The Determinants and Performance Effects of Diverse Nationality Boards

Abstract

Corporate boards are the focal points for companies’ decisions on strategy and investment, and hence they embody the key features of firm production and management. Researchers and policy makers alike thus invariably ask “who makes these decisions?” A stream of research examines the demographic characteristics of board members such as gender and race as a way of understanding the nature and effects of board decisions. In this paper, using a unique dataset of listed firms, we examine the determinants of board diversity based on directors’ nationalities and ask whether the presence of foreign directors on boards contributes in some way to firms’ operations and performance. Our results show that boards containing diverse nationalities are positively associated with shareholder heterogeneity and firms’ international market operations. National diversity is also positively and significantly related to firm performance. These results underline the role that diversity plays in the higher echelons of management and corporate governance.

Keywords: Foreign Nationality Directors, Board Performance

JEL Classification: G30, G34, J16