Board diversity and corporate performance in a two-tier governance context

Abstract

Purpose Diversity in the boardroom is a social factor that spurs public debate in academic and practical arenas. In a two-tier governance system, the question lingers on the impact of board of commissioners and board of directors’ diversity on a company’s performance. This study aims to investigate this issue based on a comprehensive set of diversity variables, namely, age, tenure, gender, education level, culture, functional expertise, industry experience, school of origin and “busyness.” Design/methodology/approach The authors constructed diversity indices for board of directors and board of commissioners and used multiple linear regressions to test the hypotheses using samples of companies listed on the Indonesian Stock Exchange from 2014 to 2018. Findings Board of director (commissioner) diversity has no significant (a positive) impact on corporate performance. However, the latter does not moderate the relationship between board of director diversity and company performance. Research limitations/implications Although the theories of human capital and upper echelons are applied here, the results more likely support a contingency argument, as the effect of diversity may vary by company and period, hence leading to offsetting effects. Thus, the impact of diversity on corporate performance might be better observed through in-depth case studies. Practical implications The positive impact of the board of commissioners’ diversity on firm performance might indicate the importance of close monitoring by this board. The results further suggest that appointment decisions of directors and commissioners from diverse backgrounds should be based on criteria other than financial performance. Originality/value No study has constructed comprehensive diversity indices of the board of commissioners and directors in a two-tier governance context. The study fills this gap.