Governance Corporate

Topics: Corporate governance, Board of directors, Non-executive director Pages: 35 (11353 words) Published: June 5, 2013

British Journal of Management, Vol. 24, 85–101 (2013) DOI: 10.1111/j.1467-8551.2011.00789.x

What Makes Better Boards? A Closer Look at Diversity and Ownership Walid Ben-Amar, Claude Francoeur,1 Taïeb Hafsi1 and Réal Labelle1 Telfer School of Management, University of Ottawa, 55 Laurier East, Ottawa, Ontario K1N 6N5, and 1 HEC Montreal, 3000 Côte-Sainte-Catherine Road, Montreal, Quebec H3T 2A7, Canada Email:,,, This study investigates the joint effect of corporate ownership and board of directors’ diversity configurations on the success of strategic merger and acquisition (M&A) decisions. Board diversity is defined as the extent to which its demographic diversity as measured by the culture, nationality, gender and experience of its directors complements its statutory diversity. A theoretical framework linking ownership, board diversity and M&A strategic decision making is proposed and tested. Based on a sample of 289 M&A decisions undertaken by Canadian firms over the period 2000–2007, demographic diversity is found to have a clear and non-linear effect on M&A performance while statutory diversity is of limited influence. Ownership is found to influence the effect of diversity, making the relation finer and more precise. This has practical implications. First, statutory diversity is not sufficient for well-performing boards. Also, ownership is an important factor. The most advocated board diversity aimed at insuring the board’s independence is not valid across all ownership configurations. From a public policy perspective, results provide support for the principles-based approach in governance. Governance regimes should encourage the search for a balance between board diversity and the need for cohesion that best serves the firm’s purpose and obligations.

Board’s diversity and its effect on firm performance have been extensively studied and yet it seems that we know little about the issue. Conflicting findings, unclear or unclean methodologies, leave scholars and managers in a quandary. The first important reason for such a situation is the dominant use of agency theory premises that statutory diversity (SD) is all that counts to control management and provide it with incentives to protect shareholder value (Fama and Claude Francoeur and Réal Labelle gratefully acknowledge financial support from the Social Sciences and Humanities Research Council of Canada (Grant 4102011-2639), the Stephen A. Jarislowsky Chair in governance and the CGA Professorship in Strategic Financial Information. Taïeb Hafsi acknowledges support from the Montreal Interuniversity Institute of Governance (IGOPP), from the Rebrab, and from the Somers families.

Jensen, 1983). SD is mandated by law or best practices and is often reduced to board members’ independence from management. The second important issue is the belief that there is a linear relationship between diversity and performance. This is questioned by both logic and extant research (Manzoni, Strebel and Barsoux, 2010; Milliken and Martins, 1996). The third important issue is ownership. It is increasingly believed that different owners pursue different goals, even when they share the same kinds of assets. This may have significant effects on firm governance and ultimately performance (Sur, 2009). In this study, we propose what we believe is a more convincing theory and finer empirical findings by considering these issues. To do so, we recognize that SD has an effect, but we consider such effect to be contingent on individual characteristics of actual board members, or demographic diversity (DD), and on the nature of owners. SD, and in particular DD, are measures

© 2011 The Author(s) British Journal of Management © 2011 British Academy of Management. Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.

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