THE EFFECT OF BOARD DIVERSITY ON FIRM PERFORMANCE

A Dissertation submitted to
The University of Wolverhampton Business School
In partial partial fulfilment for the requirements
For the degree of
MSc Finance and Accounting
7MG001

January 2013

A Dissertation Entitled
The Effects of board diversity on firm performance
By
[

'I declare that this Dissertation/Research Project, in its entirety, my own work,
and that it has not previously been presented in whole or part, for any other
award, or published in whole or in part elsewhere.'

Signed;
Date;

ii

ABSTRACT
The recent spate of accounting scandals saw the demise of the previously
thought to be unsinkable and beyond reproach organisations such as Enron
and WorldCom in the USA, and Ansett, OneTel and HIH in Australia (Kang et
al, 2007).This work investigates the effects of Board diversity (gender and age)
on firm performance as a subset of corporate governance. I took data from a
sample of 60FTSE companies in the UK using Return on Capital Employed
(ROCE) as my measure of company performance. Gender and age diversity
variables are utilised while controlling for firm size and board size. Regression
and correlation results show that there is a negative effect of board diversity on
firm performance. Though a positive relationship is obtained between age
diversity and firm performance, it is not significant. Nonetheless a positive
relationship is also shown between firm size and firm performance.

iii

ACKNOWLEDGEMENTS
Firstly, I give special thanks to my supervisor for all his guidance throughout
until the completion of this work as well as his precious time used to go over
my work time and again.
Also, I thank my tutors especially for the advice and encouragements given to
me in the course of my studies in the Business school of the University of
Wolverhampton.
Special thanks to all my classmates and group mates for their assistance which
helped go about the analysis chapter of this work.

Final but not the least special thanks to my family for their support as well as
the Almigthy God who made everything to be possible.

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TABLE OF CONTENTS
Topic..i
Declarationii
Abstract.iii
Acknowledgements...iv
Table of contentsv
Chapter 1
1.0 Introduction and Background Knowledge..1
1.1 Aims of this Study...5
Chapter 2
2.0 Literature Review7
2.1 Introduction..7
2.2 Theories of Corporate Governance..9
2.2.0 Agency Theory....10
2.2.1 Stewardship Theory.....11
2.2.2 Stakeholder Theory.12
2.2.3 Resource Dependency Theory....13
2.2.4 Upper Echelon Theory....14
2.3.0 Diversity.15

2.3.1 Definition of Diversity...15

2.3.2 Group Performance and Diversity..16
2.3.3 Firm Performance and Diversity....17
Chapter 3
3.0 Methodology.23
3.1 Data....23
3.2.0 Measure...24
3.2.1Independent Measurement variables...24
3.2.2 Dependent Measurement Variable.24
3.2.3 Control Measurement Variable..25
3.3 Model....26
3.4 Hypothesis....26
3.5 Analysis of Study.........29
Chapter 4
4.0 Findings and Analysis..30
4.1 Introduction..30
4.2 Descriptive Statistics30
4.3 Graphical representation of Variables..33
4.4 Correlation Analysis.39
4.5 Regression Analysis.41
4.6 Relating Results to Theoretical and Empirical Literature43
Chapter 5

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5.0 Introduction, Summary of study/ findings, Implication of study, Limitation,

Direction for further research and Conclusion46
5.1 Introduction.46
5.2 Summary of Study/Findings46
5.3 Limitations...47
5.4 Directions for Future Study.49
5.5 Conclusion...51
References.53

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THE EFFECT OF BOARD DIVERSITY ON FIRM

PERFORMANCE

Chapter 1
1.0 INTRODUCTION AND BACKGROUND KNOWLEDGE
In the past decades, issues related to board of directors has gained the attention
of researchers from different disciplines (Ararat et al, 2010). Ararat et al (2010)
continued by asserting that the shift of interest from Top management Team
(TMT) to the board underscored by the increase emphasis put on the role of
boards by regulators and investors in directing and controlling firms. This might
be as a result of the recent demise of the previously thought to be unsinkable
and beyond reproach organisations such as Enron and WorldCom in the USA,
and Ansett, OneTel and HIH in Australia (Kang et al, 2007). Also, board
diversity is desired by customers, employees, suppliers and other stakeholders
for whom it is a proof of the sensitivity of management to stakeholders likings,
aspirations and worries that may bring benefits through improvements in
customer loyalty, and employee motivation and retention (Powell 1999,
Bilimoria &Wheeler 2000). Investors and other stakeholders demanding better
corporate governance, especially by means of cleaning up the boardroom
(Cheng, 2003; Houle, 1990; Park and Shin, 2003). Moreover, best corporate
governance practices have been centred on discussions on board diversity
(Grosvold et al, 2007).
The demand for board diversity and associated market and regulatory responses
reinforce the outburst of research on the relationship between board diversity
and firm financial performance. Although some researchers like Bilimori and

Huse (1997) look at diversity as a goal on its own, it is important to understand

its impact on the financial and economic performance.
Studies on diversity can be viewed under two standpoints; demographic and
cognitive. Demographic diversity comprising of; age, gender, race and ethnicity
and cognitive diversity comprising of knowledge, education, values, perception,
affection and personality characteristics (Maznevski, 1994; Milliken and
Martins, 1996; Pelled, 1996; Boeker, 1997; Watson et al.,1998; Peterson, 2000;
Timmerman, 2000).
This study will focus on two demographic variables; age and gender which are
amongst the most researched components of board diversity by researchers
(Ararat et al, 2010). Difference in age is likely to bring a variation in
perceptions and values as different generations experience different social,
political, and economic environments and events. Also, some cognitive abilities
reduce with aging and same with the willingness of taking risks (Vroom and
Pahl, 1971). With a more diversified representation of different generations,
group think may be prevented and lead to better performance by balancing the
risk taking- possibly associated with younger directors on one hand and on the
other cautiousness and risk averseness, as well as wisdom of experience,
associated with older directors. Gender diversity which is the other most
researched component of diversity is mainly of descriptive literature (Terjesen,
Selay and Singh, 2009). Also, given that the participation of women in the
society and economic activity has become a widely arguable point in recent
times (Campbell and Minquez-Vera, 2008). Debates of whether female
boardroom representation should be encouraged are in twofold: ethical and
economic. The ethical which argues for less female representation on boards as
being immoral, that there should be a more equitable distribution of male and
female directors on board (Brammer et al.,2007). Whereas the later (economic)
defends the value of directors on board in permitting the firm to improve its
2

financial performance thereby replacing directors who fail to meet these targets
of the firm (Campbell and Minquez-Vera, 2008). From the theoretical point of
view, focus on an individuals gender based perceptions is determined from
human capital theory (Westhpal and Milton, 2000). Whereas at the board level,
focus of theoretical constructs is on group process and the manner specific
contributions are made by female directors (Huse, 2008).
Payne et al (2008) noted that corporate boards are an infrequent work group, as
they meet infrequently whereas they have a great say of power and status within
organizations, and upon closer investigation, boards have many common
features with decision making teams that have been studied in organizations.
This is desired as Kang et al (2007) prior literature suggests that diversity of
group membership of boards improves talks, sharing of ideas, and group
performance.
The role/task of board of directors is being explained from the main stream
theories (Agency theory, stewardship theory, resource dependency theory,
upper echelon theory and stakeholder theory). From the agency theory
standpoint of view, boards have the responsibility to resolve problems that arise
between managers and shareholders by rewarding managers that create value
for the shareholders (Huse, 2007) and replacing managers that doesnt.
Whereas stewardship theory says managers are trusts worthy people who will
act in the right interest of their principals (Clarke 2008) while Huse (2007)
under this theory sees the board as that of supporting (collaboration) and
mentoring. Resource dependent theory according to Dalton and Dalton (2010)
asserts that some board members could have some cognitive abilities that will
be beneficial to the firm. For instance like providing networking ability that will
permit the firm to obtain needed resources which they were not having access to
or at a lower cost if the firm already had access to the resource. Upper echelon
theory on its part argues for the idea generating ability of a diverse board and
3

thus linked to innovative firms (Platenga, 1992, cited in Marinova et al., 2010,
p.5). Finally, the stakeholder theory argues for the interest of who are affected
in one way or another by the firm like the supplier, customers, society etc.

1.1 AIMS OF THIS STUDY

As earlier mentioned, board of directors has attracted so much attention as well
as research carried on this domain of corporate governance due to the
aforementioned reasons. Despite the numerous researches, it still remains
unclear about the effects board diversity has got on firm financial performance.
With different theories having different standpoints with respect to board impact
on firms financial performance. These theories, has help multiply research on
diversity, but aggregate findings about diversity have been weak, inconsistent or
both (Evans and Carson, 2005). Firstly, this work is intended to throw more
light and investigates the relationship and impact of board diversity variables
(age and gender) and firm financial performance. Furthermore, this study will
act as a contribution to the body of existing literature of board diversity and firm
performance. This study aimed at examining the impact of board diversity
(gender and age) to firm financial performance will be realise through the
following;
- Examining the impact and relationship between gender diversity on firm
financial performance.
- Examining the impact and relationship between age diversity on firm
financial performance.
- Examining if there exist a relationship between these diversity variables
under study (age and gender).

This work is made up of five chapters and is structured as follows; Chapter 1

provides an introduction and general background to the work. Chapter 2
presents the literature review which consist of two parts; firstly the theoretical
framework on corporate governance and governance theories that covers board
diversity and performance; the second part of the chapter gives the conceptual
framework. Chapter 3 is divided into two parts; first the methodology of the
study; it defines the sample, variables (dependent, independent and control), the
method of analysis and model specification, the second is hypothesis
development. Empirical results shall be presented, discussed and analysed in
Chapter 4. And finally Chapter 5 covers the limitation of the work, conclusion
and recommendations for further research.

Chapter 2
2.0 LITERATURE REVIEW
2.1 INTRODUCTION
The recent spate of accounting scandals worldwide has raised the concern of
investors on corporate governance in all types of organisations. The demise of
the previously thought to be unsinkable and beyond reproach organisations
such as Enron and WorldCom in the USA, Ansett, OneTel and HIH in Australia
has had investors and other stakeholders demanding better corporate
governance, especially by means of cleaning up the boardroom (Cheng, 2003;
Houle, 1990; Park and Shin, 2003). Governments, regulators, professions,
institutional investors, shareholders, employees and the public struggled to
understand the consequences of what had occurred which seemed to seriously
weaken confidence in the security of investments, the probity US executives,
and even the fundamental of market based capitalism (Clarke, 2004).
There is no universally accepted definition of the concept of corporate
governance due to its wide impact on various stakeholders, its economic role,
and it influence on social well-being. Corporate governance is the system of
structural, procedural and cultural precautions planned to ensure that a company
is run in the best long-term interest of its shareholders. This arrangement entails
a pledge to sustain interactions between a firm and its major stakeholders
(Charles, 2006). Campbell and Minguez-Vera (2008) defined corporate
governance as that which incorporates a series of mechanisms aimed at
supporting the interest of the owners and managers, which can be either external
or internal to the firm. Keasey et al. (1997) define corporate governance as the
process, structures, cultures and systems that permits the effective running of an
organisation. The Report of the committee on Financial Aspects of Corporate
Governance (section 2.5) known as the Cadbury report (2002), defines
6

corporate governance as the scheme by which companies are directed and

controlled. Cadbury report also argues that corporate governance entails a series
of mechanisms which permits the board of directors, the shareholders, the
management and other stakeholders interest to be closely associated. OECD
(1999) comes to define corporate governance as the relationships between a
companys board of directors, its shareholders and stakeholders. It also gives
the structure that permits the company objectives and goals to be established,
and the means/methodology of reaching these goals, and determines
performance monitoring. Also, Huse (2007) define corporate governance as the
set of interactions between various internal and external actors and the board in
managing a firm for value creation and growth.
Hanson and Song (2000) assert that corporate governance has emerged as a vital
ingredient in the theory and practice in the business world. Corporate
governance has principally two main branches which are the managerial stock
ownership and the board of directors which according to Monk and Minor
(2004) is an effective mechanism to reduce agency cost. Researchers on
corporate governance have tended to focus more on board of directors as to
what concerns the origin of corporate governance literature. According to Huse
(2007) the definition of a board of directors is controversial to that of corporate
governance itself. The board of director is defined depending on which
theoretical approach corporate governance researchers take. Some proposed
definitions to a board of director include; the board of directors being the link
between the shareholders of a firm and the managers entrusted with the running
of the day-to-day operations of the organisation (Stiles and Taylor, 2002).
Payne et al (2008) gives their definition of corporate board as a group of
individuals who each bring inimitable skills and backgrounds alongside their
individual interest and agendas, but are bound to work together
interdependently to attain corporate goals. Whereas Kosnik (1987) define a
7

board as being an official representative of a companys stock holders whose

task is to supervise management performance and protect stakeholders interest.
Also, the board has the role of monitoring management on the behalf of the
shareholders (Monk and Minor, 2004). The board of directors is one of the
several internal governance tools which are put in place to ensure that the
interest of shareholders and managers are closely aligned to address ineffective
management teams (Kang et al, 2007). This view is also supported by fama and
Jensen (1983) that the board of directors is the principal internal control
instrument responsible for regulating the activities of top management.
Nevertheless, other governance mechanisms will include the market for control,
auditors, laws and regulations.
This chapter of my work is divided into three main sections which include; the
theoretical literature directly related to my study, empirical literature directly
related to this work and a conclusion.

2.2 THEORIES OF CORPORATE GOVERNANCE

Although the topic of corporate governance was mainly developed within
financial literature, a bibliographic research would reveal that it has become of
excessive interest to law researchers, economists, political scientists,
sociologists and management sciences specialists. The broadness of the
literature reflects the strong diversity of theoretical grids (Gerard, 2004).
Notwithstanding the vast number of studies on diversity, the results have been
weak, unreliable and inconclusive. This has pushed scholars to modify theories
and analysis by increasing possible intermediaries and moderators of links
between diversity and outcomes (Carter et al, 2010). The link between board
diversity and firm performance is derived with the help of theories which comes
from several and diverse angles constituting the basis for result analysis.
8

2.2.0 AGENCY THEORY

The Agency theory having its roots in economic theory was exposed by Alchian
and Demsetz (1972) and was further developed by Jensen and Meckling (1976).
Agency theory is defined as the relationship between the principals, such as
shareholders and agents such as the company executives and managers. In this
theory, shareholders who are the owners or principals of the company, hires the
agents to perform work on their behalf. Principals delegate the running of the
business to the directors or managers, who are the shareholders agents (Clarke,
2004). Agency theory recognises three task/role of the board of directors; to
monitor and control top management through output control, behavioural
control and strategic control (Huse, 2007).
The agency theory is faced with the problem of splitting management and
finance. In principle, managers are responsible in the raising of funds from
investors and these funds in useful ventures or cash out holding in the firm,
whereas financiers call for the expertise of managers to get returns on
investments. Residual control right is generated from this situation. the rights to
make decisions not that are not captured in the contract (Clarke, 2004). In
corporate governance, agency theory conceives the board as being the main
monitors of activities in the firm and they do their best to ensure that problems
from principal agent relationship are minimised (Chris, 2010). In this same
light, Payne et al.,(2008) asserts that Agency theory views the role of the boards
as effective monitors of management striving that they serve the best interest of
the owners.
Carteret al (2003), argues that one of the key elements inherent with the agency
theory is the issue of executive and non-executive directors in the boards.
Agency theory advocates for more non-executive directors on board than
executive directors. According to them, outside directors will not collude with
9

inside directors to subvert shareholders because directors have incentive to build

a reputation as an expert monitors. In this regard, board independence by having
a board composed of more non-executive directors is very critical for boards to
operate in the best interest of shareholders. This is as oppose to the stewards
point of view where managers are seen as trust worthy people who will act in
the right interest of their principals (Clarke 2008). Nonetheless, the agency and
steward theories both asserts for executives trying to build and protect their
reputation as expert managers which maximises shareholders profits.
Carter et al (2010) points out the agency theory failure to provide enough
evidence of financial benefits from a diversified board. Francoeur et al (2008)
also submits that when we consider the general impact of gender diversity on
the various duties being assumed by corporate boards from the agency theory
standpoint, it is hard to tell if promoting more female participation in the board
will bring improvement or weaken corporate governance, and as a direct
consequence corporate performance.

2.2.1 STEWARDSHIP THEORY

Stewardship theory has its roots from psychology and sociology and is defined
by Davis, Schoorman & Donaldson (1997) as a steward protects and
maximises shareholders wealth through firm performance, because by so doing,
the Stewards utility functions are maximised. In this perspective, stewards are
company executives and managers working for the shareholders, protects and
makes profits for the shareholders. Agyris (1973) argues stewardship theory
looks at an employee or people as economic being, which overpowers an
individuals own aspirations. Nonetheless, stewardship theory recognizes the
importance of structures that empower the steward and offers maximum
autonomy built on trust (Donaldson and Davis, 1991). It stresses on the position
of employees or executives to act more independently so that the shareholders
10

returns are maximised. Indeed, this can minimize the costs aimed at monitoring
and controlling behaviours (Davis, Schoorman & Donaldson, 1997).
On the other hand, Daly et al (2003) argues that in order to protect their
reputations as decision makers in organisations, executives and directors are
persuaded to run the firm to maximise financial performance as well as
shareholders profits. In this alignment, it is believed that the firms
performance can directly impact perceptions of their individual performance.
Certainly, Fama (1980) asserts that executives and directors are also managing
their careers in order to be recognised as effective and successful stewards of
their organisation. Whereas, Shleifer and Vishny (1997) claims that managers
return finance to investors to establish a good reputation so that this finance can
re-enter the market for future finance. Moreover, stewardship theory proposes
the combining/unifying the role of the CEO (Chief Executive Officer) and the
chairman in order to reduce agency cost and to gain more role as stewards in the
organization (Haslinda and Benedict, 2009).

2.2.2 STAKEHOLDER THEORY

Stakeholder theory was implanted in the management discipline in 1970 and
gradually developed by Freeman (1984) incorporating corporate accountability
to a wide range of stakeholders. Wheeler et al (2002) argued that stakeholder
theory is derived from a blend of sociological and organisational disciplines.
Indeed, stakeholder theory is less of a formal unified theory and more of a broad
research tradition, integrating philosophy, ethics, political theory, economics,
law and organizational science.
Haslinda and Benedict (2009) define stakeholder theory as any group or
individual who can affect or is affected by the achievement of the organizations
goals and objectives. Unlike the agency theory where managers are working
and serving for the shareholders, the implication of focusing on shareholders is
11

that the promotion of value is most important, whereas a wider stakeholder

group which consist of employees, creditors, customers, suppliers, governments
and the local communities is taken into consideration and the dominant focus on
shareholders value becomes less projecting (Mallin, 2010). It was debated that
this group of network is important other than owner-manager-employee
relationship as proclaimed by the agency theory (Freeman, 1999). On the other
end, Sundaram &Inkpen (2004) contend that stakeholders theory focuses on
the group of stakeholders deserving and necessitating managements attention.
Whilst, Donaldson & Preston (1995) proposed that a firm is a system where
there are stakeholders and the objectives of the organization is to create wealth
to its stakeholders. This framework gives us a diverse board which represents
the interest of the stakeholders in question and will be used as a performance
measurement stick. However, it failed to give details of how the board should
be structured and categorised.

2.2.3 RESOURCE DEPENDENCY THEORY

Resource dependency theory focuses on the role of board of directors in
securing resources needed by the firm. Hillman, Canella and Paetzold (2000)
argues that resource dependency theory pays more attention on the role
directors play in acquiring vital resources which is highly needed by the
organization through the connections they have with the external environment.
Johnson et al (1996) confirms resource dependency theorists gives attention on
the nomination of representatives of independent organizations as a means of
gaining access to vital resources critical to firm success. Debates were held on
whether resource endowments could improves the functioning of organizations,
firm performance and its survival (Daily et al, 2003). Hillman, Canella and
Paetzold (2000), argued that directors fetch resources to the firm such as
information, skills, access to key constituents such as suppliers, buyers, public
policy makers, social groups as well as legitimacy. Strategic human and social
12

and economic resources are gained by the firm through board diversity which
leads to increased innovation (Miller and Triana, 2009).
In principle, resource dependency theory portrays the directors contribution
function that enhances performance; thus diverse boards should indicate the
resources that are needed by the firm. Board of directors are throne with the
responsibility of allotting resources as well as providing ideas and connections
that will improve the performance of the firm.

2.2.4 UPPER ECHELON THEORY

Upper echelon theory brings the opinion of heterogeneous top management
teams with more creative and idea generating skills and therefore linked or
connected to more innovative organizations (Marinova et al.,2010,). The notion
that the characteristics of senior management, or the upper echelon of an
organization can influence the decisions made and practices adopted by an
organization dates back to the early upper echelon theory (Hambrick & Mason,
1984). Hambrick and Mason argued that managers characteristics (e.g
demography) influence their decision making ability and hence actions
implemented by the organization they lead. They suggest that this occurs
because demographic characteristics are linked with the cognitive bases, values
and perceptions that influence the decision making of managers. Several studies
have braced the relationship that exists between upper echelon characteristics
and organizational strategies and performance. Executives or top management
experience, values and personality greatly affect their way of perceiving and
interpreting situations they face and in turn impact their choices which have a
significant impact/consequence on firm performance considering their role in
making strategic decisions for which they are vested to make (Dwyer et
al,.2003).

13

Upper echelon theory has two interconnected parts: (i) executives acting on the
basis of their personal perception and interpretation of the strategic situations
they do face, and (ii)these personalized analysis are a function of the
executives experiences, values, and personalities. This theory is therefore
built on the principle of bounded rationality (Cyert & March, 1963; March &
Simon, 1958). Directors demographic features may impact strategic choices of
the firm as they own varying human and social capital among them based on
their diverse genders and races (Hillman et al., 2001).
In a nut shell, the upper echelon theory tends to compare whether homogeneous
boards outperform heterogeneous (diverse) boards. Though some studies say
heterogeneous boards are characterised with conflicts amongst members which
could slow down decision taking and affect the firm performance (Lau and
Murnighan, 1998), others instead believe diverse boards are positively related
with firm performance.

2.3.0 DIVERSITY
2.3.1 DEFINITION OF DIVERSITY
It will be inappropriate to defined diversity in a particular way as different
researchers define diversity with respect to their context of study or research.
This is the case of Marimuthu (2008) who defined diversity as the variation of
social and cultural identities among people existing together in defined
employment or market setting. Social and cultural identities being the personal
affiliation with groups that research have proofed to exert significant influence
on peoples major life experiences, in his work on Ethnic Diversity on Boards
of Directors and Its Implications on Firm Financial Performance. As we can
notice, this definition is confined on ethnicity which will be wrong to use in a
wider context of demographic diversity.

14

Diversity has been used to refer to many types of differences among people.
Williams and OReilly (1998) define diversity as any attribute that another
person may use to detect individual differences. Helen et al (2007) says board
diversity is the variety in the composition of the board of directors. They
identified two types of diversity; the observable diversity which is the easily
detectable qualities of directors and less visible diversity which is not easily
detectable like background of directors. Constituents of observable diversity
includes; race/ethnic background, nationality, gender and age while invisible
diversity includes; level of education, functional and occupational backgrounds,
industry experience. As a result of this broad definition, various categorization
schemes such as race or gender or even those based on proportions such as the
size of a minority, have been used to further refine the definition of diversity in
teams. Most research on diversity has primarily focused on differences in
gender, age, ethnicity, and tenure, educational and functional backgrounds
(Millikens & martins, 1996; Williams & OReilly, 1998) some of which will be
examined by this study.

2.3.2 GROUP PERFORMANCE AND DIVERSITY

It will be worthwhile to discuss about group performance and diversity before
going to firm performance and diversity. This is due to the fact that attention on
how boards have value has increased the relative significance of practices that
enable boards to work together as a group and they go beyond basic board
structures, and include issues such as board authority, board dynamism, and
teamwork ( Payne et al.(2008). Some researchers such as Jung and Dobbin
(2011) assert that firm performance is being affected by diversity due to the
impact of group work in the boards of firms.
According to Maznevski (1994) in her study of group diversity and
performance, homogeneous decision group makings outperform heterogeneous
15

decision group. She noted that improved performance could be obtained from
enhanced integration and improved communication in boards.
On the opposite side, some scholars suggest that group performance could be
impacted negatively by diversity. This is the case with Hambrick et al. (1996)
who did a longitudinal study on the effects of diversity on top management
team performance in 32 major US airlines. Treichler (1995) and Knight et al
(1999) also had the same result as Hambrick et al (1996) and they all came to a
similar conclusion that workforce diversity requires greater expenditures due to
increased initiatives and coordination to accommodate the needs of different
types of employees and stakeholders, and thus can potentially lead to upsurge
conflict and communication problems in the workgroup.
In a nut shell, group performance is affected by diversity in two ways. Increase
in performance as a result of wider information and decision-making pool on
one hand whilst on the other, it can reduce performance as a result of increase
group conflict and destructive debates/arguments.

2.3.3 FIRM PERFORMANCE AND DIVERSITY

Gender, cultural and racial composition of boards of directors is amongst the
central problems faced by managers, directors and shareholders of modern
corporations. This has being a serious centre/focus of debates over past years
due to press reports, suggestions of shareholders from advocacy groups and
policy statements from major institutional investors TIAA-CREF (1997, quoted
in Carter et al, 2002). Moreover, gender, racial, age and nationality diversity
were highly recommended when appointing directors by the national
association of corporate directors (1994, quoted in Carter et al, 2002) blue
ribbon commission.
Carter et al (2002) did a research on the relationship between board diversity
and firm performance for fortune 1000 firms, and found a positive relationship
16

between the number of women or minorities on boards and firm performance

with control variables being the industry size and other corporate governance
measures. An inverse relationship between the number of women on boards and
average age of boards was also realised. This prompted them to confirm the role
board diversity plays on the improvement of firm performance. Most corporate
managers and others who got interest in good corporate governance believes a
positive relationship between board diversity and shareholders value (Carter et
al, 2002)
Bantel (1993) carried out a research on the relationship between demographic
native of high-level management groups and strategic clarity in retail banks and
found that high education and functional background diversity contribute
immensely to better strategic planning and decision-making and vice versa.
Simon and Pelled (1999) carried a study on executive diversity using
educational level and cognitive diversity of the directors on board. From their
study they proposed that these diversity variables had a positive effect on firm
performance. However, they also proposed a negative relationship between
experience diversity and the organisational performance. Simon and Pelled
believe this negative impact was as a result of informal communication among
top management teams.
Niclas et al (2003) in a research conducted using the financial performance data
of 1993 and 1998 and the percentage of women and minorities on boards of 127
U.S firms came to a conclusion that board diversity is positively linked with
firms performance. They however suggested that diversity adversely influences
group dynamism, but on the other hand leads to improved decision-making.
Other researchers suggested board diversity could lead to greater/wider
knowledge base, increase creativity and innovation and therefore becomes a
competitive advantage to the firm (Watson et al, 1993).

17

Moreover, Richard (2000) a more recent research on organisational diversity

and firm performance measured in terms of Return on Equity from a sample of
64 banks from 3 different states. This work found a positive link between
diversity and the values of the bank. Also, Burke (2000) did a study on the
number of women directors and revenue, assets from a sample of firms in
Canada and found significant correlation coefficients. Siciliano (1996) also did
a study using several measures of board member diversity on 240 YMCA
organisations. Results of the findings suggested a positive impact of gender
diversity in organisations level of social performance and firm performance as
a whole.
Toyah. M (2009) looks at this from a completely different standpoint. He tried
to carry an investigation on mediators that explain how board diversity is linked
to firm performance. Based on the signalling theory and the behavioural theory
of the firm, they were able to argue that this relationship operates through two
mediators which include; innovation and reputation. Using a sample of 500
firms, he found a positive relationship between board racial diversity and firm
reputation and innovation and consequently performance. A positive
relationship was also found between board gender diversity and innovation.
Murray (1989) also carried a research using 84 fortune 500 food and oil
companies to study heterogeneous versus homogeneous groups and their effect
on organisational performance. They used diversity as a composite of age,
educational degree, average tenure and occupational history. Their conclusion
from their study was that diversity and firm performance has a link with the
market in which the firm is operating. More specifically, homogeneous boards
were found to be more effective than heterogeneous boards when there is high
competition in the market. Murray asserts that heterogeneous boards are more
effective in case of organisational changes, proposing that these boards can
react faster to market dynamism.
18

Nonetheless, other researchers hold contradictory view to board diversity and

firm performance relationship. Hambrik et al (1995) did a research on 32 main
airlines and suggested that homogeneous top management teams actually
outperformed heterogeneous management teams. Hambrik et al (1995) claimed
that heterogeneous boards lead to slow decision making to respond to initiatives
from competitors. The argument here is that heterogeneous boards are more
likely to disagree consequently weakening the team harmony.
Shrader, Blackburn, and Iles (1997) carried an investigation on the relationship
of female board members on board and firm financial performance using ROA
and ROE on a sample of 200 fortune 500firms. They came out with a significant
negative result of the percentage of female board members in relationship to the
firm financial performance in some of their tests. Also, Zahra and Stanton
(1988) did a study on the relationship between minorities on boards and firm
financial performance through ROE and EPS and came out with a statistically
very insignificant relationship. Farrell and Hersch (2005) on the other hand did
a similar research using poisson regression to analyse a data panel of 300
Fortune 1000firms over the period of 1990-1999. They obtained no relationship
between the increases of women directors on board and return on assets. Farrell
and Hersch (2005) again did a second study with 111 events of women added in
the board but the three day cumulative average residuals still confirm a no
relation as that of the previous work.
Also, Carter et al (2010) used a three stage least square method to analyse
641dirrent firms from the S&Ps 500 index for the period 1998-2002. Tobins Q
and ROA were used for dependent variables while the number of women on
board and the amount of women on important board committee were
independent variables. This result showed no significant relationship between
any of the gender variables and firm financial performance.

19

Adams and Ferreira (2009) did a study on women on boards from a sample
company of S&Ps 1500 index during the period 1996-2003. Results from this
work showed that women are more regular on board meetings and also
impacted men board members attendance on the same board. Adam and Ferreira
concluded that women board members contributed an important positive impact
on the inputs of boards. Still a negative relationship was found between Tobins
Q and the percentage of women on board. Contrary to the aforementioned
investigations showing negative or no relationship between the percentage of
female directors on boards and firm financial performance, Erhardt et al (2003)
found a significant positive relationship in his study between the percentage of
female directors and ethnic minorities on board and return on assets, profit
margin, sales to equity, earnings per share, and dividends. Carter et al (2003)
came out with similar results of a positive significant relationship but this time
using the relationship between ethnic minority of directors on board and
Tobins Q. Also, Carter, Simkins, and Simpson (2003) did a study from a
sample of 638 Fortune 1000 firms for the year 1997 using a two stage least
square regression to test the relationship between Tobins Q and two measure of
board gender diversity. This was the percentage of women on board and a
dummy variable representing the women participation on board. They obtained
a positive relationship between these diversity variables and Tobins Q.

CONCLUSION
From the above literature review, it can be deduced that board diversity is very
important for firm performance. There exist different diverse views about board
diversity in enhancing firm performance. April, K (1998), argues of the absence
of any relationship between board diversity and the overall board performance.
However, he obtained a positive relationship between board diversity (board
structure) and firm performance arguing that better management and firm
performance is achieved when boards are composed of more inside directors.
20

The main evidence base here is being the theory of information asymmetry as
inside directors/board members know better about the company than outside
directors. On the other hand, agency theory argues that firms should be made up
of more outside directors to monitor performance of management and the
CEO/chairman position should be divided for better performance of the firm.
The Cadbury report instructs on its own standpoint that boards should be
composed of at least 1/3 of non-executives directors for better monitoring and
performance of the firm.
In sum, it appears that there is enough evidence of the positive impact of board
diversity and performance as well as negative in terms of conflict and slow
decision making to firm performance. Company must therefore not only strife to
satisfy their shareholders (principals) but must be able to address stakeholders
interest. This is the basis for firm performance. Thus for firms to be successful,
they need to give their stakeholders proper level of attention in order to
maintain their corporate reputation and market capitalisation.

21

Chapter 3

3.0 METHODOLOGY
Research methodology is the Procedures used in making systematic
observations or otherwise obtaining data, evidence, or information as part of a
research project or study (Inrny and Rose, 2005). A quantitative approach is
being used for this study which entails the systematic empirical investigation of
social phenomena through statistical, mathematical or computational techniques
(Given, 2008). This method is being used because it will permit me to develop
and employ mathematical models, theories and /or hypothesis pertaining to this
study.
Quantitative research is the combined process of identifying the variables that
are needed for the study, measuring these values taken by the variables,
generalising from single observations, examining the relationship and
importance of the variables, and identifying the casual structure of the variables
(Jankowicz, 2006). Scientifically, quantitative methods of research are used in
an attempt to establish general laws or principles. This scientific approach is
often termed nomothetic and assumes social reality is objective and external
to the individual. The naturalistic approach to research puts emphasis on the
importance of the subjective experience of individuals, focusing on qualitative
analysis (Burns, 2000)

3.1 DATA
Our sample data is obtained from 60 companies in the FTSE 250 companies in
the UK. This is gathered from Morningstar Company Intelligence formerly
(Hemscott Company Guru) A database of the UKs top 300,000 companies. It
allows you to view company fundamentals including; charts, ratios, latest news
and director biographies. It also gives focussed research into the companies,
22

people and news that drive the UK stock market. Financial data and board of
directors information is used to analyse data. FTSE 250 index is the 250 most
highly capitalised companies in the UK and are listed in the London Stock
Exchange and sustained by the FTSE Group. FTSE 250 is a separate and
independent company co-owned by London Stock Exchange and the Financial
Times. The financial years of 2010 and 2011 are used to carry out this study.

3.2.0 MEASURES
3.2.1 INDEPENDENT MEASUREMENT VARIABLES
Gender and age are used as our demographic diversity measurement variables in
line with other studies (Roberson and Park, 2007; Erchardt et al., 2003; Certo et
al., 2006; Carson et al., 2004). Board of directors ages is obtained from their
individual profiles in the analysis of board of directors. To get our age diversity,
I took the standard deviation of the ages of board of directors on each board. As
to gender diversity, the proportion of women directors on board is used with the
help of Blaus heterogeneity index. This index is calculated as follows;

With Pi standing for the percentage of board members in each category (male
and female) on board, n is the total number of board members in each board.
Gender data is also obtained from the Hemscott Company Guru database in the
profiles of the companies. In cases where the gender is not specified, I go in the
company profile to get it.

3.2.2 DEPENDENT MEASUREMENT VARIABLE

ROCE (return on capital employed) which is the earnings before the deduction
of interest and tax divided by total assets and less current liabilities is used as
our dependent measurement variable. ROCE is an accounting measure of
23

performance and is quite a consistent means of measurement of firms

performance (Erhardt et al., 2003). There also exist other performance
measurement sticks of firm performance like the; Tobins Q measure of firm
performance (Campbell and Minquez, 2008; Carter et al., 2003), ROI (return on
investment) and ROA (return on assets) used by Erhardt et al (2003) in
measuring firm performance. The rationale of my used of ROCE is because it
takes into consideration past events unlike the Tobins Q, hence giving a true
and fair view to firm performance influenced by the diversity of their board.
Moreover, a mean of ROCE for the two years will be used in order to handle
fluctuation problem that may occur during a year, thereby distorting our study.
The mean ROCE is obtained by simply taking the sum of the two years ROCE
and divide by two. This reasoning is backed by Erhardt et al (2003).

3.2.3 CONTROL MEASUREMENT VARIABLE

Board size and firm performance has also being a focus of many controversial
debates. Some researchers argue for large boards being beneficial to the firm
through increased firm performance due to its wide pool of information
gathered from a large board (Adams and Ferreira, 2007). Whereas on the other
hand, researchers such as Carter et al (2010) and Dobbing and Jung (2011) says
large boards may lead arguments and slow down decision making which is
detrimental to firm performance. Thus, the number of directors on board should
be taken into consideration when using the financial performance formula. The
board size of this study will be the total number of directors on board which is a
control variable and in accordance with Carter et al (2010).
Firm size is also regarded as a control variable when analysing performance as
it directly affects the firms performance (Carter et al., 2010). This problem will
be tailored by taking the natural logarithm of total assets (Erhardt et al., 2003).
Other studies instead use the natural logarithm of the number of employees to
24

estimate their firm size (Luis and Jose, 2003). This is not a very good method of
estimating firm size as some firms might be having fewer employees compared
to its total assets because of intense mechanisation, thereby giving a faulty
outcome/result. Total asset is therefore a more accurate tool for estimating firm
size which is the rationale for it being used in this work.

3.3 MODEL
The fundamental model to be tested is;
Return on Capital Employed (average) = +Diversity (1Age diversity +
2Gender diversity).
Where ROCE (average) is the financial performance of the firms
Diversity is the board diversity made up of both age and gender diversity.
1and 2 being the coefficients of age and gender diversity which shows the
individual effects of the diversity variables on firm performance other factors
held constant (ceteris paribus).

3.4. Hypothesis
A hypothesis is a proposed explanation of a phenomenon which permits us to
test our results (Hilborn, Ray; mangel, Marc., 1997). The following hypothesis
shall be tested in this study in order to better understand and explain our results
obtained.
Traditionally, most boards consists of middle to retirement age members, well
educated, mature and experienced people who may have previously served in
25

another company in the same industry as executives (Gilpatrick, 2000).

However, Kang et al., (2007) assert the change from this traditional perception
to active promotion of age diversity so as to foster the initiatives and
perspectives of different age groups as well a gradual succession plan. With age
diversity, wisdom, experience and economic resources are brought by the old
group while the middle group is vested with the major responsibilities in the
corporation and the society, whereas the younger group possess the energy and
drive to succeed as well as the planning for the future (Houle, 1990). Though
there is not much empirical evidence on age diversitys positive impact on firm
performance, Huse and Rindova (2001) argue for age diversity having a positive
impact on firm performance especially in the consumer industry so as to bring
different perspectives as well as the benefits of stake holder representation in
the board for a good reputation of the company. Fombrun (1996) cited in Huse
and Rindova (2001) asserts that firms that do not respond to the concerns of
their stakeholders may not enjoy the fruits of a favourable reputation. However,
age diversity could also lead to heterogeneous board with its attributable
negative impact on firm performance mainly because of conflicts that slow
down decision making and the dynamism of the board (Lau and Murnighan,
1998). This led me to bringing forward the following hypothesis;
Hypothesis 1 (H1) = There exist a positive relationship between board of
directors age diversity and firm performance.
As earlier said, gender diversity in boardroom and in top executive positions has
been a centre of attraction and debates by the public, academic research ,
government considerations and corporate strategy for over a decade now
(Marinova et al., 2010). Marinova et al (2010) argues Gender diversity was
previously considered as a social issue and an issue of image but is gradually
being regarded now as value-driver in organisational strategy and corporate
governance, thus becoming a challenging issue in recent academic research.
26

Catalyst (2004) amongst the first to formulate and argue for women presence in
the top management as more diverse board (gender diversification) realize
better financial results. According to Smith et al (2006) gender diversity permits
a greater information and talent pool for the board. Moreover women directors
may better understand particular market situations than men especially in the
retailing sector, thereby leading to increased creativity and quality to board
decision making (Smith et al, 2006; Robinson and Dechant 1997). Also, a better
public image could be obtained for a firm by increased gender diversity on
board (Marinova et al., 2010). However there have been findings and arguments
for negative effects brought by gender diversification to a firm. Ancona and
Caldwell (1992) argued that the cost of running (coordinating) a gender diverse
board may be high enough to offset any possible increase in performance. Also,
heterogeneous boards arising as a result of encouraging gender diversity may
lead to slow down in decision making as it will become less likely to reach to
consensus (Lau and Murnighan, 1998). It was also supported by Hambrick et
al., (1996) who added that these less efficient decision making body may turn to
hamper the firms competitive behaviour. All these culminated let me to the
postulation of the hypothesis below;
Hypothesis 2 (H2) = There exist a positive relationship between board of
directors gender diversity and firm performance.
Current literature propose that board diversity leads to improved creativity,
innovation and improved decision making at individual as well as group levels
(Erhardt et al.,2003). Board of directors functions is closely linked to firm
performance (Zahra and Pearce, 1989), and becomes questionable if increased
demographic diversity impacts the firm performance. Two functions of boards
are put forward by Finkelstein and Hambrick (1996) which are closely linked to
firm performance; Firstly, boards being the most influential actors of a firm as
they determine the strategy to be adopted as well as decision makings in the
27

firm. Secondly, the board is consigned the monitoring role which consist of;
supervising the appropriate used of companys wealth, representing the
shareholders, response to takeover threats and hires, compensate and monitor
the work of top management. There are many empirical works that shows the
positive impact of increased board diversity to firm performance as earlier seen
in the previous chapter. Some of the works include; Carter et al (2002), Watson
et al (1993), Bantel (1993), Simon and Pelled (1999). Nonetheless works of
other researchers proofed the contrary (negative) impact of increased board
diversity to firm performance as also seen in the previous chapter. These
include the works of; Hambrik et al (1995), Shrader, Blackburn, and Iles
(1997), Carter et al (2010). These prompted me to bring the third hypothesis
which follows;
Hypothesis 3 (H3) = There exist a positive relationship between board of
directors diversity variables (age and gender) and firm performance.

3.5 ANALYSIS OF STUDY

For this study, correlation and regression analysis will be effectuated.
Correlation deals with analysing the relationship between the variables which
include; the dependent variable such as ROCE, ROA, and ROI., independent
variables such as; gender, age, ethnic minority., and control variables such as;
board size and firm size. A linear regression and multiple regression analysis
will be carried out as well. Linear regression analysis permits us to determine
the impact of each independent variable on the dependent variable. Whereas
multiple regression permits us to determine the impact of all the independent
variables on the dependent variable using our model stated above.

28

Chapter 4

4.0 Findings and Analysis

4.1 Introduction
This chapter will present and analyse our findings obtained from the data
entered in SPSS version 20. Table 1 gives the descriptive statistics of this work.
Then diagram 1, 2, 3, 4, 5 and 6 gives the graphical representation of the
variables (age diversity, gender diversity, board size, firm size, ROCE, and
Average age of directors) in the form of histograms with a normal distribution
curve. Moreover, correlation results are shown on table 2 and finally table 3
shows Pearsons regression analysis of the study.
4.2 Descriptive Statistics
Descriptive statistics can be defined as mathematical quantities such as mean,
median, range, mode and standard deviation that summarise and interpret some
of the properties of a set of data (sample) but do not infer the properties of the
population from which the sample was drawn. Below is a table of the
descriptive statistics of the 60 UK companies from the FTSE 250 companies.

29

Table 1
Statistics
return on capital

gender

age

Board

Ln turnover/Firm

Average age of

employed(mean)

diversity

diversity

size

size

directors

Valid

60

60

60

60

60

60

26.2730

.16728374

7.1193

8.1667

6.0058

56.8917

7.1050

56.5833

7.77

.000000

6.63

9.00

5.69

55.50

36.15314

.127516405

1.81831

1.69912

1.55325

3.30875

-2.343

-.311

.158

.309

-2.145

-.027

.309

.309

.309

.309

.309

.309

17.576

-1.415

.839

-.399

7.851

.801

.608

.608

.608

.608

.608

.608

Minimum

-176.12

.000000

2.28

5.00

-.69

47.00

Maximum

142.75

.375000

12.43

13.00

8.65

66.25

N
Missing
Mean
Median
Mode
Std. Deviation
Skewness
Std. Error of
Skewness
Kurtosis
Std. Error of
Kurtosis

a.

25.8100

.20510913

8.1429

5.9800

Calculated from grouped data.

b. Multiple modes exist. The smallest value is shown

Table 1 above gives a descriptive statistics of our variables in terms of mean,

median, mode, standard deviation, skewness and kurtosis, minimum and
maximum values. Return on capital employed (mean) ranges from 176.12(minimum) to 142.75(maximum) between the sample companies, and
averagely at 26.27. There is a huge difference in Roce amongst the companies
as shown with the high standard deviation of 36.15. Gender diversity calculated
with the Blau index formula moves from 0(minimum) to 0.375(maximum). 0
implies there is no female on board, 0.5 meaning there are equal number of
30

females and males on the board of directors and 1 signifies a board with only
female directors. On an average base, we have 0.167 of gender diversity,
meaning most boards with females have just 1 or 2 female directors and a mode
of 0 meaning we had no female director in most of the companies on our sample
study. This study shows that age diversity in the ages of the directors on board
from 2.28 (minimum) to 12.43 (maximum) and an average age diversity of 7.12
in the boards of the companies. Moreover, this study shows a minimum board
of 5 members and the largest board having 13directors on board.
But most boards on our study are having 9members on the board of directors.
Also, we have firm size which is gotten by approximating the turnover of the
companies range from -69 to firms with the highest of 8.65. And finally, the
average age of directors on board with the least average aged board 47 and the
most aged board averaging 66, with an average board of 56.89 showing a
relatively ageing board of directors.

31

4.3 Graphical representation of variables

Diagram 1

Diagram 1 shows a graphical presentation of Return on capital employed

(mean). With a mean of 26.27, and a standard deviation of 36.153 with a sample
of N=60.

32

Diagram 2

Diagram 2 gives the graphical representation of gender diversity having a mean

of 0.167284 and a standard deviation of 0.127516 from a sample of N=60.

33

Diagram 3

Diagram 3 shows Firm size in a graphical distribution with a mean of 6.01 and a
standard deviation of 1.553 still with our sample of 60 companies.

34

Diagram 4

Diagram 4 shows the graphical distribution of average age of directors having a

mean of 56.89 and a standard deviation of 3.309 still with our sample of N= 60.

35

Diagram 5

Diagram 5 gives us another graphical distribution this time being age diversity
with a mean of 7.12 and a standard deviation 1.818 with N= 60.

36

Diagram 6

Diagram 6 shows the graphical distribution of board size with a mean of 8.17
and a standard deviation of 1.699 and N= 60.

37

4.4 Correlation analysis

Correlations
Mean return

gender

age

Board

Ln

Average

on capital

diversity

diversity

size

turnover/Firm

age of

size

directors

employed
Pearson
Correlation
Mean return on
capital employed

Correlation
Sig. (2tailed)
N
Pearson
Correlation
Sig. (2tailed)
N
Pearson
Correlation
Board size

Sig. (2tailed)
N
Pearson

Ln turnover/Firm
size

Correlation
Sig. (2tailed)
N
Pearson
Correlation

Average age of
directors

.008

-.037

.203

-.075

.658

.954

.782

.120

.569

60

60

60

60

60

60

-.058

.023

.279

.201

-.182

.861

.031

.124

.164

tailed)

Pearson

age diversity

-.058

Sig. (2-

gender diversity

Sig. (2tailed)
N

.658
60

60

60

60

60

60

.008

.023

.202

-.328

.045

.954

.861

.122

.011

.732

60

60

60

60

60

60

-.037

.279

.202

.053

-.097

.782

.031

.122

.686

.461

60

60

60

60

60

60

.203

.201

-.328

.053

-.131

.120

.124

.011

.686

60

60

60

60

60

60

-.075

-.182

.045

-.097

-.131

.569

.164

.732

.461

.318

60

60

60

60

60

.318

60

*. Correlation is significant at the 0.05 level (2-tailed).

Table 2 above shows the result of my correlation analysis. Correlation was used
to examine the relationship that exist between the variables; ROCE, age
diversity, gender diversity, firm size gotten from the natural log of turnover,
38

board size and average age of directors. The result shows that there is a negative
insignificant relationship between ROCE (mean) and gender diversity (-0.058)
at 5% of significance. Also, there is a positive insignificant relationship between
age diversity and ROCE (0.008), though more diversified representation of
different generations (ages), group think may be prevented and lead to better
performance by balancing the risk taking- possibly associated with younger
directors on one hand and on the other cautiousness and risk averseness, as well
as wisdom of experience, associated with older directors This implies age and
gender diversity has not got any impact on firms financial performance
measured by ROCE. The results gives a negative insignificant relationship of
board size (-0.37) and average age of directors (-.075) to ROCE at 0.05 or 5%
of significance. This means board size does not affect firm performance which I
taught it should due to its greater pool of information provided by a large board.
Moreover, firm size does not also affect firm performance which I had expected
it to affect firm performance since being a large firm implies operating at a
lower cost and hence firm financial performance. This can be seen with firm
size having a positive insignificant relationship with ROCE (0.203). There is a
positive insignificant relationship between gender diversity and age diversity
(0.023). This is same with gender diversity and firm size (0.120) having an
insignificant positive relationship. On the other hand, a significant relationship
is found between gender diversity and board size. I am okay with this a large
board is believed to have female board member than a small board. Negative
insignificant relationships exist between average age of director and gender
diversity. I found a positive insignificant relationship between age diversity and
both board size and average age of directors. I would have expected a wide
range of age group within a large board but this study shows the contrary.
Whereas a significant negative relationship of -0.328 is found between age
diversity and firm size. Also, the correlation result show positive insignificant
relationship between board size and firm size which is not what I expected
39

given than one should be expecting a large firm to be having a large board.
Board size and average age of directors have a negative insignificant
relationship of -0.97 at 0.05 or 5% level of significance. Results also report a
negative insignificant relationship between firm size and average age of
directors (-0.131).
4.5 Regression analysis
Table 2
Model Summary
Model

.256

Adjusted R

Std. Error of the

Square

Square

Estimate

.066

-.021

Change Statistics
R Square

Change

Change

36.52770

.066

.759

df1 df2

Sig. F
Change

54

.583

a. Predictors: (Constant), Average age of directors, age diversity, gender diversity, Board size, Ln turnover/Firm
size

ANOVA
Model

Sum of Squares
Regression

df

Mean Square

5065.189

1013.038

Residual

72050.739

54

1334.273

Total

77115.928

59

Sig.
.759

.583

a. Dependent Variable: Mean return on capital employed

b. Predictors: (Constant), Average age of directors, age diversity, gender diversity, Board size,
Ln turnover/Firm size

40

Coefficients
Model

Unstandardized Coefficients

Standardized

Sig.

Coefficients
B
(Constant)

.721

-.111

-.789

.433

2.849

.106

.739

.463

-1.003

2.989

-.047

-.336

.738

Ln turnover/Firm size

5.889

3.342

.253

1.762

.084

Average age of directors

-.781

1.471

-.071

-.531

.598

age diversity
Board size

33.821

94.340

-31.587

40.023

2.105

Beta
.359

gender diversity
1

Std. Error

a. Dependent Variable: Mean return on capital employed

Table 2 above shows the regression result obtained from this study when all the
variables (age diversity, gender diversity, firm size, board size, and average age
of directors) are included, also known as a multiple regression analysis. This
permits us to test our hypothesis earlier stated above. Hypothesis 1 forecasted
age diversity to impact firm performance positively. With a coefficient value of
t= 0.739 and a significant value of 0.463, this hypothesis is not supported.
Instead, there is an insignificant positive relationship between age diversity and
firm performance (B= 2.105). For the second hypothesis, it expected gender
diversity to positively impact firm performance. The regression analysis show a
t value of -0.789 and a significant value of 0.433 which also fail to support the
hypothesis with a B value of -31.587. There is rather a negative insignificant
relationship between gender diversity and firm performance (B= -31.587).
Hypothesis 3 looked to see a positive relationship between the diversity
variables (age and gender) and firm financial performance. The absence of any
significant relationship of the individual diversity variables with firm
performance leads to a failure of both hypotheses 1 and 2, and subsequently
same for hypothesis 3. Hence there is no relationship between diversity
variables and firm performance according to this study.
41

4.6 RELATING RESULTS TO THEORETICAL AND

EMPIRICAL LITERATURE
This research intended to look the impact of board diversity variables (age and
gender) on firm financial performance. This was done with the aid of our
hypotheses drawn from the various theories of corporate governance (agency
theory, stewardship theory, upper echelon theory, stake holder theory and
resource dependency theory). The results failed to support the hypotheses
meaning there exist no positive relationship between age and gender diversity
variables and firm financial performance. This was quiet contrary to what I was
expecting. This therefore did not support the famous opinion of board diversity
positively impacting firm financial performance.
The results of this study is however consistent with other researches which
found no positive relationship between diversity and its variables and firm
financial performance. This is the case with Hambrik et al (1995) on 32 main
airlines, Shrader, Blackburn, and Iles (1997), Farrell and Hersch (2005), Carter
et al (2010). Meanwhile several researches found the contrary with diversity
having a positive relationship with firm financial performance. This is the case
with research such as Carter et al (2002), Niclas et al (2003), Bantel (1993),
Simon and Pelled (1999), Toyah. M (2009), Richard (2000), Burke (2000),
Siciliano (1996) and Murray (1989).
This study shows a positive but very insignificant relationship between firm
performance and age diversity which is not quiet consistent with that of Vroom
and Pahl, (1971) and Kang et al (2007) that argues of different age groups on
boards affecting firm financial performance positively. This positive impact
comes due to the balancing the risk taking- possibly associated with younger
directors on one hand and on the other cautiousness and risk averseness, as well
as wisdom of experience, associated with older directors on board.
42

Also, results from this findings gives us a negative relationship between gender
diversity variable and firm financial performance though consistent with studies
like that of Shrader, Blackburn, and Iles (1997), Farrell and Hersch (2005),
Carter et al (2010). Erhardt et al (2003) found a significant positive relationship
in his study between the percentage of female directors and ethnic minorities on
board and return on assets, profit margin, sales to equity, earnings per share, and
dividends. Carter et al (2003) came out with similar results of a positive
significant relationship. Also, Carter, Simkins, and Simpson (2003) did a study
testing the relationship between Tobins Q and two measure of board gender
diversity. This was the percentage of women on board and a dummy variable
representing the women participation on board. The findings showed a positive
relationship between these diversity variables and Tobins Q. Findings from my
study however shows a contradictory view as gender diversity does not
positively impact firm financial performance.
Moreover, this work shows a negative relationship between board size and firm
performance which is in accordance with the view of Carter et al (2010) and
Dobbing and Jung (2011) who argues that this may be due to arguments and
slow decision making common with large boards which will intend affects firm
performance negatively. This result however conflicts the work of Adam and
Ferreira (2007) who argued for a positive relationship between board size and
firm performance arising as a result of wider pool of information associated
with large boards that lead to increased firm performance.
Furthermore, I find a positive relationship between firm size and firm
performance supported by Carter et al (2010), he argued that firm size directly
affects firm performance.
In addition, this study obtains a significant positive relationship between gender
diversity and board size, a positive relationship between age diversity and board

43

size. This result reflects my expectations of that large board are likely to have
both genders on board than smaller boards as well as a blend of different age
groups (Klein 2002).
Also, I find a positive relationship between firm size and board size though
insignificant. This is in confirmation with my expectation as larger companies
tend to have more diverse boards. This diverse board intend lead to large board
as each board member here represent or protect the interest of the large stake
holder of a large company (Louma and Goodstein, 1999).
This work was done from 60 companies of the FTSE 250 companies in the UK.
These are the 250 most capitalised companies in the UK, however after my
correlation and regression analysis, I find that age and gender diversity does not
affect firm performance which was really contrary to my expectation. The
popular view from research argues that gender and age diversity impact firm
financial performance (Carter et al 2002, 2010; Niclas et al 2003; Bantel 1993;
Simon and Pelled 1999; Toyah. M 2009; Richard 2000), which this work does
not support. This means firms should be careful when trying to promote gender
and age diversity in their boards as this might be detrimental to their financial
performance as proven by my study.

44

Chapter 5

5.0 Introduction, Summary of study/ findings, Implication of

study, Limitation, Direction for further research and Conclusion
5.1 Introduction:
This chapter will cover the summary of my findings and then the implications
will come after, the limitation of this study, followed by directions for further
research and finally conclusion of the study.

5.2 Summary of study/findings

The purpose of this work/study was to examine the impact of board diversity
(limiting to age and gender diversity) on firm financial performance. This was
carried out of a sample of 60 FTSE companies from the FTSE 250 companies in
the UK in 2010 and 2011. This research area was chosen in consideration to
time as board diversity and firm performance are significant corporate
governance issues that our modern corporations are facing.
The main findings of this work relating the impact of board diversity (age and
gender) and firm financial performance gives no positive relationship between
these diversity variables and the financial performance of these 60 companies in
UK. A positive (0.008) but very insignificant relationship was found between
age diversity variable and firm performance measured with ROCE. While a
negative (-0.058) relationship was found between gender diversity and firm
financial performance. Also, looking at the relationship between board size and
performance of these 60 companies, a negative link is showed, thereby
supporting the notion of large board characterised by arguments which intend
slow decision taking (Dobbing and Jung, 2011). Meanwhile a connexion is
obtained from firm size and firm performance of our sample. Moreover, a
significant relationship exist between our gender diversity and board size
45

(0.279*) and a positive link existing between age diversity and board size.
Finally, some other main findings to this work are; board size ranging between
6 to 13 members,19 boards having no female board member, 30boards with
only 1female board member and 11boards with just 2 female members out of
the 60 boards. A typical board of director fall between the age of 47- 73.

5.3 Limitations
There are important issues that need to be highlighted about this study so as
provide room for better future research on this area. Some of these issues might
have impacted the outcomes or results of my findings thereby leading to less
accurate explanations of phenomena and forecast for the future.
Firstly, the hypotheses tested were developed from five theories; Agency
theory, stewardship theory, resource dependency theory, upper echelon theory
and stakeholder theory. Each of these theories is seen in details earlier in this
work because they provide the conceptual framework for the hypothesis of a
link between gender and age diversity of boards and the financial performances
of these firms. Resource dependency theory contributes the most support for a
positive relationship between gender and age diversity and firm performance.
However, other theories are not mutually exclusive such that valuable resources
provided to the firm by age diversity and women might have been distorted by
the social-psychological dynamics of the board, example being like exclusion or
conflict.
Moreover, this work only takes into consideration 60 major UK based
corporations listed in the FTSE 250 index. Perhaps looking at smaller
companies or a mixture of small and large companies may provide us with
different results given that small companies may better portray these diversity
variables with respect to firm financial performance.

46

In addition, this work is based on 60 most capitalised companies in the UK. In

other countries there are different laws, cultural environments, geography,
historical backgrounds and other factors that can affect diversity in general and
board diversity in particular. An example can be seen with Norway where the
law requires every board of companies to be composed of at least 40% women
(Rose, 2007). This gives a Norwegian board which is more diverse in terms of
gender than a UK boards which is based on merits. With respect to the potential
differences in diversity across countries and multi-country, research in board
diversity and firm performance are likely to differ. Considerations should
therefore be made upon this like carrying a research based on sample of
companies from many different countries.
Also, all the data used to carry this research are secondary data obtained from
the Morningstar Company Intelligence formerly (Hemscott Company Guru) and
the websites of the company. These data source cannot be accorded full credits
as there were situations of missing data as some companies did not provide all
information needed on their annual reports. Also, companies are careful about
the information they publish of their firm as these might be very critical to their
profitable continuation of business. This therefore calls for concerns on
secondary data which could be misleading, thereby making wrong analysis and
interpretations.
Furthermore, the choice of diversity variables is also very important. For this
study, I took age and gender diversity which is quiet peculiar to the UK. In
other countries, language or religion could be more important dimensions of
diversity which should be explored by further studies on this domain.
Also, the period considered in this study could also be a limitation. The data of
almost all the variables used in this research is on a two year average for the
intention of reducing fluctuations. These could still be misleading as there are

47

cases where economic boom or recession could last for many years, thereby
making this work less credible.
Finally, the results of my analysis do not confirm or reject any specific theory
since the investigations were not intended or structured to be a direct test of any
single broad base theory, like the agency theory or resource dependency theory.

5.4 Directions for future study

Despite the numerous limitations attributed to this work as seen earlier, it
contributes to the body of existing literature and studies on board diversity
(gender and age) and firm performance. This work also provides a base for
future studies on this area. The following paragraphs are directives to be
considered for future studies in order to better analyse the relationship standing
between diversity and financial performance of firms.
Firstly, future studies could incorporate a more large study period or why not a
panel data (e.g Campbell and Minquez-Vera, 2008) than just the two year
period (2010 and 2011) used by this work, as it is possible to have economic
boom or recessions that last for many more years. This will lead to better
understanding and more accurate analyses of the impact of diversity and firm
financial performance.
Also, future study on board diversity and firm financial performance should
consider more variables rather than limiting only to age and gender. Other
variables like religion and language just to name a few are very important
diversity variables in some countries which should be considered when trying to
analyse the impact of diversity on the financial performance of firms (Carter et
al., 2010). In addition, it could be important taking also non-listed and small
companies in our future sample. In this case we can therefore use an
accounting-based measure (ROA), rather than a market-based performance
measure (ROCE).
48

Furthermore, one can also think of looking at this research in future the other
way round. That is, why not that performing firms are increasing diversity in
their boards which explains the positive relationship between board diversity
and firm financial performance.
Also, forthcoming research under this area should attempt using unbiased
primary source of data which could permit us to better understand board
processes and explain how diverse boards make decisions (Miller and Triana,
2009)
Moreover, it could be more interesting extending the scope of this study by
considering events like mergers and acquisitions (M & A) and bankruptcies.
These events can be unambiguously classified under success or failure, this type
of research can allow us understand causality in the link between gender
diversity and firm performance.
Finally, further research on this field could be directed towards investigating
possible risk-propensity differences in gender which moderates the relationship
between the characteristics of directors and firm financial performance. This
could be a very productive area of research as there is many evidence of the
risk-averseness of women compared to men (Byrnes, Miller and Schafer 1999).
However researchers like Croson and Gneezy (2009) argue that the difference
in risk taking is very minimal if not inexistent amongst managers and
professionals of different gender. The reason behind this could be due to the fact
that managerial positions are taken by mostly people who are more risk taking
leading to no difference in this respect between the men and women.

5.5 Conclusion
Conclusively, this work has thrown more lights on the impact of boards
diversity with respect firm financial performance, though it didnt proofed any
significant impact or relationship between the two. However, theories on
49

corporate governance (agency theory, resource dependence theory, stewardship

theory, upper echelon theory and stakeholder theory) firmly back the fact that
diversified boards affect firms financial performance either positively or
negatively. Agency theory views the board as being the main monitors of
activities in the firm and they do their best to ensure they serve the best interest
of the owners through improved firm financial performance (Payne et al.,
2008). on the other hand, resource dependency theory argues for a board
diversed such that it can secure vital resources (human, social and economic)
which are highly needed by the firm to enhance its performance. In a case
where the firm already has access to such resources, these different directors on
board could permit the board obtained these resources at a lesser cost than
before due to their connections with the external environment (Hillman, Canella
and Paetzold, 2000). Upper echelon theory on its part brings the opinion of
heterogeneous top management teams with more creative and idea generating
skills and therefore linked or connected to more innovative organizations
(Marinova et al.,2010). Unlike agency and resource dependent theory, the
stakeholder argues for a diversed board representing and defending the interest
of the of the stake holders of the firm (Haslinda and Benedict, 2009). Thus, a
wider stakeholder group consisting of employees, creditors, customers,
suppliers, governments and the local communities is taken into consideration
and the dominant focus on shareholders value becomes less projecting (Mallin,
2010).
Empirical studies as seen earlier have also proofed the importance of board
diversity in contributing to the performance of the firm (Carter et al; 2002,
Niclas et al; 2003, Bantel; 1993, Simon and Pelled; 1999,). Nonetheless other
studies like this one and Zahra and Stanton (1988), Farrell and Hersch (2005),
Carter et al (2010) show no significant relationship between board diversity and
firm financial performance. On the other hand, some studies proof negative
50

relationship between the two arising mainly due to conflicts that slow decision
taking in diverse boards (Lau and Murnighan, 1998). Such studies include;
Hambrik et al (1995), Shrader, Blackburn, and Iles (1997). However, a
significant relationship was found between gender diversity and board size
(0.279*) and a positive link existing between age diversity and board size. This
work was done based on the UK economy, thus will be right as institutional and
idiosyncratic characteristics asserts that care should be taken in the
generalisation of the results.

51

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