The Impact of Board Diversity on Textual Social, Environmental Disclosures, and Corporate Performance

Abstract

Drawing on the notion of faultlines – a hypothetical dividing line that splits a group into two or more subgroups based on the alignment of one or more individual attributes – this thesis proposes a new approach to the measurement and assessment of board diversity to understand how high(er) performing boards can be built i.e., the multi-dimensional diversity index (MDI). The proposed MDI captures the joint effect of differences in director attributes at four diversity levels for 26,743 directors, namely: (i) surface (or baseline); (ii) identity; (iii) demographic; and (iv) meso-level. The current study uses three-stage least squares (3SLS) with a panel of 3,357 FTSE All-Share index non-financial companies from 2005 to 2018. To this end, a key implication of this study – and by extension, the proposed MDI – is that it challenges the conventional notion that boards are improved ‘enough’ by focusing on the micro-dimension and increasing stand-alone diversity attributes, such as gender. Collectively, this study’s results suggest that a well-diversified board incentivises managers to disclose more information on social and environmental activities in contrast to firms with an extreme faultline score. The results show that highly effective boards with a moderate faultline score at meso-level diversity (e.g., identity, information, and non-demographic attributes) lead to better accounting profitability, corporate value, and market-based performance. Remarkably, the present study finds that nationality diversity per se positively impacts corporate performance; in contrast, the dominance of male directors hinders firm performance significantly.