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The Diversity of Corporate Board Committees and Firm Financial Performance

40 Pages Posted: 20 Mar 2007  

David Carter

Oklahoma State University - Stillwater - Department of Finance

Frank P. D'Souza

Loyola University - Sellinger School of Business and Management

Betty J. Simkins

Oklahoma State University - Stillwater - Department of Finance

W. Gary Simpson

Oklahoma State University - Stillwater - Department of Finance

Date Written: March 15, 2007

Abstract

We examine the relationship between the gender and ethnic minority diversity of the board of directors and the financial performance of the firm, i.e. the economic case for a diverse board of directors. The research is unique because we analyze both the diversity of the board and the diversity of important board committees to gain greater insight into the way diversity affects board functions and, ultimately, shareholder value. Our sample consists of all firms listed on the Fortune 500 over the period 1998-2002 yielding a panel of data with approximately 2,000 firm years. Our data also indicate that the direction of causation goes from board diversity to firm financial performance which supports the economic case for board diversity. When we consider the percentage of women and ethnic minority directors on the board, the diversity of board composition appears to create value for shareholders. The results of a cross-section fixed-effects procedure with lagged variables and a three-stage least-squares estimation support board diversity has a positive effect on financial performance as measured by Tobin's q. However, the board committee evidence also indicates that the process through which gender and ethnic diversity impacts financial performance is subtle and complex. Some functions of the board may benefit from diverse directors while other functions may actually suffer. Furthermore, the type of diversity appears to matter. We conclude a more nuanced view of the economic case for board diversity is most appropriate.

Keywords: Diversity, financial performance, board of directors, board committees

JEL Classification: G34

Suggested Citation

Carter, David and D'Souza, Frank P. and Simkins, Betty J. and Simpson, W. Gary, The Diversity of Corporate Board Committees and Firm Financial Performance (March 15, 2007). Available at SSRN: https://ssrn.com/abstract=972763 or http://dx.doi.org/10.2139/ssrn.972763

David A. Carter

Oklahoma State University - Stillwater - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States
405-744-5104 (Phone)
405-744-5180 (Fax)

Frank P. D'Souza

Loyola University - Sellinger School of Business and Management ( email )

4501 North Charles Street
Baltimore, MD 21210-2699
United States

Betty J. Simkins (Contact Author)

Oklahoma State University - Stillwater - Department of Finance ( email )

336 Business Building
Stillwater, OK 74078-4011
United States
405-744-8625 (Phone)
405-744-5180 (Fax)

HOME PAGE: http://spears.okstate.edu/~simkins

W. Gary Simpson

Oklahoma State University - Stillwater - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States

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