al. (2021) found in the FTSE100
(22%). The average percentage of INEDs is 72%, which is well above the required level by the
UK CG code. The CG committee is not very common in boards (0.16), because it is optional.
However, the majority of NC members are independent (92.6%), as required by the CG code.
Finally, the average age of executive directors is high (64 years), ranging from 49 to 88 years.
Moreover, Pearson’s correlation analysis was conducted to examine whether correlation
is high among the independent variables, which may cause multicollinearity. Table 4
demonstrates that all of the correlation coefficients fall into the category of very weak (less
than 0.4) or weak (less than 0.60) level and VIF is less than 5 for all variables. Therefore,
multicollinearity is unlikely in this study.

4.2 Multivariate analysis

The dependent variables (Tobin’s Q, ROA) are regressed on a set of predictor variables (BD)
in two stages while controlling for board and corporate characteristics, as well as industry
and year effects. The regression results, as presented in Table 5, indicate that the F value is
significant at 1% in all models, suggesting that all models are statistically fit to predict
Tobin’s Q with R2 ranging from 0.49 to 0.52 (Panel A) and ROA with R2 ranging from 0.22 to
0.30 (Panel B).
 35,4
ARJ

570

analysis
Table 4.
Pearson’s correlation
Variables TTBNQ TROA FBGDI EEGDI TTHHI BBSDI NQLCV NNETCV CNTOI FAGCV

RTBNQ 1 0.503** 0.013 0.063* 0.112** 0.030 0.012 0.164** 0.048 0.001
TROA 0.503** 1 0.012 0.021 0.035 0.010 0.017 0.136** 0.129** 0.010
FBGDI 0.013 0.012 1 0.221** 0.075* 0.135** 0.107** 0.107** 0.114** 0.018
EEGDI 0.063* 0.021 0.221** 1 0.078* 0.110** 0.036 0.119** 0.073* 0.002
BTHHI 0.112** 0.035 0.075* 0.078* 1 0.045 0.024 0.098** 0.080** 0.055
BBSDI 0.030 0.010 0.135** 0.110** 0.045 1 0.008 0.009 0.078* 0.008
NQLCV 0.012 0.017 0.107** 0.036 0.024 0.008 1 0.003 0.008 0.117**
N NETCV 0.164** 0.136** 0.107** 0.119** 0.098** 0.009 0.003 1 0.158** 0.025
CNTOI 0.048 0.129** 0.114** 0.073* 0.080** 0.078* 0.008 0.158** 1 0.004
FAGCV 0.001 0.010 0.018 0.002 0.055 0.008 0.117** 0.025 0.004 1
LAGEO 0.101** 0.055 0.062 0.085* 0.118** 0.078* 0.002 0.163** 0.187** 0.003
BBSIZ 0.133** 0.132** 0.143** 0.109** 0.266** 0.177** 0.153** 0.243** 0.271** 0.111**
YBMET 0.078** 0.004 0.011 0.037 0.073* 0.041 0.040 0.106** 0.021 0.022
YDUL 0.065* 0.123** 0.182** 0.017 0.035 0.111** 0.020 0.039 0.070* 0.004
DINED 0.207** 0.134** 0.157** 0.003 0.006 0.119** 0.084** 0.208** 0.278** 0.036
CCGC 0.148** 0.138** 0.070* 0.107** 0.102** 0.095** 0.053 0.180** 0.174** 0.014
GNCI 0.042 0.065* 0.200** 0.125** 0.038 0.089** 0.003 0.130** 0.115** 0.016
GLGA 0.422** 0.231** 0.200** 0.066* 0.270** 0.114** 0.046 0.385** 0.220** 0.039
GDTA 0.161** 0.302** 0.052 0.141** 0.006 0.143** 0.016 0.117** 0.108** 0.022
GSLG 0.010 0.019 0.040 0.047 0.064* 0.056 0.007 0.011 0.042 0.009
GCAPX 0.082** 0.094** 0.033 0.015 0.014 0.090** 0.019 0.057* 0.045 0.005
RRDS 0.012 0.119** 0.009 0.017 0.040 0.011 0.018 0.056* 0.003 0.013

Notes: ** Correlation is significant at the 0.01 level (two-tailed). * Correlation is significant at the 0.05 level (two-tailed)
(continued)
Variables AAGEO BBSIZ YBMET NDUL DINED CCGC NNCI lLGA DDTA SSLG CCAPX RRDS

RTBNQ 0.101** 0.133** 0.078** 0.065* 0.207** 0.148** 0.042 0.422** 0.161** 0.010 0.082** 0.012
TROA 0.055 0.132** 0.004 0.123** 0.134** 0.138** 0.065* 0.231** 0.302** 0.019 0.094** 0.119**
FBGDI 0.062 0.143** 0.011 0.182** 0.157** 0.070* 0.200** 0.200** 0.052 0.040 0.033 0.009
EEGDI 0.085* 0.109** 0.037 0.017 0.003 0.107** 0.125** 0.066* 0.141** 0.047 0.015 0.017
BTHHI 0.118** 0.266** 0.073* 0.035 0.006 0.102** 0.038 0.270** 0.006 0.064* 0.014 0.040
BBSDI 0.078* 0.177** 0.041 0.111** 0.119** 0.095** 0.089** 0.114** 0.143** 0.056 0.090** 0.011
NQLCV 0.002 0.153** 0.040 0.020 0.084** 0.053 0.003 0.046 0.016 0.007 0.019 0.018
N NETCV 0.163** 0.243** 0.106** 0.039 0.208** 0.180** 0.130** 0.385** 0.117** 0.011 0.057* 0.056*
CNTOI 0.187** 0.271** 0.021 0.070* 0.278** 0.174** 0.115** 0.220** 0.108** 0.042 0.045 0.003
FAGCV 0.003 0.111** 0.022 0.004 0.036 0.014 0.016 0.039 0.022 0.009 0.005 0.013
LAGEO 1 0.097** 0.036 0.116** 0.015 0.020 0.006 0.139** 0.049 0.044 0.059 0.038
BBSIZ 0.097** 1 0.026 0.128** 0.135** 0.305** 0.106** 0.569** 0.214** 0.035 0.040 0.003
YBMET 0.036 0.026 1 0.058 0.102** 0.017 0.069* 0.020 0.035 0.048 0.042 0.017
YDUL 0.116** 0.128** 0.058 1 0.197** 0.078** 0.220** 0.164** 0.125** 0.021 0.012 0.008
DINED 0.015 0.135** 0.102** 0.197** 1 0.195** 0.407** 0.294** 0.066* 0.008 0.046 0.019
CCGC 0.020 0.305** 0.017 0.078** 0.195** 1 0.021 0.337** 0.060* 0.020 0.109** 0.007
GNCI 0.006 0.106** 0.069* 0.220** 0.407** 0.021 1 0.164** 0.086** 0.024 0.038 0.022
GLGA 0.139** 0.569** 0.020 0.164** 0.294** 0.337** 0.164** 1 0.300** 0.033 0.043 0.063*
GDTA 0.049 0.214** 0.035 0.125** 0.066* 0.060* 0.086** 0.300** 1 0.028 0.099** 0.050*
GSLG 0.044 0.035 0.048 0.021 0.008 0.020 0.024 0.033 0.028 1 0.017 0.011
GCAPX 0.059 0.040 0.042 0.012 0.046 0.109** 0.038 0.043 0.099** 0.017 1 0.134**
RRDS 0.038 0.003 0.017 0.008 0.019 0.007 0.022 0.063* 0.050* 0.011 0.134** 1

Table 4.
571
Board
diversity
 35,4
ARJ

572

Table 5.
Regression analysis
Panel A: TOBINQ
Variables Model (1) Model (2) Model (3) Model (4) Model (5) Model (6)
BGDI 0.092**2.424 0.159***3.768
EGDI 0.088***2.816 0.090***2.564
THHI 0.0361.012 0.0050.144
BSDI 0.108***3.018 0.119***3.350
QLCV 0.0200.578 0.0210.587
NETCV 0.0381.001 0.0491.279
NTOI 0.108***2.721 0.092**2.262
BSZE 0.236***6.182 0.217***4.697 0.212***4.616 0.226***4.933 0.241***5.272 0.241***5.189
BMET 0.087***2.949 0.071**2.109 0.070**2.090 0.064*1.903 0.058*1.739 0.0511.539
DUL 0.113***3.443 0.184***5.181 0.176***4.954 0.186***5.224 0.188***5.333 0.149***4.120
INED 0.117***3.212 0.135***3.058 0.136***3.099 0.142***3.219 0.118***2.679 0.120**2.723
CGC 0.040–1.131 0.0140.323 0.0400.906 0.0130.293 0.0170.396 0.0430.982
NCI 0.0150.450 0.0250.610 0.0240.607 0.0260.630 0.0370.904 0.0561.375
LGA 0.670***16.400 0.623***12.646 0.615***12.598 0.635***12.338 0.601***12.171 0.633***12.435
DTA 0.0130.429 0.0160.422 0.0010.025 0.0090.238 0.0270.735 0.0210.565
SLG 0.0070.254 0.0120.358 0.0140.424 0.0140.425 0.0150.480 0.0090.287
CAPX 0.002**0.044 0.0561.429 0.0300.710 0.0531.338 0.0571.468 0.0050.114
RDS 0.057*1.717 0.0150.385 0.0210.505 0.0140.363 0.0230.606 0.01400.354
AGCE 0.089***2.988 0.187***5.340 0.192***5.444 0.188***5.367 0.172***4.920 0.199***5.626
Constant 1.519***20.354 1.654***170.003 1.591***15.603 1.704***15.915 1.622***16.670 1.592***14.702
Year fixed effects Yes Yes Yes Yes Yes Yes
Industry fixed effects Yes Yes Yes Yes Yes Yes
R2 0.488 0.485 0.494 0.485 0.491 0.520
(continued)
 Panel B: ROA
BGDI 0.154***3.342 0.210***4.088
EGDI 0.0200.520 0.0320.751
THHI 0.0060.130 0.0350.810
BSDI 0.151***3.444 0.147***3.408
QLCV 0.0250.607 0.0180.424
NETCV 0.0240.517 0.0320.692
NTOI 0.168***3.442 0.156***3.142
BSZE 0.140***3.014 0.166***2.900 0.153***2.712 0.168***2.971 0.194***3.455 0.196***3.473
BMET 0.0471.314 0.0230.569 0.0180.436 0.0210.499 0.0050.134 0.0060.149
DUL 0.0390.972 0.076*1.735 0.0681.574 0.077*1.763 0.083*1.910 0.0430.993
INED 0.0140.316 0.0070.133 0.0030.059 0.0100.180 0.0340.623 0.0340.630
CGC 0.114***2.674 0.111**2.060 0.0781.441 0.112**2.079 0.108**2.046 0.105**1.963
NCI 0.097**2.325 0.0731.462 0.0070.561 0.0741.491 0.095*1.916 0.138***2.807
LGA 0.360***7.207 0.318***5.229 0.314***5.268 0.327***5.156 0.292***4.809 0.332***5.375
DTA 0.240***6.294 0.238***5.162 0.251***5.552 0.240***5.263 0.209***4.606 0.234***5.195
SLG 0.0290.824 0.0070.184 0.0000.012 0.0070.163 0.0040.094 0.0070.186
CAPX 0.0260.620 0.103**2.109 0.131**2.546 0.099**2.030 0.094**2.535 0.095*1.862
RDS 0.152***3.762 0.0571.224 0.103**2.083 0.0561.185 0.0641.373 0.092*1.928
AGCE 0.0160.452 0.085**1.974 0.102**2.365 0.087**2.014 0.0641.483 0.098**2.291
Constant 1.489***11.190 1.506***8.578 1.380***7.567 1.549***8.022 1.435***8.188 1.392***7.232
Year Fixed Effects Yes Yes Yes Yes Yes Yes
Industry Fixed Effects Yes Yes Yes Yes Yes Yes
R2 0.231 0.220 0.248 0.220 0.234 0.295

Notes: T-statistics in parenthesis. Significance levels are *** p < 0.01, ** p < 0.05; * p < 0.10

Table 5.
573
Board
diversity
ARJ The regression results of most variables are consistent across all models. BGDI has a positive
35,4 association with both Tobin’s Q and ROA at 1%, supporting H1a. The results support the
proposition of the resource dependency theory that having female directors on board increases
board effectiveness and help companies access finance and other resources. They are also in
line with previous studies (Martin et al., 2008). However, EGDI has a negative association with
Tobin’s Q and no significant association with ROA; thus, H1b is not accepted. One reason
574 could be that the UK CG code does not explicitly require companies to hire females at the senior
management level. It can also be explained by the negative bias against women from the
institutional investors, which reduces share prices of firms that appoint female executive
directors (Dobbin and Jung, 2011).
However, THH is associated neither with Tobin’s Q nor with ROA failing to support H2.
The results are in line with the findings of Li and Wahid (2018), who found no significant
association between tenure diversity and future market performance. Furthermore, BSDI
has a positive association with both Tobin’s Q and ROA at 1%, supporting H3a. The results
are in line with the findings of previous studies (Lee et al., 1999; Dionne and Thouraya, 2005)
and support the argument that the diversity of financial and nonfinancial skills provides
more resources that facilitate decision-making and problem-solving. Interestingly, QLCV
did not show any significant relationship with Tobin’s Q or ROA; thus, H3b is not accepted.
Similar results were also obtained by Boadi and Osarfo (2019), who reported a negative
association between the number of board members with PhDs and firm performance,
especially that the obtained degrees are sometimes not relevant to the directors’ roles and
responsibilities.
NETCV did not exhibit any significant association with Tobin’s Q or ROA, failing to
support H4. One explanation is that the majority of board members in FTSE 350 are well
connected with little variation in their networks. However, NTIO is negatively associated
with both Tobin’s Q and ROA at 1%. The results support the opposite argument of H5 of
potential cross-cultural communication problems and interpersonal conflicts (Cox, 1991),
when foreign directors join the board of directors.
Some control variables show consistent results across models. BSIZ has a positive
association with FP (both Tobin’s Q and ROA) in all models at 1%. BMET did not
demonstrate any significant relationship with ROA with limited evidence of positive
relationship with Tobin’s Q. The frequency of BMET is not always indicative of board
effectiveness. DUL indicates a negative association with Tobin’s Q at 1% and negative
association with ROA in some models. The results support the notion that CEO duality
strengthens CEO’s power and weakens the board. INED are negatively associated with
Tobin’s Q in all models, but not significant in any of the ROA models, which raises concern
over their independence and lack of expertise (Jensen, 1993).
There is no evidence that CGC or NCI can enhance Tobin’s Q, probably because there is
little variation in these variables among companies. The presence of CGC in boards is rare,
since it is voluntary, whereas the independence of NC members is very common, since it is
required by the CG code. However, both committees are negatively associated with ROA in
some models due to the extra burden that these committees have on profit, including
remuneration and travel expenses. McKnighta and Weir (2009) argued that the existence of
NC could be costly. Further, Baghat and Black (2001) contended that increasing the
percentage of independent board members does not improve profitability. Interestingly,
AGCE is negatively associated with both Tobin’s Q and ROA, probably because executive
positions require younger directors to participate in innovative strategies, which leads to
firm growth.
 At the corporate level, LGA is negatively associated with both Tobin’s Q and ROA, Board
probably because small companies have flexible structures that can fit to changes. DTA has diversity
a negative association with ROA due to high interest payments and increased firm risk,
which lead to poor profitability. However, there is no evidence of significant association
between DTA and Tobin’s Q.
SLG did not exhibit any significant relationship with any measure of FP. Similarly, RDS
did not show any significant relationship with FP with a limited evidence of improving ROA
due to the excess returns from investing in R&D. However, CAPEX is negatively associated 575
with ROA because of an increase in depreciation expenses in subsequent years. It is also
negatively associated with Tobin’s Q in some models because of the increased risk of the
investments, which may require higher return to recover.

4.3 Robustness checks

We used several regression models to test the effect of each dimension of board diversity on
FP separately and then combined them in one aggregate model (No. 6). However, the
significance of each dimension did not significantly change after the addition of other
dimensions. Further, after using ROA, as an alternative measure of FP, the board diversity
dimensions had almost the same statistical significance, suggesting that the results are
robust to the use of FP measures.
As a further robustness check, we excluded the 10 dummy variables of industry
classification, as well as the 7 dummy variables that represent the study period, from the
model specification to test their effects on firm performance. However, the results of this test
are not statistically different from those presented in Table 5.

4.4 Endogeneity test

Failing to address endogeneity, which arises from omitted variables and reverse causality,
in the investigation of the relationship between board diversity and performance could
confound the interpretation of the findings. To address the concern of omitted variables, we
estimated our model using a fixed-effect regression to control for firm-specific unobserved
time-invariant effects arising from corporate culture and other firm characteristics to yield
consistent parameter estimates. We also included year dummies in the estimation to control
for other macroeconomic effects.
Another concern is the reverse causality, which can be addressed using different
approaches. We lagged the independent and other control variables by one period to
mitigate any endogeneity problem arising from simultaneous determination of performance
and the other variables (Ntim, 2015; Fernandez-Temprano and Tejerina-Gaite, 2020). In
Table 6, L stands for lagged variables. Panels A and B give the results of Tobin’s Q and
ROA models, which are highly consistent with previous models in Table 5.

5. Conclusion
We investigated the relationship between multiple aspects of board diversity and financial
performance. The results, in some aspects, are in line with the resource dependency theory.
Gender and skill diversity bring more diversified personnel to boards, thus creating wider
connections to companies that ultimately improve their performance. However, diversity
does not always improve board effectiveness and add value to business. Board tenure,
educational and network diversity have no significant influence on financial performance.
Contrary to our expectations, diversity in other aspects (e.g. nationality diversity) negatively
affects financial performance due to the possible clashes between personnel. Moreover, the
gender diversity among executive directors negatively affects market-based performance
 35,4
ARJ

576

Table 6.
Lagged models
Panel A: TOBINQ
Variables Model (1) Model (2) Model (3) Model (4) Model (5) Model (6)
LBGDI 0.099***2.910 0.159***3.768
LEGDI 0.045*1.586 0.090***2.564
LTHHI 0.0010.039 0.0050.144
LBSDI 0.078**2.409 0.119***3.350
LQLCV 0.0230.731 0.0210.587
LNETCV 0.0170.480 0.0491.279
LNTOI 0.091***2.656 0.092**2.262
LBSZE 0.236***6.182 0.152***3.779 0.137***3.379 0.153***3.882 0.171***4.290 0.236***5.080
LBMET 0.087*1.936 0.0401.301 0.0411.331 0.0381.241 0.0361.184 0.0521.553
LDUL 0.099***3.334 0.139***4.289 0.136***4.159 0.139***4.304 0.142***4.410 0.153***4.255
LINED 0.102***3.120 0.113***2.956 0.109**2.784 0.115***2.995 0.098***2.578 0.122**2.777
LCGC 0.0411.326 0.083**2.248 0.096***2.573 0.082**2.232 0.085**2.344 0.0491.114
LNCI 0.0311.005 0.0381.057 0.0330.928 0.0371.039 0.0260.733 0.0571.400
LLGA 0.622***16.691 0.586***130.576 0.580***13.505 0.593***13.162 0.576***13.456 0.636***212.526
LDTA 0.0010.021 0.0120.335 0.0060.184 0.0110.337 0.0180.544 0.0230.620
LSLG 0.0120.462 0.0120.413 0.0120.400 0.0120.402 0.0110.356 0.0100.308
LCAPX 0.057**1.965 0.087***2.619 0.075**2.229 0.0842.525 0.084**2.533 0.0060.147
LRDS 0.0381.389 0.03100.969 0.0381.157 0.0300.937 0.0290.912 0.01400.356
LAGCE 0.081***2.689 0.177***5.037 0.182***5.172 0.178***5.098 0.172***4.920 0.199***5.626
Constant 1.380***22.385 1.420***180.074 1.366***16.402 1.438***16.601 1.443***19.707 1.414***14.513
Year fixed effects Yes Yes Yes Yes Yes Yes
Industry fixed Yes Yes Yes Yes Yes Yes
effects
R2 0.393 0.368 0.372 0.368 0.374 0.524
(continued)
 Panel B: ROA
LBGDI 0.138***3.615 0.208***4.056
LEGDI 0.0170.537 0.0350.816
LTHHI 0.008–0.211 0.035–0.806
LBSDI 0.095***2.598 0.146***3.401
LQLCV 0.0110.306 0.0170.393
LNETCV 0.0130.343 0.0370.783
LNTOI 0.102***2.621 0.156***3.143
LBSZE 0.072**1.844 0.089**1.954 0.070*1.541 0.088**1.964 0.109**2.422 0.201***3.553
LBMET 0.0040.133 0.0230.680 0.0240.685 0.0240.697 0.0270.797 0.0090.215
LDUL 0.0381.131 0.0310.858 0.0280.757 0.0320.865 0.0340.949 0.0481.090
LINED 0.0040.120 0.0020.047 0.0090.210 0.0030.076 0.0210.492 0.0310.574
LCGC 0.067**1.904 0.0531.278 0.0360.858 0.0531.286 0.0531.289 0.103*1.926
LNCI 0.0260.747 0.0070.179 0.0070.185 0.0070.175 0.0080.191 0.140***2.844
LLGA 0.351***8.333 0.315***6.465 0.314***6.504 0.321***6.33 0.305***6.312 0.332***5.373
LDTA 0.232***7.035 0.217***5.744 0.225***5.971 0.216***5.784 0.206***5.538 0.234***5.185
LSLG 0.0361.198 0.0280.826 0.0270.797 0.0280.826 0.0260.779 0.0060.167
LCAPX 0.0310.942 0.096***2.572 0.104***2.733 0.094**2.494 0.094**2.535 0.096*1.895
LRDS 0.1254.024 0.0411.126 0.0561.527 0.0401.095 0.0461.267 0.094*1.928
LAGCE 0.0150.429 0.080**1.875 0.096**2.246 0.082**1.913 0.0641.483 1.08**2.517
Constant 1.358***13.326 1.367***10.637 1.292***9.507 1.386***9.792 1.415***11.805 1.260***7.261
Year fixed effects Yes Yes Yes Yes Yes Yes
Industry fixed Yes Yes Yes Yes Yes Yes
effects
R2 0.231 0.201 0.217 0.202 0.208 0.298

Notes: T-statistics in parenthesis. Significance levels are *** p < 0.01, ** p < 0.05; * p < 0.10

Table 6.
577
Board
diversity
ARJ reflecting a negative bias against women from the institutional investors. The findings suggest
35,4 that we need to be cautious when addressing the diversity issue. Although diverse boards could
be more effective at solving problems and increasing network connections, resources and
creativity compared with other homogenous boards, they may still have serious problems.
Diversity may provoke group conflict that interferes with efficacy and hinder communication
that interferes with cooperation, thereby lowering performance (Dobbin and Jung, 2011).
578 The findings of this study provide useful insights into the FTSE 350 companies, board
members, policymakers and stakeholders. They can guide companies toward the best way of
diversifying their boardrooms, which would reap economic benefits, including improved decision-
making, efficient use of resources and improved firm performance. The findings are also useful for
policymaking concerning the issue of gender diversity in the boardroom, as they support the
recommendations of Hampton Alexander’s report to increase female representation on board, but
not its recommendations to increase female executive directors because of their negative effect on
market performance. Furthermore, the findings of this study shed light on the usefulness of board
diversity to investors, creditors and other stakeholders helping them make informed decisions.
Although the study provides valuable contribution to the literature, it is not without limitations.
The sample is limited to the FTSE 350 companies, which may limit the generalizability of findings
to other companies in the UK and other countries. Future studies can use other theories, such as
the social identity theory and the critical mass theory, to investigate the same relationships from
different perspectives. They can also adopt different methodologies, such as cross-country
comparative study, to test differences between the voluntary system and the quota system of
board diversity. Future studies can examine other dimensions of board diversity, such as age,
ethnicity and culture, while controlling for ownership structure, risk and liquidity.

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Corresponding author
Adel Elgharbawy can be contacted at: adelelgharbawy@gmail.com

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