Board Diversity, Business Groups and Firm Performance: Evidence from India

With the new Companies Act 2013 as well as Clause 49 of the listing agreement with stock exchanges in India mandating gender quota in the form of inclusion of at least one woman director in the board composition, the study on board diversity has assumed significant importance in the Indian context. Instead of limiting ourselves to gender diversity, we examine the various facets of the boardroom diversity as well as some structural features of the board for a longitudinal sample of listed firms in India and their impact on the accounting and stock-based measures of firm performance as proxied by return on assets (ROA) and Tobin’s Q respectively. We also explore if this relation is influenced by the business group affiliation of firms. We use two measures viz. Blau Index and Coefficient of Variation for defining our diversity attributes based on gender, age, educational qualification, tenure and statutory independence of the board members. Unlike several other research studies, we do not pool the various diversity scores to create a single diversity index as it has the potential to mask the actual association of each diversity attribute. We find that gender diversity increases the stock-based performance of firms not having any business group affiliation. In case of business group affiliated firms, on the other hand, we find gender diversity to have an insignificant effect. We attribute this to director-interlocking in the business group affiliated firms. We also find the statutory diversity to have a positive effect on the stock-based performance for all kinds of firms. Our results allow us to conclude that regulatory requirements like imposing mandatory gender quota and mandating minimum proportion of independent directors on corporate boards help boost the stock-based performance of firms.