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Board Composition and Financial Performance: Uncovering the Effects of Diversity in an Emerging Economy

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Abstract

We examine the key elements of board diversity (or heterogeneity) amongst listed companies operating in an emerging economy (Mauritius) and the extent to which these influence financial performance. Specifically, we ask whether there is evidence of tangible benefits in pursuing a strategy of board diversity in terms of gender-, age-, educational background and independence in a corporate context which has long been dominated by family-led and ‘closed’ boardrooms. In light of recent corporate governance developments which appear to foster greater diversity, we examine data from the 2007 annual reports of all 42 companies listed on the Stock Exchange of Mauritius. We find that (i) women remain poorly represented on boards (ii) there is a relatively satisfactory level of heterogeneity in terms of educational background, age and independence in relation to developed countries. We also find significant regression coefficients for all four variables in terms of their impact on short-term performance. However, these relationships are characterised by both negative and positive impacts thereby leading to discussions on the validity of a strict heterogeneous or homogeneous board composition in the context of a developing economy.

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Notes

  1. Refer for example to the Organization for Economic Cooperation and Development’s Principles of Corporate Governance (2004).

  2. Whilst we acknowledge the importance of ethnic/religious diversity in Mauritius, the absence of reliable data on the ethnic, cultural or religious affiliation of individual directors has precluded us from including this variable in our study.

  3. The Variance Inflation Factors (VIF) were examined for the regression and were found to be within acceptable limits (i.e. close to 1). As a result, multi-collinearity is not deemed to be significantly present.

  4. Alternatively, this is suggestive of family concentration at board level. Hence, an apparent diversity in age may in fact reflect a more homogeneous board in terms of family relationships—thereby again validating the clan rationale outlined by Wilkins and Ouchi 1983). Unfortunately, we do not have access to publicly available data to proxy for the extent of family homogeneity at board level.

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Authors and Affiliations

  1. Department of Management, University of Mauritius, Reduit, Mauritius

    Jyoti D. Mahadeo & Vanisha Oogarah Hanuman

  2. University of Southampton, Southampton, UK

    Teerooven Soobaroyen

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  1. Jyoti D. Mahadeo
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  2. Teerooven Soobaroyen
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Correspondence to Jyoti D. Mahadeo.

Appendix 1: Selected Extracts of the Code of Corporate Governance (2004)

Appendix 1: Selected Extracts of the Code of Corporate Governance (2004)

2.2.1. The board should have an appropriate balance of executive, non-executive and independent directors under the firm and objective leadership of a chairperson to ensure satisfactory performance within a framework of good governance to serve the interests of all the stakeholders of the company.

2.2.2 It is essential for the protection of shareholder interests (including minority interests) that the board has some directors who are independent from the company and from any dominant shareholder. All companies should have at least two independent directors on their boards, as defined in this Code.

2.2.5. Crucially, all members of the board should be individuals of integrity who [can] bring a blend of knowledge, skills, objectivity, experience and commitment to the board.

2.5.4 The titles, functions and roles of chairperson and chief executive officer must be kept separate as a cornerstone of good governance.

2.5.5 The chairperson can be any non-executive or independent non-executive director elected by his or her fellow directors.

2.7.1.3 Independent director—a director who is non-executive and who:

  1. (a)

    is not a representative or member of the immediate family (spouse, child, parent, grandparent or grandchild) of a shareholder who has the ability to control or significantly influence the board or management. This would include any director who is appointed to the board (by virtue of a shareholders’ agreement or other such agreement) at the instigation of a party with a substantial direct or indirect shareholding in the company;

  2. (b)

    has not been employed by the company or the group of which the company currently forms part, in any executive capacity for the preceding three financial years;

  3. (c)

    is not a professional advisor to the company or the group other than in a director capacity;

  4. (d)

    is not a significant supplier to, debtor or creditor of, or customer of the company or group, or does not have a significant influence in a group related company in any one of the above roles;

  5. (e)

    has no significant contractual relationship with the company or group;

  6. (f)

    is free from any business or other relationship which could be seen to materially impede the individual’s capacity to act in an independent manner.

3.1 Committees of the board can help to efficiently advance the business of the board. At the same time, committees can demonstrate that directors’ responsibilities are being adequately and properly discharged. However, the board is the focal point of the corporate governance system and is ultimately accountable and responsible for the performance and affairs of the company. Delegating authority to board committees or management does not in any way mitigate or dissipate the discharge by the board and its directors of their duties and responsibilities. Board committees are merely a mechanism to assist the board and its directors in giving detailed attention to specific areas of their duties and responsibilities in a more comprehensive evaluation of specified issues. Being smaller, committees can go into greater detail and deal with complex issues where the full board might not have sufficient time.

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Mahadeo, J.D., Soobaroyen, T. & Hanuman, V.O. Board Composition and Financial Performance: Uncovering the Effects of Diversity in an Emerging Economy. J Bus Ethics 105, 375–388 (2012). https://doi.org/10.1007/s10551-011-0973-z

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