Staff Papers
Published Date: 01 November 2004

Review of Literature & Empirical Research: Is Board Diversity Important for Corporate Governance and Firm Value?

MAS Staff Paper No. 35, November 2004 - By Pei Sai Fan

Abstract

This paper builds on the earlier MAS staff paper published by the same author in March 2004 by updating the recent empirical research on corporate governance and examines at length the issue of board diversity in section 7 to 10.

Board diversity refers to differences or variation in the age, gender, ethnicity, culture, religion, constituency representation, professional background, knowledge, technical skills and expertise, commercial and industry experience, career and life experience of the members of corporate boards of directors.

The recent wave of high profile corporate scandals in the U.S. and Europe has placed the issue of board effectiveness under intense scrutiny by various stakeholders. Institutional investors and shareholder activists have also pressured firms to appoint directors with different backgrounds and expertise under the assumption that greater diversity of the boards should improve board functioning.

But, does greater board diversity improve board functioning? If so, in what way does the board diversity improve board functioning? How is board diversity related to a firm's profile, social norms and external environment facing the firms? This paper attempts to shed some light on these questions by looking at the relevant theories on boards of directors, namely the agency and resource dependence perspectives of a board?s function and also relevant empirical studies to date. This paper also helps summarize recent increased research and empirical study on board functioning and attributes of board members including board diversity in search of a more parsimonious corporate governance model to better explain the relationship between board composition and firm performance.

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