The Impact of Cultural Diversity in Corporate Boards on Firm Performance

64 Pages Posted: 9 Aug 2016

See all articles by Bart Frijns

Bart Frijns

Open University of the Netherlands - School of Management

Olga Dodd

Auckland University of Technology

Helena Cimerova

Auckland University of Technology - Department of Finance

Date Written: July 28, 2016

Abstract

We examine the impact of cultural diversity in boards of directors on firm performance. We construct a measure of national cultural diversity by calculating the average of cultural distances between board members using Hofstede’s culture framework. Our findings indicate that national cultural diversity in boards negatively affects firm performance measured by Tobin’s Q and ROA. These results hold after controlling for potential endogeneity using firm fixed effects and instrumental variables regressions. Further, the results are robust to controlling for a wide range of board and firm characteristics, including various measures of “foreignness” of the firm, alternative culture frameworks, and other measures of culture. The negative impact of cultural diversity on performance is mitigated by the complexity of the firm and the size of foreign sales and operations. In addition, we find that the negative effects of cultural diversity are concentrated among the independent directors. Finally, we find that not all aspects of cultural differences are equally important and that it is mainly the diversity in individualism and masculinity that affects the effectiveness of boards of directors.

Keywords: Cultural Diversity, Cultural Distance, Board Diversity, Firm Performance

JEL Classification: G3

Suggested Citation

Frijns, Bart and Dodd, Olga and Cimerova, Helena, The Impact of Cultural Diversity in Corporate Boards on Firm Performance (July 28, 2016). Available at SSRN: https://ssrn.com/abstract=2817642 or http://dx.doi.org/10.2139/ssrn.2817642

Bart Frijns

Open University of the Netherlands - School of Management ( email )

Valkenburgerweg 177
Heerlen, NL-6401DL
Netherlands

Olga Dodd (Contact Author)

Auckland University of Technology ( email )

Auckland, 1142
New Zealand
+6499219999 ext 5423 (Phone)

Helena Cimerova

Auckland University of Technology - Department of Finance ( email )

Auckland, 1142
New Zealand

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