Board Diversity and Firm Performance Influenced by Ownership Concentration: Evidence from India

Abstract

With the new Companies Act 2013 as well as Clause 49 of the listing agreement with stock exchanges in India mandating gender quota in the form of inclusion of at least one woman director in the board composition, the study on board diversity has assumed significant importance in the Indian context. Instead of limiting ourselves to gender diversity, we examine the various facets of diversity among the board of directors for a cross-sectional sample of listed firms in India and their association with the accounting and stock-based measures of firm performance as proxied by return on assets (ROA) and Tobin’s Q respectively. We also explore if this relation is influenced by the ownership concentration in firms. We use three measures viz. Blau Index, Shannon Index and Coefficient of Variation for defining our diversity attributes based on gender, age, nationality, educational qualification, tenure and independence. Unlike several other research studies, we do not pool the various diversity scores to create a single diversity index as it has the potential to mask the actual association of each diversity attribute. We find that Tobin's Q is positively associated with international diversity suggesting that firms with higher proportion of international directors are considered favourably by investors than the ones with lower proportion. Moreover, firms where directors have repeat appointments increasing their tenure with the firms are valued less favourably by their investors. We also find that ROA is negatively associated with statutory diversity (board independence) which could possibly be attributed to over-monitoring in already well-governed firms. However, in our sample, we do not find significant difference in the association of board diversity with firm performance, contingent upon the ownership concentration or firm type (i.e. whether a firm is family firm or not based on our chosen definitions of a family firm).