Simultaneous board and CEO diversity: does it increase firm value?

Abstract

There remain open questions regarding whether board of director ethnic and gender diversity increases or decreases firm value. Additionally, prior research has yet to examine the value effects of a diverse board in the presence of a gender/ethnic minority CEO. Using the KLD social ratings database, we examine 13 000 firm-years and provide robust evidence that board diversity increases firm value. However, we also show that any value added via board diversity is nullified when a diverse board operates in the presence of a female and/or minority CEO. Results suggest that a significant portion of the value in board diversity may come from gender/ethnic differences between the board members and the CEO. One implication of our study is that when hiring a CEO or electing directors relative gender/ethnic make-up is important.

Keywords:

• Gender
• ethnic
• minority
• diversity
• board of directors
• CEO

JEL Classification:

• G30
• M14

Notes

¹ Throughout the article, all results that are not shown are available upon request.

² Sum Community is the sum of all eight KLD community variables.

³ Firms having higher advertising expenses spend more money on corporate social responsibility (McWilliams and Siegel 2001). Board diversity is a CSR dimension and therefore we use Industry Advertising Expense/Assets as one of the instruments. Also, Sum Community is likely to be higher when there is a diverse customer base, and firms with highly diversified customers are likely to have a more diversified board.