Abstract:
Directors need to guide and govern companies on behalf of and for the benefit of shareholders and
stakeholders. However questions remain as to 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 examines whether increased levels of diversity within boards are associated with improved
financial performance to shareholders. From the literature, several theoretical frameworks that could explain
why increased diversity might or might not lead to improved board performance were noted. Share returns
and directors’ demographic data were collected for a sample of the largest 40 companies listed on the JSE
from 2000 to 2013. This data was analysed using Muller and Ward’s (2013) investment style engine by
forming portfolios of companies based on board-diversity constructs. Time-series graphs of cumulative
portfolio market returns were analysed to determine if the diversity dimensions tested were associated with
improved share performance. The results show that racial diversity within boards is not associated with
financial performance. However, increased gender diversity and younger average board age are shown to
have strong associations with improved share price performance. These findings are mainly attributed to
agency-, resource dependency, human capital and signalling theories. Increased diversity is seen to bolster
independence and lessen agency problems. Rising diversity levels also enlarge boards’ external networks,
allowing diverse stakeholders’ needs to be accommodated and limiting dependence on strategic resources.
Finally, as human capital is increased, the collection of different skills and experiences are associated with
better performance. The results, based on a more robust methodology and improved data set, provide
additional support to previous studies.
