Board Diversity and Financial Performance of the Nigerian Listed Firms: A Dynamic Panel Analysis

Abstract

The effect of board diversity on organisational performance has continued to be given attention by policymakers, non-governmental agencies, and academic communities. It has been established that boardroom diversity enhances the corporate boards’ monitoring capacity and mitigates the agency costs, which positively influences the firms’ performance. Despite the advantages of constituting diverse boards, the corporate governance framework guiding the operations of such firms does not contain any specific requirement on board diversity. Hence, empirical studies need to stress more on the relevance of boardroom diversity to firms’ value in the Nigerian context. Therefore, this paper examines the effect of board diversity on financial performance of the Nigerian listed firms. The study utilised the balanced panel data of 70 firms for a period of 8 years (2012 to 2019) using a two-step system generalised method of moments (GMM) framework. This study indicates a positive and significant relationship of board gender diversity (BGD) and Foreign directors (FD), with financial performance. However, the effect of CEO financial expertise on the firms’ return on assets (ROA), return on equity (ROE), and return on sales (ROS) appear positive but insignificant. Consequently, the Nigerian listed firms should attach more value to constitute a smaller board size with a considerable number of female and foreign directors to maximise their performance.

Does Family Ownership Moderate the Relationship between Board Diversity and the Financial Performance of Saudi-Listed Firms

“…These are agency theory, upper echelons perspective, and resource dependency theory. The agency theory argues that subsequent to the separation between ownership and control in modern organisations, conflicts of interest between managers and shareholders may emerge (Jensen and Meckling 1976;Sani 2021). According to this perspective, managers as custodians of firm resources may focus on maximising their utilities at the expense of the shareholders' wealth (Bazhair 2023;Terjesen et al 2016).…”

“…Additionally, it is argued that corporate boards composed of diverse directors are associated with superior monitoring techniques that can compel managers to align with firm value maximisation objectives (Galbreath 2016;Shehata et al 2017). Diverse boards engage in extensive debates and bring new ideas into the boardroom deliberations, which can shape board decisions (Bazhair 2023;Harjoto et al 2019;Sani 2021). Also, boards with a higher ratio of female directors, financial experts, and foreign nationals are more likely to scrutinise management proposals and compel managers to embrace disclosure, thereby mitigating information asymmetry among firm stakeholders (Ararat et al 2015;Miller and Triana 2009;Zaid et al 2020).…”

“…It is suggested that the board of directors is the highest decisionmaking organ charged with formulating policies. Given that, the proponents of the upper echelon theory argued that the personal attributes of the board members may influence firms' strategic decisions and positively impact financial performance (Darmadi 2013a;Sani 2021). It is reported that diverse boards are more inclined towards innovative strategies, have a breath of experience, and possess better strategies in utilising competitive advantage (Matemilola et al 2018).…”

“…The resource dependency view argues that the board of directors carries out an advisory role and links firms to strategic resources (Al-Matari 2022;Pfeffer and Salancik 2003;Zahra and Pearce 1989). On the other hand, the agency literature suggests that corporate boards perform monitoring roles and discipline self-interest managers (Jensen and Meckling 1976;Sani 2021). The board of directors matters a lot in firms' governance because its decisions directly influence organisational outcomes (Bazhair 2023;Jensen 1993).…”

“…Moreover, the empirical literature tested the predictions of these theories but documented contradictory views. A stream of the literature stated board diversity facilitates extensive debates that can shape decisions and brings new ideas to the boardroom (Abbas and Frihatni 2023;Bazhair 2023;Galbreath 2016;Othuon et al 2023;Sani 2021), hence enhancing the chances of firms to secure strategic resources that may raise firm value. In contrast, it is argued that a diverse board may be associated with higher inefficiency due to ineffective communication, cognitive conflicts, and lesser boardroom cohesion (Abdullah 2014;Ain et al 2021;Min and Chizema 2015;Shao 2019;Ujunwa 2012).…”