Effect of board diversity on firms performance

Topics: Corporate governance, Board of directors, Non-executive director Pages: 8 (2546 words) Published: February 15, 2014
INTRODUCTION

One of the most significant governance issues currently facing the managers, directors, and shareholders of the modern corporation is the gender, racial, and cultural composition of the board of directors. The issue has taken on a high public profile as a result of reports in the popular press, shareholder proposals from advocacy groups, and policy statements from major institutional investors. This is simply stated as Board of diversity which means different things to different people. Among the types of diversity commonly described are: gender, national origin, race, sexual orientation and viewpoint. In my report I have selected three companies and have focused on “The Impact of board of diversity on the company performance’. In my report I have mostly concentrated on gender, educational and age diversity of the board of directors.

Board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. It is the most important decision-making body in a corporation. It has very defined roles and responsibilities within the business organization. Essentially it is the role of the board of directors to assess the overall direction and strategy of the business. It is solely responsible for approving major strategic and financial decisions, such as mergers and acquisitions and changes in capital structure, and also for the most important task of all, which is to hire and fire top executives. Effective boards build capabilities within themselves and their organizations that allow them to do both protect existing assets (compliance role). A board is a group of diverse individuals who have different biases and prejudices and whose behavior is affected by social constraints and power relations. This perspective suggests that director heterogeneity plays a key role in how boards function. In contrast, most researchers in economics consider the board as a single entity. The only heterogeneity considered is whether directors are independent from managers. All other director characteristics are usually deemed unimportant unless they are somehow related to (formal or real) independence. The surprising fact is that, substantial research focuses on the workings of corporate boards. But researchers focus on various aspects of boards.

The board of directors is the internal governance mechanisms intended to ensure that the interests of shareholders and managers are closely aligned, and to discipline or remove ineffective management teams. This internal corporate governance mechanism is highly important in emerging markets Bangladesh, because due to weak institutional structure, emerging market firms depend highly on internal governance mechanisms. Diversity can be a source of market insight, creativity and innovation, and improved problem solving. These diverse resources can provide a firm with a competitive advantage if they are valuable, rare, inimitable, and non-substitutable. However, the value of these resources varies in firms across markets and so does their ability to provide competitive advantage.

This study examines the influence of corporate board composition in the form of representation of outside independent directors on firm economic performance in Bangladesh. Two hypotheses are developed to examine the relationship among composition of board memberships including independent directors and firm performance. The focus of this report is the ways in which board diversity can contribute to a higher financial performance of firms and a more independent board. It examines ways in which firms can gain a competitive advantage by providing insights on how a board should be structured to improve firm performance.

Literature Review
Theoretical literature
Stakeholder Theory recognizing the fact that firms does not operate in an isolation but within an environment made of different interest groups aside the immediate owners, stakeholder theory expanded...
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