Abstract
Organizational boards of directors are one of the most important subgroups within most modern organizations, performing critical advisory, monitoring and resource dependence roles. This paper investigates the crucial question of whether the stock market values ethnic and gender diversity within organizational boards. We find that board diversity is positively associated with market valuation. We distinctively demonstrate further that ethnic diversity is valued more highly by the stock market than gender diversity. By contrast, we do not find any evidence of a significant non-linear link between board diversity and market valuation. Our findings are robust across a number of econometric models that deal with different types of endogeneities and market valuation measures. Overall, our results are consistent with agency and resource dependence theoretical predictions.
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1 Introduction
Organizational boards of directors are one of the most important subgroups within the top management of most modern organizations (Bilimoria and Piderit 1994; Roberson and Park 2007; Mahadeo et al. 2012; Arnegger et al. 2013; Bart and McQueen 2013; Dale-Olsen et al. 2013; Luckerath-Rovers 2013), performing strategic functions, including advising, monitoring, disciplining, motivating and compensating managers, as well as providing access to critical resources, such as business contracts, contacts and finance (Lipton and Lorsch 1992; Jensen 1993; Welbourne et al. 2007; Lincoln and Adedoyin 2012; Abdullah 2013; Triana et al. 2013; Wellage and Locke 2013). This paper examines the crucial question of whether the South African (SA) stock market values ethnic and gender diversity among the boards of publicly listed organizations. Specifically, we exploit a natural and unique organizational context in SA, where recent regulatory, affirmative action, and organizational governance (OG) reforms uniquely require listed organizations to formally compose diverse boards on the basis of ethnicity and gender to investigate whether board diversity can explain observable variations in their market value.
Although SA has been widely recognised as one of the most ethnically diverse countries in the world (Armstrong et al. 2006; West 2009; Ntim and Soobaroyen 2013a, b), long-standing apartheid policy of racial, social, economic and political segregation resulted in largely homogenous organizational boards (Ho and Williams 2003; Swartz and Firer 2005). As will be discussed further, and following the collapse of apartheid in 1994, a number of regulatory, affirmative action, and OG reforms have been pursued aimed at enhancing diversity within SA organizational boards (Armstrong et al. 2006; West 2009; Ntim and Soobaroyen 2013a). These reforms include the 1994 and 2002 King Reports on OG, the 1998 Employment Equity (EE) Act, and the 2003 Black Economic Empowerment (BEE) Act.Footnote 1
Generally, the reforms, especially the King Reports have focused on improving governance standards in SA public organizations (King Committee 2002; Rossouw et al. 2002; Armstrong et al. 2006; Ntim and Soobaroyen 2013a). A more specific objective of these reforms, however, has been to increase the monitoring power of SA organizational boards by improving board effectiveness and efficiency (West 2009; Andreasson 2013), and thereby enhancing the overall market value. A key determinant of organizational boards’ operational and functional effectiveness and efficiency is the degree of ethnic and gender diversity (Pfeffer 1973; Lipton and Lorsch 1992; Jensen 1993; Sonnenfeld 2002; Krishman and Park 2005; Kang et al. 2007; Campbell and Minquez-Vera 2008; Bart and McQueen 2013). Arguably, these unique regulatory and OG reforms provide a significant impetus to investigate the extent to which board diversity on the basis of ethnicity and gender influence market valuation in a major emerging economic power.
Apart from the distinctive regulatory and OG reforms pursued, it has been argued that the association between board diversity and market valuation may not just vary by organizational-level heterogeneities (Baysinger and Butler 1985; Baysinger and Hoskisson 1990; Goodstein et al. 1994), but also by variations in country-level regulatory, OG and institutional features (van der Walt and Ingley 2003; Singh and Vinnicombe 2004; Singh 2007). In spite of this development, previous studies investigating the association between board diversity and market valuation are primarily concentrated in a small number of matured Western economies, such as US that depict comparatively similar institutional contexts (Gilbert and Stead 1999; Carter et al. 2003; Catalyst 2007; Adams and Ferreira 2009; Carter et al. 2010). A further issue of concern is that existing studies that have been mainly conducted in developed countries have focused largely on the valuation implications of board diversity on the basis of gender (Shrader et al. 1997; Burges and Tharenou 2002; Erhardt et al. 2003; Welbourne et al. 2007; Johnston and Malina 2008; Dobbin and Jung 2011; Lincoln and Adedoyin 2012; Abdullah 2013; Luckerath-Rovers 2013).
With respect to the African context, although a limited number of studies have analysed the impact of different OG structures, such as the frequency of board meetings (El Mehdi 2007; Ntim and Osei 2011), ownership structure (Sanda et al. 2010; Ntim 2012, 2013), board size (Ho and Williams 2003; Kyereboah-Coleman et al. 2006) and board structure (Swartz and Firer 2005; Kyereboah-Coleman and Biekpe 2006; Sunday 2008; Ntim 2011) on market valuation, studies examining the valuation implications of ethnic and gender diversity within organizational boards are rare (Lincoln and Adedoyin 2012; Mahadeo et al. 2012; Ujunwa 2012; Ujunwa et al. 2012).
However, it is argued that in emerging economies, such as SA with different regulatory, OG practices, and institutional contexts (as will be explained further), the effectiveness and efficiency of board diversity may vary, and as such the association between board diversity on the basis of ethnicity and gender, and market valuation can be expected to be different from what has been reported for public organizations operating in developed countries. Hence, an examination of the impact of board diversity on market value in emerging African markets, where there is an acute dearth of reliable empirical evidence (Swartz and Firer 2005; Amankwah-Amoah and Debrah 2010; Mahadeo et al. 2012) will arguably be important in providing a more holistic understanding of the effect that board diversity has on market valuation (Dwyer et al. 2003; Brammer et al. 2007; du Plessis 2008; Lincoln and Adedoyin 2012; Triana et al. 2013
Therefore, and in this paper, we investigate the crucial policy question of whether the SA stock market values ethnic and gender diversity within the boards of publicly listed organizations, and thereby making a number of distinctive contributions to the extant literature. First, using a sample of SA listed organisations, we provide evidence on the relationship between board diversity and market value. To the best of our knowledge, this study constitutes one of the first attempts at estimating the impact of board diversity on organizational valuation within an African context, with particular focus on SA, and thus crucially extends the literature to that continent. The study also contributes to the mainly developed countries-based literature on the association between board diversity and market valuation. Second, and different from most past studies, we show how both ethnic and gender diversity affect market value, and thereby shedding new crucial insights on the link between ethnic diversity and market value. Third, we distinctively provide evidence on the relative value relevance of ethnic versus gender diversity on market valuation. Fourth, we uniquely investigate the existence of a non-monotonic association between board diversity and market valuation. Finally, and distinct from most prior studies, we apply econometric methods that sufficiently deal with different kinds of endogeneities, as well as make use of different measures of market valuation.
Our results suggest that the SA stock market values ethnic and gender diversity within organizational boards as there is a statistically significant and positive relationship between board diversity and market valuation. Distinct from prior studies, we show further that ethnic diversity is valued more highly by the SA stock market than gender diversity. This sheds new important insights on the relative value relevance of gender versus ethnic diversity on market valuation. By contrast, we do not find any evidence of a significant non-linear link between board diversity and market valuation. The central tenor of our findings remains unchanged across a number of econometric models that deal with different types of endogeneities and market valuation measures. Overall, our findings are consistent with agency and resource dependence theories, which suggest that ethnic and gender diversity enhances board independence, executive monitoring and decision-making, as well as helps to better link an organization to its external environment that facilitates securing critical resources, and thereby improving market valuation.
The rest of the paper is structured as follows. The second section provides a brief overview of the organizational governance and statutory reforms on board diversity within the South African organizational context. The third section discusses the extant theoretical and empirical literature on the impact of board diversity on market valuation. The fourth section presents the research design. The fifth section reports empirical analyses, whilst the final section contains concluding remarks.
2 Organizational governance and statutory reforms on board diversity within the South African organizational context
As previously explained, and although SA is widely perceived as one of the most ethnically diverse countries in the world (Armstrong et al. 2006; Andreasson 2013), apartheid policy of racial segregation in every reasonably conceivable aspect of life, such as education, housing, and economic participation ensured that organizational boards were dominated mainly by middle class white males (Swartz and Firer 2005; Ntim and Soobaroyen 2013a). Therefore, and following the collapse of apartheid in 1994, the ruling African National Congress initiated a number of reforms that were aimed addressing historical socio-economic inequalities between black and white South Africans (Rossouw et al. 2002; West 2009). Among the reforms pursued so far, the 1994 and 2002 King Reports on OG, the 1998 EE Act and the 2003 BEE Act are directly relevant to enhancing diversity within SA organizational boards.Footnote 2
First, and although OG had implicitly existed in SA in the form of the 1861 Companies Act, the general view is that the introduction of the King Reports explicitly institutionalised OG practices (Mangena and Chamisa 2008; Ntim et al. 2012). The reports focused primarily on improving the way in which SA organizations are governed (King Committee 2002), coinciding with international attempts (e.g., the 1992 UK Cadbury Report) at enhancing the efficacy of OG structures around the world, as well as preceding well-publicised cases of major organizational failure mainly in a number of developed economies in the 1980s, especially in the UK and US (King Committee 2002).
Noticeably, the OG proposals contained in the King Reports were largely similar to those of the UK’s Cadbury Report (Mangena and Chamisa 2008; Andreasson 2013). For example, and similar to the Cadbury Report, the King Reports recommended an Anglo-American style single-tier independently chaired board of directors, consisting of executive and independent non-executive directors, supported by independent committees (e.g., audit, remuneration, and nomination), and operating within a voluntary (‘comply or explain’) OG compliance regime (King Committee 2002; Armstrong et al. 2006). With particular respect to board diversity, the King Reports did not set any specific targets for organizations to comply with. However, the Reports suggested that every organization should consider whether its board is diverse enough in terms of demographics (i.e., age, ethnicity and gender). This is expected to ensure that the composition of SA organizational boards reflect the naturally diverse SA context, as well as make them effective.
Second, and unlike the King Reports, the 1998 EE and 2003 BEE Acts focused directly on enhancing diversity within SA organizational boards (Andreasson 2013; Ntim and Soobaroyen 2013a). More specifically, the EE Act seeks to identify and eliminate all previous unfair and discriminatory employment practices on any grounds, including race and gender, requiring every organization to work towards achieving a balance between their non-white and white workforce across all levels of the organisational hierarchy.Footnote 3 Similarly, the BEE Act focuses on transforming the SA economy by de-racialising organizational ownership and management by increasing black ownership and direct participation in business. Specifically, the BEE Act proposes a number of ways by which economic transformation can be achieved, including equity ownership and management control with clear cut targets for organizations to meet. For example, and to address the low participation of blacks in executive management, the Act encourages organizations to appoint qualified blacks into senior management positions, including board memberships, with a target of 40 to 50% non-whites.
Third, and crucially, compliance with these reforms are largely voluntary. The SA organizational setting is, however, distinctively characterised by high block and institutional shareholdings, mainly in the form of complex cross-ownerships and tall pyramids (Barr et al. 1995; Ntim et al. 2012). Also, shareholder activism is noticeably weak, whilst the ability to implement and enforce organizational laws is observably poor (Rossouw et al. 2002; Mangena and Chamisa 2008). Together, and given the SA organizational context, this raises critical concerns as to whether a voluntary compliance regime, as contained in the King Reports and the BEE Act, for example, will be effective in achieving meaningful diversity within SA organizational boards. Consequently, the main objective is to investigate the extent to which these regulatory, affirmative action, and OG reforms have been able to enhance diversity within the SA organizational boards, and whether the stock market values such diversity within SA organizational boards.
3 Board diversity and market value: theory, evidence and hypothesis development
Organizational boards of directors remain one of the most crucial subgroups within the upper management of a considerable number of organizations (Lipton and Lorsch 1992; Bilimoria and Piderit 1994; Sonnenfeld 2002; Lincoln and Adedoyin 2012; Bart and McQueen 2013; Dale-Olsen et al. 2013). As a group, organizational boards perform a number of strategic functions, including advising, monitoring, compensating and firing executives, and securing critical organizational resources (Pfeffer 1973; Jensen 1993; Yermack 1996; Abdullah 2013; Luckerath-Rovers 2013; Wellage and Locke 2013). In fact, and as discussed, one of the most significant OG issues currently facing SA organizations is board diversityFootnote 4 and its impact on market valuation.
However, there are mixed theoretical propositions as to the impact of board diversity on shareholder value: those who argue for more diversity in boardrooms and those who are in favour of organizational monoculture and boardroom uniformity (Bilimoria and Piderit 1994; du Plessis 2008; Kang et al. 2007; Singh 2007; Campbell and Minquez-Vera 2008). Proponents of diversity in organizational boardrooms usually base their arguments on agency, resource dependence and stakeholding theories (Goodstein et al. 1994; Burges and Tharenou 2002; Dwyer et al. 2003; Roberson and Park 2007; Yang and Konrad 2011). Firstly, agency theory suggests that boards of diverse backgrounds increases board independence and improves executive monitoring (Kesner 1988; van der Walt and Ingley 2003; Johnston and Malina 2008; Lincoln and Adedoyin 2012; Abdullah 2013; Triana et al. 2013), and thereby enhance market value.
Secondly, it brings diversity in ideas, perspectives, experience, and business knowledge to the decision-making process in boardrooms (Gilbert and Stead 1999; Watson et al. 1993; Baranchuk and Dybvig 2009; Luckerath-Rovers 2013), which can facilitate better appreciation of the complexities of the organizational external environment. It can also increase creativity and innovation in boardrooms due to diversity in cognitive abilities, which can also facilitate effective decision-making (Wiersema and Bantel 1992; Carter et al. 2003; Welbourne et al. 2007; Lincoln and Adedoyin 2012; Bart and McQueen 2013), and impact positively on market valuation.
Thirdly, resource dependence theory indicates that board diversity can have a positive influence on market valuation by linking an organization to its external environment and secure critical resources, including skills, business contacts, prestige and legitimacy (Goodstein et al. 1994; Westphal and Bednar 2005; Arnegger et al. 2013). Finally, it has been suggested that (Shrader et al. 1997; Ryan and Haslam 2007; Mahadeo et al. 2012; Wellage and Locke 2013) organizational boards of qualified individuals of diverse backgrounds and constituencies can help provide a better link with an organization’s stakeholders, such as consumers and communities, which can improve its opportunities, reputation and value. Carter et al. (2003) suggest, for example, that by matching the diversity of an organization’s board to the diversity of its customers and suppliers, it can significantly increase its ability to penetrate competitive markets.
However, and relying on agency and organization theories, opponents contend that board diversity can impact negatively on market valuation. Firstly, ethnic and gender-based board members may be appointed as a sign of tokenism, and as such their contributions may be marginalised (Hillman et al. 2007; Abdullah 2013). Secondly, organization theory indicates that greater diversity within boards may significantly constrain its efforts to take decisive action and initiate strategic changes, especially in times of poor organizational performance and environmental turbulence (Goodstein et al. 1994; Krishman and Park 2005). Thirdly, diverse board members may bring their individual and constituencies’ interests and commitments to the board (Baysinger and Butler 1985; Wellage and Locke 2013). The greater the diversity of these interests, the greater the potential for conflicts and factions to emerge among them as a group (Roberson and Park 2007; Baranchuk and Dybvig 2009), which can inhibit boardroom cohesion and performance (Goodstein et al. 1994; Francoeur et al. 2008; Lincoln and Adedoyin 2012).Footnote 5
Consistent with the conflicting nature of the theoretical literature on board diversity, previous evidence regarding the link between board diversity and market valuation is equally mixed (Zahra and Stanton 1988; Wiersema and Bantel 1992; Shrader et al. 1997; Carter et al. 2003, 2010; Ujunwa 2012; Dale-Olsen et al. 2013). One strand of the empirical literature reports that more diverse boards are associated with higher market valuation (Erhardt et al. 2003; Adams and Ferreira 2009; Adler 2010). For example, and using 25 American listed organizations, Adler (2010) finds a positive correlation between employing higher percentage of women in top management and market valuation. Carter et al. (2003) also report a positive link between board diversity and market value using a 1997 cross-sectional sample of 638 American organizations.
Consistent with prior evidence (Erhardt et al. 2003; Catalyst 2007; Kang et al. 2007; Campbell and Minquez-Vera 2008; Johnston and Malina 2008; Robertson and Park 2008), Francoeur et al. (2008) examine whether the participation of women in an organization’s board improves market valuation in a sample of 230 Canadian listed organizations from 2001 to 2004. They report positive and significant abnormal returns in organizations with a higher proportion of women officers. Further, recent evidence by Mahadeo et al. (2012), Abdullah (2013), Bart and McQueen (2013), Luckerath-Rovers (2013), Triana et al. (2013), and Wellage and Locke (2013) provide additional support for the evidence of a positive association between board diversity and market valuation in Mauritius, Malaysia, Finland, Netherlands, US, and Sri Lanka, respectively.
By contrast, but consistent with the conflicting nature of prior board diversity theory, other studies report that board diversity rather impacts negatively on market valuation (Watson et al. 1993; Shrader et al. 1997; Hillman et al. 2007; Ujunwa 2012; Ujunwa et al. 2012; Dale-Olsen et al. 2013). Goodstein et al. (1994) investigate the impact of board diversity on an organization’s ability to initiate strategic changes in a total of 335 American organizations from 1980 to 1985, and find that organizations with diverse boards are less likely to initiate strategic changes than those with homogenous boards. Shrader et al. (1997) examine the association between the percentage of female board members and market valuation for a 1992 cross-sectional sample of 200 American organizations. Their results suggest a negative relationship between the percentage of women on the board and market valuation, implying that while the views of women on the board may be marginalised, their presence may also have financial costs implications for the organization, which can impact negatively on market valuation. Recent evidence by Ujunwa (2012), Ujunwa et al. (2012), and Dale-Olsen et al. (2013) supports the theoretical prediction that firms that have more women on their boards tend to be valued lowly.
A third stream of empirical studies (Zahra and Stanton 1988; Farrell and Hersch 2005; Westphal and Bednar 2005; Rose 2007), indicates that board diversity has no impact on market valuation. For example, and using a sample of 95 American listed organizations, Zahra and Stanton (1988) find no significant relationship between board diversity and market valuation. Similarly, Rose (2007) investigates whether female board representation influence market valuation using a sample of Danish listed organizations over the period 1998–2001. Consistent with the evidence of Zahra and Stanton (1988), he finds no significant link between market valuation and female board representation. Observably, these studies have focused mainly on how gender diversity within organizational boards impacts on their market valuation, resulting in limited insights on how ethnic diversity within boards influence their dynamics, as a top management group and market valuation.
With respect to SA, and as has been discussed, both the 1998 EE and 2003 BEE Acts directly seek to enhance ethnic and gender diversity within SA organizational boards. Similarly, the King Reports require organizations to regularly review ethnic and gender composition of their boards, so as to not only reflect the diverse SA context, but also enhance effective operations. Together, these regulatory and OG reforms appear to suggest that board diversity can impact positively on market valuation. However, and given the mixed international evidence, we predict a statistically significant association between board diversity and market valuation without being specific about the direction of the sign of the coefficient. Therefore, our main hypothesis to be tested in this study is that:
H 1
There is either a statistically significant negative or positive association between board diversity on the basis of both ethnicity and gender, and market valuation.
4 Research design
4.1 Sample and data
As at 31/12/2007, a total of 402 organizations from ten industries, namely: basic materials; consumer goods; consumer services; financials; health care; industrials; oil & gas; technology; telecoms; and utilities were listed on the Johannesburg Stock Exchange. Due to capital structure and regulatory reasons, 111 financials and utilities were excluded from the sample, leaving us with 291 organizations from eight non-financial industries to be sampled. We needed data on OG and financial variables to investigate the association between board diversity and market value. The OG variables were collected from the sampled organizations’ annual reports, which were downloaded from the Perfect Information Database. The financial data were collected from DataStream. The organizations in our final sample had to satisfy two criteria: the accessibility to an organization’s full five-year annual reports from 2002 to 2006; and the availability of an organization’s corresponding financial data from 2003 to 2007.Footnote 6
Our criteria were motivated by a number of reasons. First, and in line with past studies (Yermack 1996; Carter et al. 2003), the criteria allowed us to satisfy the requirements for a balanced panel data analysis. Some of the benefits that can be derived for using panel data include having both time-series and cross-sectional observations, more degrees of freedom and less multi-collinearity among the variables (Gujarati 2003; Wooldridge 2010). Second, an investigation of five-year data with both cross-sectional and time-series properties may be useful in determining whether the observed cross-sectional relationship between board diversity and market valuation holds over-time (Carter et al. 2010; Ntim et al. 2012). This may help in drawing direct comparisons with the findings of previous studies (Rose 2007; Francoeur et al. 2008; Robertson and Park 2008). Using our selection criteria, the complete data needed is obtained for a total of 169 organizations over five years and 8 industries for our empirical investigation.
4.2 Dependent, independent and control variables
In this subsection, we discuss the three main categories of variables that we use in our examination, and Table 1 contains their full definitions. First, we measure our main independent variable in four ways: board diversity on the basis of ethnicity (BDIVE); board diversity on the basis of gender (BDIVG); board diversity on the basis of gender non-whites (i.e., black women) (BDIVGNW); and board diversity on the basis of both ethnicity and gender (BDIV). Second, the widely used Tobin’s Q (Q) is our main dependent variable/measure for market valuation. As a robustness check, however, we use return on assets (ROA) and total share return (TSR), as an alternative accounting and market-based organizational valuation measures, respectively.
Finally, and in line with past studies (Carter et al. 2003, 2010; Johnston and Malina 2008; Dale-Olsen et al. 2013), we include below a number of control variables to control for potential omitted variables bias. First, organizations with greater investment opportunities often grow faster (Beiner et al. 2006; Ntim et al. 2012) and hence, such organizations are more likely to be highly valued by the stock market. Therefore, we conjecture that sales growth (SGR) will correlate positively to market valuation. Second, organizations that invest heavily in research and development can obtain knowledge and technological advantages over their competitors (Shrader et al. 1997; Adams and Ferreira 2009), and as such, may be highly valued by the stock market. By contrast, the capital intensive nature of the research and development activity (Baranchuk and Dybvig 2009; Ntim et al. 2012), can impact negatively on current market valuation.
In a similar vein, and on the one hand, organizations that use more debt can improve their market valuation by effectively minimising the ability of opportunistic managers to extract ‘free cash flows’ (Jensen 1986; Guest 2009). On the other hand, high levels of leverage can increase the risk of financial distress and bankruptcy by impairing the ability of organizations to fully utilise commercial opportunities (Jensen 1986; Ntim et al. 2012). This can impact negatively on market valuation. Also, larger organizations may have economy of scale, market power, and access to resources advantages over their smaller counterparts (Beiner et al. 2006; Roberson and Park 2007) and therefore, may be more highly valued by the stock market. By contrast, smaller organizations tend to have higher opportunities to grow than larger ones (Pfeffer 1973; Guest 2009; Kang et al. 2007; Dale-Olsen et al. 2013; Triana et al. 2013) and hence, smaller organizations may be valued higher by the stock market than larger organizations.
Due to the conflicting theoretical expectations, we predict that leverage (LEV), capital expenditure (CAPX) and organizational size (LOGTA) will have either a negative or positive correlation with market valuation. Third, organizations that are cross-listed on foreign stock markets may be better placed to raise capital at a cheaper cost to finance growth opportunities than their non-cross-listed counterparts (Ntim et al. 2012), and thus may be valued more highly by the stock market. Hence, we expect dual-listed organizations (DUALIST) to be positively related to market valuation. Fourth, DeAngelo (1981) suggests that audit organizational size is positively related to auditor independence and audit quality, and therefore organizations audited by large audit organizations may be more highly valued by the stock market. Thus, we predict that the size and reputation of the audit organization (BIG4) will impact positively on market valuation.
Fifth, maintaining connections with government in the form of direct government ownership can provide access to critical resources, such as finance and lucrative business contracts (Pfeffer 1973; Yang and Konrad 2011). Therefore, we expect government ownership (GVOWN) to correlate positively with market valuation. Sixth, organizations that voluntarily set-up OG committee to specifically monitor OG standards may be in a better position to reduce the ability of self-serving managers to expropriate organizational resources (Ntim et al. 2012), and as such may be more highly valued by the stock market. Thus, we expect the presence of an OG committee (OGCO) to be positively associated with market valuation. Finally, and in line with past studies (Roberson and Park 2007; Welbourne et al. 2007; Johnston and Malina 2008), we expect that market valuation will differ across different industries and financial years. Therefore, we include industry (IND) dummies for the 5 remaining industriesFootnote 7: basic materials and oil & gas; consumer goods; consumer services and health care; industrials; and technology and telecoms; and year (YED) dummies for the financial years 2003–2007.
5 Empirical analyses and discussion
5.1 Descriptive statistics
Table 2 contains detailed descriptive statistics relating to different aspects of board diversity within SA organizations. Table 2 shows that BDIV has a wide spread, ranging from a minimum of 0% to a maximum of 100%, and averaging approximately at 30%. This implies that despite board diversity reforms pursued (BEE, EE and King Reports), the average SA listed organization’s board remains dominated (70%) by white males. Our finding is largely consistent with those of past studies (Brammer et al. 2007; Francoeur et al. 2008; Luckerath-Rovers 2013; Triana et al. 2013). For example, in a sample of 543 UK organizations, Brammer et al. (2007) find that only 23% of the average board members originate from diverse ethnic and gender backgrounds. Of the 30% diverse board members (BDIV), only 34% are women (BDIVG).
Similarly, and of the approximately 26% non-whites (BDIVE) found on an average organization’s board, only 23% are women (BDIVGNW). Overall, only 17% of the board members of an average sampled organization are women (BDIVG), of which 56% are women of colour. The evidence of low representation of women on SA organizational boards is also consistent with the findings of prior studies (Carter et al. 2003; Singh and Vinnicombe 2004; Campbell and Minquez-Vera 2008; Abdullah 2013; Ujunwa 2012; Dale-Olsen et al. 2013; Luckerath-Rovers 2013). This notwithstanding, however, gender and ethnic diversity within SA boards are generally increasing. For example, BDIV has increased from 26% in 2002 to 35% in 2006, and similar increases are noticeable in BDIVE, BDIVG and BDIVGNW, which may be explained by the increasing willingness of the sampled organizations to comply with the provisions of the 1998 EE and 2003 BEE Acts. These findings are also consistent with examples of disclosures regarding the progress made by some SA organizations on complying with the requirements of the EE and BEE acts that are reported in the "Appendix". For example, AngloGold Ashanti Group, a large mining company had only 14% (2 out of 14) of its year 2002 board members as non-whites with no (0%) woman. By contrast, a significant 47% (8 out of 17) of AngloGold Ashanti’s year 2006 board members were non-whites with 4 (24%) women, representing a substantial 33 percentage point increase over the 5-year period examined. Similar positive developments and patterns are observable in the Aspen Pharmacare, Harmony Gold, and Truworths International Groups (see the “Appendix”), as well as across the entire 169 sampled organizations that were analysed.
Table 3 reports descriptive statistics relating to the other variables used, although for purposes of completeness, the summary board diversity measures are also reported. Generally, all the values show wide variations. For instance, and consistent with the results of Beiner et al. (2006) and Guest (2009), Q is between a minimum of0.58 and a maximum of 3.58 with a mean of 1.52, displaying wide spread. The alternative market valuation proxies (i.e., ROA and TSR), as well as the control variables (i.e., BIG4, CAPX, DUALIST, GVOWN, LEV, LOGTA, OGCO and SGR) show wide variations, implying that our sample has been adequately chosen to achieve sufficient variation, and thus eschews any possibilities of sample selection bias.
We also examined linear regression assumptions of multicollinearity, autocorrelation, normality, homoscedasticity, and linearity. We investigated the multicollinearity assumption by conducting the Spearman non-parametric and Pearson parametric bivariate correlation tests among the variables. The results, which are not reported for the sake of brevity, but available upon request, suggested that no significant non-normality and multicollinearity problems were present among the variables. In addition, we examined scatter, P–P and Q–Q plots, studentised residuals, Cook’s distances and Durbin-Watson statistics of the variables, with these tests indicating no serious violation of the linear regression assumptions of homoscedasticity, linearity, normality and autocorrelation, and thereby implying that it is appropriate to carry out multivariate regression analyses.
5.2 Multivariate regression analyses
Organizations tend to differ in the challenges and opportunities that they encounter over time (Guest 2009; Ntim et al. 2012). This can lead to situation whereby BDIV and Q are jointly and dynamically determined by organizational-specific differences, such as organizational culture, complexity and managerial talent (Guest 2009), which simple OLS regressions may not be able to detect (Gujarati 2003; Wooldridge 2010), and thereby resulting in misleading findings (Hausman 1978; Beiner et al. 2006; Dale-Olsen et al. 2013; Triana et al. 2013). As such, and given the panel nature of our data, as well as in line with past studies (Guest 2009; Carter et al. 2010), we carry out fixed-effects regressions so as to control for possible unobserved organization-specific heterogeneities. We start our analysis with a fixed-effects regression model specified as follows:
where Q is the main dependent variable; BDIVG, BDIVE, BDIV and BDIVGNW are the main independent variables; and CONTROLS refers to the control variables, including BIG4, CAPX, DUALIST, GVOWN, LEV, LOGTA, OGCO, SGR, IND and YED, and δ refers to the organizational-level fixed-effects, made up of a vector of the mean-differences of all time variant variables.Footnote 8
Table 4 reports fixed-effects regressions results of the impact of the various BDIV measures on Q. First, to ascertain whether the SA stock market values board diversity on the basis of gender, we run Q on BDIVG, including the control variables using Eq. (1). Statistically significant and positive impact of BDIVG on Q is observable in Model 1 of Table 4, and thereby providing support for H 1, as well as the similar findings of past studies (Johnston and Malina 2008; Adams and Ferreira 2009; Adler 2010; Bart and McQueen 2013; Luckerath-Rovers 2013; Wellage and Locke 2013). Second, and whilst prior studies have examined how the presence of white women on organizational boards influence performance (Shrader et al. 1997; Farrell and Hersch 2005; Rose 2007; Mahadeo et al. 2012; Abdullah 2013; Dale-Olsen et al. 2013; Luckerath-Rovers 2013), the effect that non-white or black women board members has on market value remains largely unexplored. Therefore, we seek to fill this gap within the literature by uniquely running BDIVGNW on Q. Statistically significant and positive effect of BDIVGNW on Q is noticeable in Model 2 of Table 4, and thereby providing support for H 1, in addition to shedding new crucial empirical insights on the impact of BDIVGNW on market valuation.
Third, the question of whether ethnic diversity within organizational boards is valued by the stock market has also rarely been explicitly investigated in the past (Roberson and Park 2007; Carter et al. 2003, 2010; Mahadeo et al. 2012; Abdullah 2013; Wellage and Locke 2013). Therefore, to separately examine the impact of board diversity on the basis of ethnicity on market valuation, we re-estimate equation (1) by replacing BDIVG with BDIVE. The coefficient of Q on the BDIVE in Model 3 of Table 4 is positive and statistically significant, thereby providing support for H 1, as well as shedding new insights on the effect of BDIVE on market valuation.
Fourth, and given the evidence of higher market valuation separately for BDIVG and BDIVE, respectively, we expect organizations that exhibit high levels of both gender and ethnic diversity to be valued more highly by the stock market. Hence, we re-regress equation (1) by replacing BDIVG with BDIV, which includes both BDIVG and BDIVE, in order to investigate the overall effect of board diversity on market valuation. Statistically significant and positive effect of BDIV on Q is discernible in Model 4 of Table 4, thereby providing further support for H 1. Overall, our results imply that organizations that show greater commitment towards enhancing board diversity and good governance are rewarded with higher market valuation. This evidence is also largely consistent with the recommendations of the 1998 EE act, the 2003 BEE act, and the 1994 and 2002 King Reports, as well as similar findings from other markets (Erhardt et al. 2003; Francoeur et al. 2008; Dobbin and Jung 2011; Wellage and Locke 2013). Theoretically, our results provide support for agency (Lipton and Lorsch 1992; Jensen 1993) and resource dependence theories (Pfeffer 1973; Yang and Konrad 2011; Arnegger et al. 2013), which suggest that ethnic and gender diversity improves board independence, executive monitoring, disciplining, and decision-making, as well as helps to better link an organization to its external environment that can facilitate securing critical resources, and thereby by improving market valuation.
Fifth, our evidence so far suggests that both gender and ethnic diversity contributes to market value, but it is unclear within the empirical literature whether gender or ethnic diversity contributes more to market value. In a regression containing both BDIVG and BDIVE, we would expect the stronger contributor to market value to dominate the other. We therefore re-run Eq. (1) by including both BDIVG and BDIVE to test for the relative value relevance of gender versus ethnic diversity on organizational boards. The coefficient of Q on BDIVE in Model 5 of Table 4 is positive and statistically significant, while that on BDIVG is positive, but statistically insignificant, and thereby uniquely further shedding new important empirical insights on the relative value relevance of gender and ethnic diversity within organizational boards. Although this finding may also be explained by the lower number of gender representation on SA boards compared with men from ethic backgrounds (see Tables 2, 3), it appears to be consistent with the view that women’s views on the board tend to be marginalised (Shrader et al. 1997; Hillman et al. 2007; Ujunwa 2012; Dale-Olsen et al. 2013; Luckerath-Rovers 2013; Triana et al. 2013).
Finally, and the coefficients on the control variables in Models 1–5 of Table 4 are generally in line with our expectations. For example and as predicted, the coefficients on CAPX, LEV and LOGTA are statistically significant and negatively related to Q, whereas BIG4, DUALIST, GVOWN, OGCO and SGR are statistically significant and positively associated with Q, in Models 1–5. Finally, the F-values in Models 1–5 of Table 4 consistently reject the null hypothesis that the coefficients on the main independent and the control variables are equal to zero. Consistent with the findings of previous studies (Adams and Ferreira 2009; Carter et al. 2003, 2010), the adjusted R 2 is between 21 and 32%, implying that our fixed-effects regressions can explain significant differences in our sampled organizations’ Q.
5.3 Robustness analyses
Our fixed-effects regressions so far do not take into account the presence of possible non-monotonic associations and alternative market valuation measures, as well as other potential endogeneities. This indicates that the evidence of a significant positive effect of BDIV on Q, for instance, may be misleading. In this subsection, we investigate how robust our findings are to the existence of potential non-linear relationships, alternative market valuation proxies, and other endogeneity problems.
First, to examine whether there is a non-monotonic link between board diversity and market valuation, such that initial increases in ethnic and gender board representations lead to declines in market valuation up to a point, beyond which additional increases in diversity improve market valuation, as predicted by Roberson and Park (2007), we re-estimate equation (1) using squared board diversity (BDIV 2) in addition to BDIV.Footnote 9 Positive, but statistically insignificant impact of BDIV 2 on Q is discernible in Model 6 of Table 4, and thereby indicating that our evidence of a positive impact of BDIV on Q is not sensitive to this specification.
Second and as previously noted, we investigate the robustness of our findings to two alternative market valuation measures: return on assets (ROA—an accounting based measure) and total share returns (TSR—a market based proxy). Models 7 and 8 of Table 4 report results obtained by making use of ROA and TSR, respectively, instead of Q. Statistically significant and positive impact of BDIV on ROA and TSR in models 7 and 8 of Table 4, respectively, is observable, and thereby implying that our results are fairly robust to the use of either an accounting (ROA) or a market (TSR) based market valuation measure, instead of Q.
Third, to account for potential additional endogeneity problems that may be caused by omitted variable bias, we apply the widely used two-stage least squares (2SLS) technique (Beiner et al. 2006; Carter et al. 2003, 2010). However, to make sure that the 2SLS research design is appropriate, and in line with Beiner et al. (2006), we first carry out Durbin-Wu-Hausman exogeneity test (see Beiner et al. 2006, p. 267) to determine whether BDIV is endogenously associated with Q. Applied to Eq. (1), the test rejects the null hypothesis of exogeneity, and therefore we conclude that the 2SLS technique may be appropriate and that our earlier results based on the fixed-effects regressions may be misleading. In the first stage, we conjecture that BDIV will be determined by all the control (exogenous) variables specified in equation (1). In the second stage, we utilise the predicted portion of the BDIV (PRE_BDIV) as an instrument for the BDIV and re-estimate Eq. (1) as specified below:
whereby everything remains unchanged as specified in Eq. (1)Footnote 10 except that we use the predicted BDIV (PRE_BDIV) from the first-stage regression as an instrument for the BDIV. Statistically significant and positive effect of the PRE_BDIV on Q is noticeably in Model 9 of Table 4, and thereby indicating that our evidence of a positive effect of BDIV on Q is not sensitive to endogeneity problems that may be caused by potential omitted variables. Overall, the robustness analyses indicate that our results are fairly robust to potential endogeneity problems, non-linear associations, and alternative market valuation proxies.
6 Summary and conclusions
Organizational boards of directors are one of the most important subgroups within most modern organizations, performing a number of critical roles, such as advising, monitoring, disciplining, motivating, and compensating managers, as well as providing access to critical resources, such as contracts and finance. This paper has attempted to determine whether the South African (SA) stock market values ethnic and gender diversity within organizational boards using a sample of 169 publicly listed organizations from 2002 to 2007. This coincides with a period during which the SA authorities embarked upon regulatory, affirmative action and OG reforms, noticeably including the 1998 EE Act, 2003 BEE Act, and the 1994 and 2002 King Reports. These reforms have focused primarily on enhancing ethnic and gender diversity within organizational boards in order to improve their independence and monitoring power, and thereby enhancing overall market valuation.
Our results contribute to the literature in a number of ways. First, our summary descriptive statistics suggest a wide spread in the distribution of board diversity on the basis of ethnicity and gender, ranging from a minimum of 0% to a maximum of 100%, and averaging approximately at 30%. This implies that despite board diversity reforms pursued (e.g., BEE, EE and King Reports), the average SA listed organization’s board remains dominated (70%) by white males. This notwithstanding, however, the evidence also suggests that gender and ethnic diversity within SA boards are generally increasing. For example, general board diversity has increased from 26% in 2002 to 35% in 2006, and similar increases are noticeable in ethnicity and gender, which may be explained by the increasing willingness of the sampled organizations to comply with the provisions of the 1998 EE and 2003 BEE Acts. These findings are also in line with examples of disclosures regarding the progress made by some SA organizations on complying with the requirements of the EE and BEE acts that are presented in the "Appendix".
Second, we find a statistically significant and positive relationship between board diversity and market valuation, implying that the SA stock market values ethnic and gender diversity within organizational boards. Third and distinct from prior studies, we show further that ethnic diversity is valued more highly by the SA stock market than gender diversity. This sheds new crucial insights on the relative value relevance of gender versus ethnic diversity on market valuation. Fourth and by contrast, we do not find any evidence of a significant non-linear link between board diversity and market valuation. Our findings are consistent across a raft of econometric models that take into consideration different types of endogeneity problems and market valuation measures.
Overall, our results provide support for agency and resource dependence theories, which suggest that ethnic and gender diversity improves board independence, executive monitoring and decision-making, as well as helps to better link an organization to its external environment that can facilitate securing critical resources, and thereby enhancing market valuation. Resource dependence may be particularly powerful in explaining our evidence of a positive effect of board diversity on market value in SA. This is because securing and renewing profitable government contracts and mining licenses in SA are usually linked to complying with affirmative action policies, such as those contained in the 1998 EE and 2003 BEE acts (Rossouw et al. 2002; West 2009; Andreasson 2013; Ntim and Soobaroyen 2013a). This means that by appointing more board members from diverse ethnic and gender backgrounds, SA organizations may be inherently complying with the EE and BEE acts. As the EE and BEE acts are backed by the government, this may be a major way by which SA organizations can win government support and gain access to critical resources, such as government contracts and contacts, finance, and tax concessions that can facilitate growth and improve long-term financial performance.
Our evidence also has important implications for governments, policy-makers, and regulatory authorities. Whereas our evidence of a positive effect of board diversity on market valuation provides support for the recommendations of the EE and BEE Acts, as well as those of the King Reports, the relatively low levels of ethnic and gender diversity within SA organizational boards appear to suggest that there is the need to strengthen enforcement and compliance with the provisions of the reforms. In this case, setting up a “compliance and enforcement committee” to regularly check the levels of compliance among listed organizations may help in improving board diversity specifically, but OG standards more generally. Our SA findings will also have particular implications for countries that are currently and/or contemplating pursuing board diversity reforms. Specifically, our findings will be of specific interests and added impetus to regulators, policy-makers and governments in Australia, Brazil, Canada, the European Union, India, Malaysia, Norway, Mozambique, New Zealand, and the USA, amongst others, where different variants of affirmative action policies are being pursed with the aim of improving racial, ethnic minority and/or gender representation in top corporate management.
Notes
As will be discussed further, some of the reforms set specific targets of non-white (i.e., people of Black African, Chinese, Indian and Mixed Race backgrounds) board representation for organizations to comply with. For example, the 1998 Employment Equity and 2003 Black Economic Empowerment Acts set aspirational (not legally enforceable) target of 40 to 50% non-white senior management and/or board membership.
This implicitly suggests that the average SA organizations should ideally have a workforce consisting of about 80% non-whites and 20% whites at all levels of the organizational hierarchy, including the board of directors in order to reflect the ethnic diversity and composition of the SA populace.
Board diversity has been broadly defined as the various attributes that may be represented among directors in the boardroom in relation to board process and decision-making, including age, gender, ethnicity, culture, religion, constituency representation, independence, knowledge, educational and professional background, technical skills and expertise, commercial and industry experience, career and life experience (van der Walt and Ingley 2003, p. 219). In this paper, we focus only on ethnic and gender aspects of the board.
This also suggests that the association between board diversity and organizational value can be non-linear, whereby initial increases in ethnic and gender board representations lead to declines in market valuation up to a point, beyond which additional increases in diversity improve market valuation (Roberson and Park 2007). Therefore, we investigate whether there is a curvilinear relationship between board diversity and market valuation, as part of our robustness analyses.
Organizational board decisions take time in order to be reflected in market value (Guest 2009; Ntim et al. 2012). Thus, to circumvent potential endogenous relationship between board diversity and market valuation, we introduce a one year lag between board diversity and market valuation such that this year’s organizational value depends on last year’s governance structure similar to Yermack (1996) and Ntim et al. (2012), as specified in equation (1). The sample also starts from 2002 for two reasons. First, King II came into operation in 2002, and secondly, data coverage in Perfect Information/DataStream on SA listed organizations is very limited until 2002. The sample ends in 2007 because it is the year for which data is available.
Due to insufficient number of observations in 3 industries, namely health care, oil and gas, and telecoms industries with three, one and three listed organizations, respectively, were merged with the closest remaining five major industries. Consequently, the three health care organizations were included in the consumer services industry, the one oil and gas organization was added to the basic materials industry, whilst the three telecoms organizations were also shared out to the technology industry.
However, we note that our choice is between random and fixed-effects estimation techniques. Therefore, to ensure that fixed-effects model is appropriate, we first carry out Hausman (1978) specification test by estimating both fixed and random-effects models for the BDIV proxies separately using Eq. (1) and comparing their respective coefficients. Under the null hypothesis of consistent random unobserved organizational-level heterogeneity (i.e., unobserved organization-specific effects or the regressions errors are uncorrelated with the independent variables), random-effects estimates will be both consistent and efficient, whilst fixed-effects coefficients will be consistent, but inefficient (Hausman 1978; Wooldridge 2010). In contrast, if the null hypothesis is rejected, then the fixed-effects approach will provide both consistent and efficient estimates, whereas random-effects estimates will be both inconsistent and biased (Hausman 1978; Gujarati 2003). The test consistently rejects the null hypothesis of consistent random effects for both models at the 1% level, providing further empirical support for our decision to rely primarily on fixed-effects models.
We carried out similar non-monotonic examination for the BDIVE, BDIVG and BDIVGNW measures and found statistically insignificant non-linear association between board diversity and market valuation. We further investigate other forms of non-linear transformations, such as cubing the variables (i.e., BDIVE, BDIVG, BDIVGNW and BDIV), but we found statistically insignificant link between board diversity and market valuation.
As estimating a lagged structure will jeopardise the validity of the Durbin-Wu-Hausman test (Gujarati 2003; Wooldridge 2010), we estimate Eq. (2)) as un-lagged structure. An additional advantage is that it allows us to ascertain the robustness of our results against estimating an un-lagged structure.
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The author gratefully acknowledges the insightful and timely suggestions by the Editor-in-Chief, Professor Roberto Di Pietra, and two anonymous reviewers. However, I am solely responsible for any remaining omissions and commissions.
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Ntim, C.G. Board diversity and organizational valuation: unravelling the effects of ethnicity and gender. J Manag Gov 19, 167–195 (2015). https://doi.org/10.1007/s10997-013-9283-4
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DOI: https://doi.org/10.1007/s10997-013-9283-4