EFFECTS OF BOARD DIVERSITY ON FINANCIAL MANAGEMENT OF BANKS
1.1 Background to the study
The collapse of well known companies such as Enron and others in developed nationsled many industrialists and legal practitioners; including investors to a belief that governance crisis was eminent in America. In response to these well known events, the United States passed the Sarbanes-Oxley Act while major stock exchange markets modified their listing criteria for effectiveness and improving board monitoring (Byoun, Chang and Kim, 2011).Issues related to boards of directors have attracted the interest of researchers from various disciplines for the past decade. This represents a shiftin paradigm from top management teams (TMT) to corporate boards, coupled with the high emphasis put on the role of boards by regulators and investors in directing and controlling firms.
Recently some countries in Europe have legislated higher representation of women on
boards, while others have included the concept in laws in response to the normative case calls for diversity. Those in support of gender diversity such as McKinsey and Catalyst have proved that the concept have economic importance to firms. Catalyst proved that Fortune 500 firms with more females on corporate boards tend to make more profit. Also, Mckinsey also proved that that companies with a higher number of women at board level display a higher degree of organisation, above average operating margins and higher valuations.(Credit Suisse, 2012). Although diversity is looked upon to be a goal in itself by some academia, it is also pertinent to understand its economic importance to firms.
Diversity is needed in the boardrooms today in order to reflect both the diversity of
stakeholders in a firm and the diversity of its customer’s base. The concept of diversity
cannot be measured by composition alone but should also be measured by organizational growth and by how it enables an organization move forward (Susan as cited in Inspire, 2012).
It is a quality that drives broader thinking due to the fact that board members are given
leadership roles which in turn enable them achieve success in the board in the way of
increased financial performance (Susan as cited in Inspire, 2012).Despite all this, the problem now faced is not how to convince leaders and board members to treat diversity as a serious issue but how to successfully achieve a rich balance of gender, nationality, ethnicity, experience, and educational background.
Statement of the Problem
The role of board diversity in ensuring increased financial performance has been a subject of controversy with serious implications for shareholders. Previous studies on the effect between board diversity and financial performance do not provide conclusive evidence. Some studies provide evidence of firms with a diverse board improve financial performance (Carter et. al. 2002, Smith, Smith and Verner, 2005, Rovers 2010), while others hold that diversity incorporate boards have a negative effect on the financial performance of firms (Wachudi and Mboya 2009, Darmadi 2011, and Locke and Wellage (2012).The mixed results could be as a result of the different regulatory and governance structure, economic, climate and culture,as well as the size of capital markets of the domain of the various studies.
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