The association between diversity within boards and company financial performance : a graphical time-series approach

Abstract

Directors need to guide and govern companies on behalf of and for the benefit of shareholders and stakeholders (Adams, Hermalin, & Weisbach, 2010; “Duties of directors,” 2011), but questions remain in academic literature (Carter, D’Souza, Simkins, & Simpson, 2010; Jhunjhunwala & Mishra, 2012; Nielsen & Nielsen, 2013) whether boards with higher levels of diversity amongst directors are better equipped to fulfil their fiduciary duty than boards with lower levels of diversity. This research report set out to determine if increased levels of diversity within boards is associated with improved financial performance of companies. To accomplish that literature was reviewed to confirm the function of boards, determine dimensions of diversity that could affect board performance and to identify theoretical frameworks that could explain why increased diversity might lead to improved board performance. Share price, dividend payout and directors’ demographic data was collected for a sample of 40 companies listed on the JSE from 2000 to 2013 and subjected to tests using Muller and Ward’s (2013) investment style engine in a quasi-experimental design combining cross-sectional and longitudinal methodologies. Graphical time-series representations of cumulative portfolio market returns were analysed to determine if diversity dimensions tested were associated with improved company financial performance. The results showed that for the selected sample, racial diversity within boards does not contribute to improved financial performance. Increased gender diversity and decreased average board age were shown to have strong associations with improved company performance.