Content uploaded by Hisham Farag
Author content
All content in this area was uploaded by Hisham Farag on Jul 09, 2017
Content may be subject to copyright.
Content uploaded by Hisham Farag
Author content
All content in this area was uploaded by Hisham Farag on Jul 09, 2017
Content may be subject to copyright.
1
The Impact of the Dual Board Structure and
Board Diversity: Evidence from Chinese Initial
Public Offerings (IPOs)
Hisham Faraga and Chris Mallinb
a Birmingham Business School, University of Birmingham, Birmingham B15 2TT, UK
b Norwich Business School, University of East Anglia, Norwich NR4 7TJ
Abstract
Chinese listed companies have a two-tier (dual) governance structure that comprises a
supervisory board/committee (SB) and the board of directors (BoD). However as there is no
hierarchical relationship between them, the two boards are independent. This is different from
the governance mechanism in Continental Europe in which the SB appoints the directors of
the management board; in this sense the Chinese two-tier governance structure is unique. We
investigate the impact of governance characteristics and ownership structure on gender
diversity of both the board of directors (BoD) and the supervisory board (SB) for a sample of
892 Chinese IPOs floated in both the Shanghai and Shenzhen Stock Exchanges. We find that
the average proportion of female directors and female SB members on the BoD and the SB
are 10% and 22% respectively. Using both static and dynamic panel data methods, we find
that there is no significant impact of board structure on gender diversity in China. However,
we find a positive and significant relationship between SB size and gender diversity. We also
find that the higher the state ownership the lower the female representation on both boards.
Finally, our findings show that there is a bi-directional relationship between financial
performance and the proportion of female directors sitting on the BoD.
Key words: Board diversity; corporate governance; two-tier board; Initial Public Offerings (IPOs);
China.
2
The Impact of the Dual Board Structure and
Board Diversity: Evidence from Chinese Initial
Public Offerings (IPOs)
Introduction
Equality and diversity of organisations has become a cornerstone of corporate governance,
sustainability and growth. The increasing importance of corporate governance and
government regulations, together with the influence of the media and stakeholders, impose
more pressure on business organisations to promote more diverse boards. In January 2006,
Norway enforced a gender quota requirement on listed companies by which the percentage of
females sitting on the board should be 40% by 2008. Recently, the UK Corporate Governance
Code clearly recognises the importance of board diversity. Meanwhile, in 2012 the EU
Commission has agreed a proposal for a Directive to improve the gender balance of non-
executive directors (NEDs) in listed companies by 1 January 2020
1
.
China has different socio-economic and cultural frameworks compared with western
countries; moreover it has an increasing importance in the world economy in terms of
economic growth (9.2% and 8% in 2011 and 2012 respectively). Therefore studying the
Chinese experience is interesting and adds to the existing literature on board diversity. In
1999, the China Securities Regulatory Commission (CSRC), published the Code of Corporate
Governance for listed companies in which there is no reference to diversity as a desirable
quality or background for board members. In 2001, the CSRC issued comprehensive
guidelines in which the proportion of independent directors should be one-third by June 2003
(CSRC 2001). Moreover, in 2006, the amended Corporate Law mandated that all listed
companies should have at least one third independent directors. Chen and Al-Najjar (2012)
argue that companies may appoint inefficient independent directors - apart from their
qualifications- just to comply with this legal requirement.
Recent statistics show that there are more women than men enrolled in tertiary education
institutions in China (Yi, 2011). However, the proportion of female directors in China is 8.1%
in a sample of the largest (by market capitalization) 100 domestic companies (Deloitte,
3
2011). China is no different from other Asian countries as poor female representation on
corporate boards is a global phenomenon; for instance, the average percentage of female
directors in 2011 is 7.8 % in Malaysia, 6.4 % in Singapore and 4.7 % in India (Yi, 2011).
Moreover, more than 70 % of boards in five countries (China, India, Malaysia, New Zealand
and Singapore) have no female independent directors (Yi, 2011).
However, we agree with van der Walt and Ingley (2003) that gender diversity per se is part of
the story as building effective corporate boards relies on other factors e.g. the selection
criteria, experience and qualifications of directors. Jensen (1993) argues that more diverse
boards with different perspectives bring managerial know-how and this may lead to better
decision making processes and more efficiency in resource utilisation. Anderson et al. (2011)
claim that board diversity and heterogeneity bring a variety of backgrounds and experiences
to the boardroom and hence both directors and companies can benefit from this mixture of
skills and occupational experiences. However, Anderson et al. (2011) argue that more diverse
boards with different backgrounds may lead to communication and co-ordination problems
and may cause conflict among directors.
The main objective of this paper is to investigate the impact of board structure and
governance characteristics on gender diversity of both the board of directors (BoD) and the
supervisory board (SB) for a sample of 892 Chinese IPOs floated in both the Shanghai and
Shenzhen Stock Exchanges during the period 1999-2009. Moreover, we analyse the impact of
ownership structure and financial performance on board diversity. Finally, we investigate the
bi-directional relationship between gender diversity and financial performance. Our paper has
several incremental contributions. It is the first to investigate the two-tier board diversity
(including analysis of both the BoD and the SB composition), in addition to the governance
characteristics, and ownership structure in China. We believe that our paper is also the first to
investigate the two-tier board diversity for Chinese IPOs. Finally, we use both static and
dynamic panel data models namely fixed effects and system GMM.
We find that the average proportion of female directors sitting on both the BoD and the SB
are 10% and 22% respectively. Moreover, the percentage of directors with postgraduate
qualifications e.g. Masters and PhD degrees are 23% and 10% for the BoD and the SB
respectively. The findings of the empirical models reveal that there is no significant impact of
board structure on gender diversity in China. This result is consistent with Cha (2001) and
4
Chen and Al-Najjar (2012). However, we find a positive and significant relationship between
SB size and gender diversity. We also find that the higher the state ownership the lower the
female representation on both boards. This might be due to the weak monitoring role and
weak governance mechanisms of state-owned companies. On the other hand, we find a
positive and significant relationship between directors’ ownership and the proportion of
females sitting on the BoD. This implies that directors might motivate and influence the
nomination decisions for the appointment of female directors.
Our findings also show that there is a bi-directional relationship between financial
performance and the proportion of female directors sitting on the BoD. Therefore consistent
with the resource dependence theory, appointing female directors may enhance company’s
financial performance as female directors may bring to the board different viewpoints and
experience and thus improve the financial performance. Similarly, companies with better
financial performance are likely to appoint female directors. We also find that appointing
younger directors and those with postgraduate qualifications may improve the proportion of
female directors sitting on the BoD and the SB. Furthermore, we find no influence of
company’s financial performance on gender diversity in the SB. Finally, we find that state-
owned companies have better financial performance. The remainder of the paper is structured
as follows. The next section discusses the ethical and theoretical perspectives of board
diversity followed by a discussion of the related literature and hypotheses development. We
then present the data and the empirical models followed by the results. Finally, we conclude
the paper with a discussion on the main findings and policy implications.
Board diversity and ethics: theoretical perspectives
Gender diversity reflects good corporate governance practice which is required to establish a
resilient ethical culture within organizations (van der Walt and Ingley, 2003 and Nekhili and
Gatfaoui, 2013). Van der Walt and Ingley (2003) argue that board diversity is a moral
obligation by the company to its stakeholders and a measure to reflect companies’ social
responsibility (Nekhili and Gatfaoui, 2013). Board diversity also has ethical implications
and challenges, for instance poor female representation in boardrooms may raise ethical
issues not only related to discrimination and equality e.g. fairness in recruitment,
compensation packages, treatment of employees and promotion (Nekhili and Gatfaoui, 2013)
but also to female appointments in top positions (Brammer et al., 2007). We agree with
5
Agrawal and Knoeber (2001) that the push for greater board heterogeneity and diversity is
driven by social and ethical factors rather than company profitability. Nekhili and Gatfaoui
(2013), Falkenberg and Monachello (1990), Singh et al. (2002) and Burke and McKeen
(1990) among others argue that gender inequality and discriminatory behavior should be
prevented as it is founded on subjective criteria e.g. work life balance and lack of female
networks.
The traditional view of boards is that the BoD is a homogeneous group with similar
backgrounds, education and professional experience and hence similar views and
perspectives on business which may lead to better decision making (Carpenter and Westphal,
2001). However, companies nowadays are facing tough economic, social, technological and
political challenges that require boardrooms, in a multi-cultural environment, to comprise of a
pool of talented and highly skilled entrepreneurial directors (Chambers et al., 1998). This
indicates the importance of board diversity as a switch from a single-culture to multi-culture
boardrooms. Van der Walt and Ingley (2003) argue that the BoD can be seen as a social
network that combines a mixture of skills and competences that represents a basis of social
capital. The latter is considered a measure of board value-added when experience contributes
to its governance function.
Carter et al. (2010) provide a comprehensive theoretical background on the impact of board
diversity on company performance. We present three main theoretical perspectives relating to
board diversity, namely agency theory, resource dependence theory and human capital
theory. There are many roles for the BoD namely monitoring, controlling, and advising and
counseling managers in addition to monitoring compliance with applicable laws and
regulations, and linking the corporation to the external environment (Mallin, 2013). Agency
theory provides the basis and the rationale for the board’s monitoring function on behalf of
shareholders and entails that agents are working in the best interests of shareholders. Agency
theory is related to two main aspects namely the impact of board structure on the company
performance and the influence of corporate leadership on performance. This may suggest that
the greater the proportion of independent non-executive directors (INEDs), the better the
organizational performance as boards can better practice the monitoring role (van der Walt
and Ingley, 2003). Carter et al. (2003) argue that board diversity may enhance board
independence and lead to better monitoring of managers. Therefore, diverse boards may
eventually have lower agency costs (van der Walt and Ingley, 2003). Governance guidelines
6
promote more board independence and urge for there to be a balance between executive and
non-executive directors. Hillman and Dalziel (2003) argue that to better exercise the
monitoring role boards should include the appropriate mix of different backgrounds,
experience and qualifications. Therefore, board diversity may lead to a better monitoring role
and lower agency cost Carter et al. (2003).
According to the resource dependence theory, the BoD is viewed as a strategic resource for
companies, in particular the link between companies and their external environment e.g.
access to external funds, competitors, and industry (van der Walt and Ingley, 2003). The
resource dependence theory provides the basis and theoretical argument with regard to board
diversity and suggests that diverse boards have better access to skilled and well-connected
directors (Carter et al., 2010). Moreover, more diverse boards may lead to efficient resource
utilisation, Jensen (1993). Hillman et al. (2000) suggest that different types of directors
provide different experience and backgrounds. Carter et al. (2010) argue that the presence of
women directors on the board brings different benefits and resources to the company. On the
other hand, Carter et al. (2010) argue that human capital theory complements the resource
dependence theory. According to human capital theory, diversity may lead to better
performance as directors with different backgrounds, experience and qualifications may lead
to more diverse boards and accordingly better performance (Terjesen et al., 2009).
Literature review and hypotheses development
There has been an on-going debate in the literature regarding board diversity. We classify the
literature survey into three main building blocks, namely the influence of corporate
governance and ownership structure on board diversity and the relationship between financial
performance and board diversity.
Corporate governance and board diversity
Bhagat and Bolton (2008) argue that good governance practices are one of the main
determinants of board effectiveness and hence contribute to the company’s overall
performance. Terjesen et al. (2009) conclude that the impact of gender diversity on corporate
boards contributes to more effective corporate governance and corporate social responsibility.
7
Jia and Zhang (2013) find that companies with a critical mass of females (at least three) on
the BoD have better responses to corporate philanthropic disaster.
Anderson et al (2011) argue that diversity leads to better monitoring and advisory roles for
shareholders and managers and brings more benefits to operationally complex companies due
to the different perspectives and viewpoints of board members (Kandel and Lazear, 1992).
Gul et al (2011) find that more gender diverse boards have better public and private
disclosure as they experience better monitoring roles and thus more informative stock prices.
Farrell and Hersch (2005) argue that female directors are tougher monitors and enhance the
overall board heterogeneity and this reduces the agency problems (Peterson and Philpot,
2007). Moreover, gender diversity may improve communication as women are open minded
and more patient compared to their male counterparts (Gul et al., 2011). Reagans and
Zuckerman (2001) find that demographic diversity mitigates free-riding problems and
enhances collaboration between board members.
On the other hand, board heterogeneity may be considered as a potential source of conflict
and difficulties in decision making. Putman (2007); O’Reilly et al (1989) and Lang (1986)
find that board diversity may have an adverse impact on board effectiveness as it causes
communication problems and increases the inter-group conflicts in larger boards. Farrell and
Hersch (2005) argue that to enhance companies’ image and reputation and to minimise the
pressure from stakeholders, some companies tend to appoint directors from ethnic minorities.
Adams and Ferreira (2009) argue that some CEOs prefer small and homogeneous boards, as
this would reduce the boards’ monitoring process. Nekhili and Gatfaoui (2013) argue that
board size and independence may mitigate the potential problems caused by board diversity.
Raheja (2005) claim that the greater the board size and independence the more diversity and
the better the supervisory role. We argue that operationally complex companies are likely to
have bigger and more diverse boards to better perform their monitoring and supervisory roles.
Therefore, the presence of female directors is expected to be higher in larger and more
independent boards. Conyon and Mallin (1997) and Brammer et al. (2007) find that large and
more independent boards are more likely to have a higher percentage of female directors.
Hence, we formulate our first and second hypotheses:
H1: There is a positive relationship between board size and the proportion of female
directors.
8
H2: There is a positive relationship between board independence and the proportion
of female directors.
Ownership structure and diversity
Agency theory suggests that ownership structure may influence the monitoring role of the
BoD (Morck, Shleifer and Vishny, 1988). Ben-Amar et al. (2013) argue that ownership
structure has a significant impact on board diversity. They argue that demographic diversity
in boardrooms is likely to be associated with widely held companies compared with family or
institutionally controlled companies. Dobbin and Jung (2011) find a positive relationship
between institutional ownership and board diversity. They conclude that institutional
investors may put pressure on shareholders to encourage board diversity in the US. Farrell
and Hersch (2005) argue that companies are motivated to attract institutional investors and
therefore they tend to appoint female directors as more diverse boards send a positive signal
to institutional investors. Director ownership on the other hand also has an influence on board
diversity. The CEO and other board directors might motivate the appointment of female
directors. This depends on the trade- off between the cost and benefits of diversity. The CEO
and board directors may have an incentive to influence the nomination decisions to appoint
directors who are likely to achieve their objectives (Hermalin and Weisbach, 1998).
Therefore directors may impact company strategy in this regard and higher director
ownership may lead to more diverse boards (Hillman and Dalziel, 2003 and Nekhili and
Gatfaoui, 2013).
State ownership is a unique feature of the Chinese listed companies (Chen and Al-Najjar,
2012). To the best of our knowledge, there are no other studies that investigate the impact of
state ownership on board diversity in China. However, other studies find a negative
relationship between both SB size and independence and state ownership in China (Chen and
Al-Najjar, 2012). State ownership is found to have a negative impact on the monitoring role
and this may lead to higher executive pay, agency problems and poor operating efficiency
due to the lack of economic incentives to maximise the value of companies (Xu and Wang,
1999, Zou and Adams, 2008, and Yuan et al., 2009). Based on the above discussion, we
formulate our third and fourth hypotheses:
H3: There is a negative relationship between state-ownership and board diversity.
H4: There is a positive relationship between directors’ ownership and board diversity.
9
Board diversity and financial performance nexus
We believe that the link between board diversity and financial performance is not simple as
there are other conceivable variables that may influence the nature of this relationship. We
argue that board diversity creates both costs and benefits to companies. We expect that
diverse boards may have better financial performance if the benefits of diversity - in terms of
better advisory and monitoring roles - exceed the costs of communication and conflict
between managerial levels (Anderson et al., 2011). However, the diversity-financial
performance link might be negative if the cost of diversity exceeds its benefits (Anderson et
al., 2011). A large strand of the literature investigates the link between diversity and financial
performance and finds mixed results. The results are not consistent as researchers tend to use
different periods of analysis, different countries and different methodologies
2
.
A large strand of the literature investigates the impact of gender diversity on financial
performance; see for example Erhardt et al. (2003); Miller and del Carmen Triana (2009);
Pathan and Faff (2012); Luckerath-Rovers (2011); and Mahadeo et al. (2012). However, few
studies have investigated the potential bi-directional relationship between the proportion of
female directors and financial performance; see for example Carter et al. (2003); Campbell
and Vera (2008) and Randøy et al. (2006). We argue that the diversity–performance
relationship might be bi-directional as some successful companies tend to appoint female
directors to send a positive signal to institutional investors and stakeholders (Farrell and
Hersch, 2005). This may suggest that the relationship between these two endogenous
variables runs from financial performance to gender diversity. One the other hand, the
resource dependence theory assumes that more diverse boards have different perspectives,
backgrounds and experience; therefore, more diverse boards may have a positive impact on
financial performance. This suggests that diversity-performance relationship runs from
diversity to financial performance. To the best of our knowledge, there is no other study that
investigates the bi-directional relationship between board diversity and financial performance
for the two-tier board diversity in China and thus we believe that our paper may fill this gap
in the literature. Based on the above discussion we formulate our fifth hypothesis:
H5: The relationship between financial performance and the proportion of female
directors is bi-directional.
10
Governance mechanisms and board structure in China
Corporate governance codes in the UK, the US and some European countries recommend a
unitary board system. By contrast, according to the Company Law introduced in 1993,
Chinese listed companies have a two-tier (dual) governance structure that comprises of a
supervisory board/committee (SB); and a BoD. The two boards are independent as there is no
hierarchical relationship between them. Both boards submit their reports to the shareholders
and are appointed and/or reappointed by the shareholders in their general meetings. This is
different from the governance mechanism in continental Europe in which the SB appoints the
directors of the Management Board, in this sense the Chinese two-tier governance structure is
unique.
The Company Law was amended in 2006 to define and extend the functions and power of the
supervisory board (OECD, 2011). Moreover, the China Securities Regulatory Commission
(CSRC) had published the Code of Corporate Governance for listed companies in 2001. This
states that the main responsibility of the SB is to oversee the BoD and to review the financial
affairs of the company. The SB has also the mandate to monitor the ethical conduct of the
members of the BoD and senior executives. Moreover, it is empowered to call for
disciplinary action or removal of those directors or executives. The SB comprises of at least
three members including an elected employee and minority shareholders representatives in
addition to an independent supervisor; the Company Charter determines the proportion of
each group. The tenure of the SB members is normally three years, which can be renewed by
the approval of the shareholders. Furthermore, the Code of Corporate Governance also states
that SB members should have professional knowledge and work experience in accounting
and law. The BoD on the other hand, is similar to the board structure in Western countries.
The Chinese BoD comprises of both executive and non-executive directors at least one third
of them are independent according to the Code of Corporate Governance in 2001.
The Chinese governance mechanism is unique and different from those of Western countries
as the state ownership plays a significant role in company management and influences the
decision-making process. The government has the power to influence the appointment of the
directors and senior management team in the SB in particular. This may have a negative
impact on companies’ performance as politically connected directors may lack the experience
11
and managerial know-how in corporate governance and financial markets for instance (Firth
et al., 2007).
Data and sample
There are 1693 IPOs floated in both the Shanghai and Shenzhen Stock Exchanges over the
period 1999-2012. Our sample comprises of all non-financial Chinese IPOs floated in both
Stock Exchanges over the period 1999-2009. We track the changes in diversity, governance
and performance measures over at least 4 years including the IPO year. In line with other
studies (e.g., Vafeas, 2000, 2005; Peasnell et al., 2005 and Anderson et al., 2011), we exclude
companies in the financial sector as they have different governance characteristics and a
different regulatory framework. Therefore, our final sample is an unbalanced panel that
comprises of 892 IPOs and 8006 company-year observations. Data is collected from the
China Stock Market and Accounting Research (CSMAR) database which is designed and
developed by GTA Information Technology Corporation.
Board diversity variables
We collect data on directors’ profiles in both the SB and the BoD. We construct alternative
measures of board diversity for each director/supervisor and company including age,
education, and professional experience. We measure gender diversity by the percentage of
female directors/ supervisors sitting on both SB and the BoD. We also use the Blau index as a
robustness check
3
following Campbell and Vera (2008). We use the average directors’ age
across each board to measure age diversity. We also use the percentage of directors with
postgraduate qualifications (e.g. Masters and/or PhD) as a proxy for education diversity on
both boards
4
. Finally, board professional experience takes into account the total number of
boards that a director has sat on (multiple directorships).
Corporate governance variables
We control for corporate governance characteristics e.g. board size, board independence,
board committees and ownership structure. Board size is measured by the total number of
directors/supervisors sitting in both the BoD and the SB. We believe that board independence
may have a positive impact on diversity and that more independent boards are more likely to
embrace diversity. Therefore, we control for board independence by using the percentage of
independent non-executive directors. Moreover, combining the roles of CEO/Chair might be
seen as an indication of power vested in a single individual. CEO/chair duality is defined by a
12
dummy variable equals to 1 where the roles of the CEO and Chairman are conducted by the
same person, and zero otherwise. We also measure the number of board sub-committees to
capture the intensity of the board activities. Ownership structure is measured by the
percentage of shares owned by directors, employees, in addition to the percentage of state-
owned shares.
Financial performance and company specific variables
We use different measures of financial performance e.g. return on assets (ROA) and return on
equity (ROE)
5
. We construct a number of company-specific variables which are the primary
determinants of board diversity. We use companies’ total assets and market capitalisation as a
proxy for size. Large companies are more likely to have diverse boards. As companies evolve
over their life cycle, their stakeholders expect much more involvement in equality and
diversity. Therefore, we control for company age defined as the number of years since the
IPO. We also take into account the impact of financial risk by controlling for financial
leverage defined as the ratio of long-term debt to total assets. Finally, we create a set of
industry and year dummies to control for the potential inter-industry and time specific effects.
Methodology
To investigate the main determinants of board diversity for the Chinese IPOs, endogeneity
between gender diversity, governance characteristics (e.g. board size and independence) and
financial performance may bias the results. Endogeneity could also lead to spurious
correlations between board diversity, performance and governance variables due to the
omitted unobservable company characteristics (e.g. corporate culture, norms which are
assumed time invariant during the period of study). Given the clear company heterogeneity in
our sample that may lead to different diversity-governance relationships, we use panel data
regression with company fixed effects to control for company heterogeneity and any other
unobservable company characteristics which may drive the results (Adams and Ferreira,
2009). We run the Hausman test to decide between fixed or random effects. The test result
rejects the null hypothesis that “errors are not correlated with regressors and that the random
effects model is preferred against the alternative fixed effects model”.
On the other hand, to investigate the impact of diversity on financial performance, we also
use the company fixed effects regressions to control for company heterogeneity as discussed
above. However, reverse causality between financial performance and board diversity is
13
another concern for consistent estimation. Therefore, we use the dynamic panel data model of
Blundell and Bond (1998) namely the system GMM (Generalized Method of Moments)
estimator, which combines in a system the equation in first-differences with the same
equation expressed in levels.
We argue that there are many econometrics problems which may arise when using a static
panel data model e.g. regressors might be endogenous and correlated with the residuals.
Secondly, the fixed effects model assumes that errors are correlated with company fixed
effects. Finally, serial correlation may bias the estimation. GMM estimator is designed for
datasets with a larger number of groups and a short time dimension (Roodman, 2009).
Moreover, the system GMM estimator allows for fixed individual effects and endogenous
regressors. It also assumes that the idiosyncratic error terms are heteroskedastic and serially
correlated, and uncorrelated across companies (Roodman, 2009).
The choice of an instrument is crucial for a consistent estimation. Roodman (2009) and
Wintoki et al. (2012) claim that it may be possible to use a set of historical values of suspect
endogenous variables (dependent and independent) as a valid internal instrument to control
for simultaneity and other sources of endogeneity and this eliminates the need for external
instruments
6
(Wintoki et al., 2012). We use - following Andres and Vallelado (2008) and
Wintoki et al. (2012) - lagged levels instruments for the regression in differences, and lags of
the first-differenced variables for the equation in levels. Therefore, we use 3 lags of ROA,
ROE, board size, board independence, ownership structure and the proportion of female
directors as instruments in the equation in first-differences, and two lags of their difference as
instruments in the equation in levels.
We use the Hansen over-identification test to measure the validity of our instruments. The
null hypothesis associated with the Hansen test is that the instruments are exogenous.
Insignificant values indicate that the instruments are adequate and that the model is correctly
specified. Moreover, we calculate the Arellano and Bond test for first- and second-order
autocorrelation with a null hypothesis of no autocorrelation. Rejecting the null in the first-
differenced errors for the second or higher order suggests that the moment conditions used
are not valid (Roodman, 2009). For all regression models, we control for time fixed effects
and estimate clustered standard errors to produce more robust, reliable and unbiased
coefficient estimates.
14
Empirical results
Table 1 presents the summary statistics of the main variables used in the empirical analysis.
Panels A and B show the summary statistics for the BoD and the SB respectively. The
average BoD ranges from 4 to 19 directors with a mean value of 9.4 directors; while the
average SB size is 4.19 directors/supervisors. The percentage of independent non-executive
directors is 33%, which is consistent with the requirement of the CSRC. The average number
of BoD’s sub-committees ranges from 1-8 committees with a mean value of 3.82 committees.
Table 1 also shows that the average proportion of female directors sitting on the BoD is 10%
with a maximum of 83%. Meanwhile the average proportion of female directors sitting on the
SB is 22%. Moreover, the average age of directors sitting on the BoD and SB are 49 and 45.6
years respectively. On the other hand, the professional experience for the directors sitting on
the BoD is greater than those of the SB as the percentage of directors who hold multiple
directorship positions are 58% and 36% for the BoD and the SB respectively. Similarly for
the educational background as the percentage of directors with postgraduate qualifications
e.g. Masters and PhD are 23% and 10% for the BoD and the SB respectively.
Panel C presents the ownership statistics; we notice that the average state ownership is 22%
with a maximum of 86% of shares while the average directors’ ownership is 6%. Panel D
presents the financial and other company specific information for our sample in which we
notice that the average ROA and ROE are 6% and 7% respectively. Finally, the average
company size, proxied by the natural logarithm of total assets, is 21.48 (2131.3 million CNY)
while the leverage ratio measured by long-term debt/total assets is 40%.
Insert Table 1 about here
Table 2 presents the correlation matrix for the main variables used in the empirical analysis.
It is clear from Table 2 that there is no evidence of multicollinearity as none of the
correlations between the independent variables are above 0.50.
Insert Table 2 about here.
Table 3 presents the determinants of the board of directors’ diversity for the Chinese IPOs.
Panels A and B present the fixed effects (FE) and GMM regressions results respectively. The
dependent variable is the proportion of female directors sitting on the BoD. We use both
ROA (Models 1 and 3) and ROE (Models 2 and 4) as a proxy for financial performance.
15
Panel A shows that there is a positive and significant (p value <1%) relationship between
financial performance measured by ROA and the proportion of females sitting on the BoD.
However, when ROE is used the relationship is still positive but less significant
7
(p value
<5%).
Insert Table 3 about here.
Roodman (2009) suggests that fixed effects models might produce biased results due to
econometrics problems such as serial correlation. We agree with Roodman (2009) as the
proportion of females is likely to be correlated with their lagged variable. Therefore, we use
the system GMM estimator. Panel B shows that the lagged proportion of female directors is
highly significant. Therefore, we reject the null hypothesis that lagged endogenous variables
are zero in both Models 3 and 4. This implies a rejection of a static panel data model (fixed
effects model) in favour of a dynamic model. The results presented in Panel B also show a
positive and significant relationship between both ROA and ROE and gender diversity. This
suggests that companies with high financial performance are likely to appoint female
directors.
Panels A and B also show that there is no significant relationship between both board size
and the proportion of independent non-executive directors and the proportion of female
directors sitting on the BoD in China. This suggests that there is no impact of board structure
on gender diversity in China. The duality role of CEO/Chairman is also insignificant
suggesting that the CEO power has no significant impact on appointing female directors.
However, we observe that the number of committees variable is positive and highly
significant meaning that the higher the number of board sub-committees the higher the
proportion of female directors. The above results show that there is no significant impact of
corporate governance characteristics on gender diversity in China. Cha (2001) and Chen and
Al-Najjar (2012) argue that corporate governance mechanisms in China suffer from insider
control as corporate governance is still in its early stages. For instance, Chen and Al-Najjar
(2012) argue that companies may appoint inefficient independent directors -apart from their
qualifications- just to comply with the legal requirement. Therefore, we can reject our first
and second hypotheses with respect to the BoD.
16
We also find a negative and significant relationship between the percentage of state
ownership and the proportion of female directors. This suggests that the higher the state
ownership the lower the female representation on the BoD. This result is consistent with Xu
and Wang (1999); Lin (2004); Lin et al. (2005) and Zou and Adams (2008). We argue that
this result is related to the weak monitoring role and weak governance mechanisms of state-
owned companies. Therefore, we cannot reject the third hypothesis with respect to the BoD.
The results also show that there is a positive and significant relationship between directors’
ownership and the proportion of female directors. This implies the influence of directors’
ownership on gender diversity in China as directors might motivate and influence the
nomination decisions relating to the appointment of female directors. This result is consistent
with the findings of Hillman and Dalziel (2003) and Nekhili and Gatfaoui (2013). Therefore,
we cannot reject our fourth hypothesis with respect to the BoD. Interestingly, we find a
negative and highly significant relationship between average directors’ age and the
proportion of female directors. This suggests that the younger directors’ age are the greater
the proportion of female directors. This result is consistent with Farag and Mallin (2014).
Finally, we find that larger companies are less likely to appoint female directors.
Table 4 presents the determinants of SB diversity for the Chinese IPOs. Panels A and B
present the results of FE and GMM regressions respectively. The results presented in Table 4
show that there is no influence of company’s financial performance on gender diversity in the
SB as the coefficients on ROA and ROE are insignificant. This result may imply that gender
diversity in the SB is not determined by financial performance.
Insert Table 4 about here.
Our results also show that the larger the SB size the greater the proportion of female directors
as the coefficient on the SB size variable is positive and significant in Panels A and B.
Therefore, our first hypothesis is supported with respect to the SB. However in Panel B, we
find a negative and significant relationship between the proportion of NEDs and the
proportion of female directors. Consistent with the results presented in Table 3, we find that
the younger the SB members the higher the proportion of female directors sitting on the SB.
Moreover, we notice that the greater the proportion of SB members with postgraduate
qualifications, the higher the proportion of female directors.
17
We also find that state ownership has a negative impact on the proportion of female directors.
However, we find that the coefficient on the SB members’ ownership is statistically
insignificant. This result suggests that we cannot reject our third hypothesis; however, we can
reject our fourth hypothesis with respect to the SB. Moreover, we find that the larger the
number of shareholders the greater the proportion of female directors. This is mainly related
to the fact that the SB comprises of at least three members including elected employee and
minority shareholders’ representatives in addition to an independent Supervisor. Finally,
younger companies and those with higher financial risk are less likely to appoint female
supervisors as we find that the natural logarithm of total assets and the ratio of long-term debt
to total assets are negative and highly significant mainly in Panel B.
Table 5 presents the estimation of the impact of board diversity on financial performance.
Panels A and B present the FE and GMM regressions results respectively. The dependent
variable is financial performance measured by both ROA and ROE. It is worth mentioning
this fact given the main responsibility of the SB is to oversee the BoD and to review the
financial affairs of the company; we estimate only the impact of BoD diversity on financial
performance.
Insert Table 5 about here.
The results presented in Table 5 show that there is a positive and significant relationship
between the proportion of female directors and financial performance. This result is
consistent with the resource dependence theory as female directors bring to the board
different viewpoints and experience and thus improve the financial performance. Moreover,
the results presented in Tables 3 and 5 show that there is a bi-directional relationship between
board diversity and financial performance in China. Therefore, we cannot reject our fifth
hypothesis. Table 5 also shows that directors’ age has a negative and significant impact on
financial performance. This implies that appointing younger directors may improve the
financial performance. Education diversity has a positive and significant impact on financial
performance as we find a positive and significant relationship between the proportion of
directors with postgraduate qualifications and financial performance. Finally, state-owned
companies have better financial performance as we find a positive and highly significant
relationship between the proportion of state-owned companies and both ROA and ROE.
Allen et al. (2005) and Guariglia et al. (2011) argue that this could be due to the preferential
18
treatment from financial institutions and other advantages of state-owned companies. They
found that private firms are generally discriminated against by the formal financial system.
The models presented in Tables 3, 4 and 5 are well specified. F-statistics for the fixed effects
models are highly significant (at 1% level). The result of the Arellano and Bond (1991) test
for the second-order autocorrelation cannot reject the null hypothesis of no autocorrelation
suggesting that the moment conditions used are valid. Moreover, the insignificant results of
Hanson test of exogeneity of instruments and the over-identifying restrictions cannot reject
the null hypothesis that the instruments are exogenous.
Summary and conclusion
Chinese companies have a unique governance mechanism, namely a dual or two-tier board
structure that comprises of a supervisory board/committee (SB) and the BoD. The Chinese
economy has attracted the attention of researchers due to the fast and remarkable high
economic growth (9.2% and 8% in 2011 and 2012 respectively) while western counties are
suffering from slow economic growth. Therefore studying the Chinese experience in board
diversity and corporate governance provides some particularly interesting insights. We
investigate the influence of board structure and governance characteristics on gender
diversity of both the board of directors (BoD) and the supervisory board (SB) for a sample of
892 Chinese IPOs floated in both Shanghai and Shenzhen Stock Exchanges during the period
1999-2009. Moreover, we analyse the impact of ownership structure and financial
performance on board diversity. Finally, we investigate the bi-directional relationship
between gender diversity and financial performance.
We find that the average proportion of female directors sitting on both the BoD and the SB
are 10% and 22% respectively. Moreover, the percentage of directors with postgraduate
qualifications e.g. Masters and PhD degrees are 23% and 10% for the BoD and the SB
respectively. Furthermore, the average age of directors sitting on both the BoD and the SB
are 49 and 45.6 years respectively. Using both the fixed effects and system GMM panel data
models we find that there is no influence of board structure on gender diversity in China. This
result is consistent with Cha (2001) and Chen and Al-Najjar (2012). However, we find a
positive and significant relationship between SB size and gender diversity.
19
We also find a negative and significant relationship between state ownership and female
representation on both boards. This might be due to the weak monitoring role and weak
governance mechanisms of state-owned companies. On the other hand, we find that the
higher the directors’ ownership the greater the proportion of females sitting on the BoD. This
implies that directors might motivate and influence the nomination decisions relating to the
appointment of female directors. Our findings also show that there is a bi-directional
relationship between financial performance and the proportion of female directors sitting on
the BoD. Therefore consistent with the resource dependence theory, appointing female
directors may enhance company’s financial performance as female directors may bring to the
board different viewpoints and experience and thus improve the financial performance.
Similarly, companies with better financial performance are likely to appoint female directors.
We also find that appointing younger directors and those with postgraduate qualifications
may improve the proportion of female directors sitting on the BoD and the SB. Furthermore,
we find no influence of company’s financial performance on gender diversity in the SB.
Finally, we find that state-owned companies have better financial performance.
The paper has a number of policy implications as it is the first to investigate the main
characteristics of board diversity for Chinese IPOs for both the BoD and SB. Our empirical
results provide support for the calls for more board diversity by various government reports
on diversity. Furthermore, it provides support and encouragement for the recent
recommendations in a number of countries to encourage board diversity as a feature of
corporate governance best practice. Given China’s economic growth and the increasingly
prominent role of its companies, a sound system of corporate governance with appropriate SB
and BoD diversity policies would help ensure both the robustness and the integrity of its
corporate sector, and its attractiveness to investors. An investigation of the impact of venture
capital backed IPOs on board diversity and the diversity measures of venture capitalists, in
addition to compensation diversity, are areas for future research.
20
Endnotes
1
According to this proposal, all EU listed companies except small and medium size enterprises (SMEs) should
increase substantially the number of women on EU corporate boards by setting a minimum objective that 40%
of NEDs of listed company boards should be of the ‘under-represented gender’, generally women. In addition,
listed companies should make individual commitments on gender-balanced representation by the end of 2020
and must disclose information about board diversity in their annual reports and websites. Member states will set
their own sanctions for non-compliance which may include fines or invalidity of a NED appointment.
2
To illustrate, the positive relationship between board diversity and financial performance is supported in the
following studies; Erhardt et al. (2003); Miller and del Carmen Triana (2009) and Pathan and Faff (2012) in the
US; Luckerath-Rovers (2011) in the Netherlands and Mahadeo et al. (2012) in Mauritius However, a negative
diversity- performance link is found in the following studies: Ryan and Haslam (2005) and Haslam et al. (2010)
in the UK.; Bohren and Strom (2010) in Norway. Finally, a neutral link is supported in Farrell and Hersch
(2005) in the US.
3
Blau index is calculated as
n
ii
PD 1
2
1
where D is the Blau index, P is the percentage of board members in
each category and n is the board size. The Blau index values range from 0 to 0.5, the latter occurs when the
board is equally balanced (i.e. each gender represents 50%). Therefore, the maximum value of the Blau index
occurs in the case of an equally balanced board when both genders are represented in equal proportions.
4
We also use the Herfindahl index to measure education diversity on three categories namely undergraduate
degree (e.g. BSc), postgraduate degree (e.g. Master and/or PhD) and non- university degree (e.g. technical
secondary school and associate degree).
5
We agree with Wintoki et al (2012) and Boone et al (2007) that Tobin’s Q is a measure of growth opportunity
rather than a measure of financial performance.
6
Although higher order of lag length result in more exogenous instruments, the use of internal instruments may
cause the problem of weak instruments as the number of lags increases (Wintoki et al., 2012). However, we
used different lag length as an empirical trade –off.
7
Adams and Mehran (2012) and Mateos de Cabo et al (2012) argue that ROA is the most widely used measure
of profitability as it examines the returns generated from a companies’ assets. However, there are some
limitations to the ROE as it is mainly used as a measure of return on shareholders’ funds. Moreover, it might
provide inaccurate measure of profitability when companies have high leverage ratio.
21
References
Adams, R. & Ferreira D. (2009). Women in the boardroom and their Impact on Governance and
Performance. Journal of Financial Economics, 94(2), 291-309.
Adams, R.B., & Mehran, H. (2012). Bank board structure and performance. Evidence for large
holding companies. Journal of Financial Intermediation, 21(2), 243-267.
Agrawal, A. and Knoeber, C. (2001). Do some outside directors play a political role? Journal of Law
and Economics, 44. No. 1, 179-198.
Allen, F., Qian, J. & Qian, M. (2005). Law, Finance, and Economic Growth in China. Journal of
Financial Economics, 77, 57-116.
Anderson, R. C., Reeb, D. M., Upadhyay, A., & Zhao, W. (2011). The economics of director
heterogeneity. Financial Management, 40(1), 5-38.
Andres, D. P., & Vallelado, E. (2008). Corporate governance in banking: The role of the board of
directors. Journal of Banking & Finance, 32, 2570-2580.
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence
and an application to employment equations. The Review of Economic Studies, 58(2), 277-
297.
Ben‐Amar, W., Francoeur, C., Hafsi, T., & Labelle, R. (2013). What makes better boards? A closer
look at diversity and ownership. British Journal of Management, 24(1), 85-101.
Bhagat, S., & Bolton, B. (2008). Corporate governance and firm performance. Journal of Corporate
Finance, 14, Issue 3, 257–273.
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data
models. Journal of Econometrics, 87, 115-43.
Bohren, O ., & Strom, R. O . (2010). Governance and politics: Regulating independence and diversity
in the boardroom. Journal of Business Finance & Accounting, 37(9), 1281–1308.
Boone, A. L., Field, L. C., Karpoff, J. M. and Raheja, C. G. (2007). The determinants of corporate
board size and composition: An empirical analysis. Journal of Financial Economics, 85, 65-
101.
Brammer, S., Millington, A., & Pavelin, S. (2007). Gender and ethnic diversity among UK corporate
boards. Corporate Governance: An International Review, 15(2), 393–403.
Burke, R. J., & McKeen, C. A. (1990). Mentoring in organizations: Implications for women. Journal
of Business Ethics, 9(4–5), 317–332.
Campbell, K & Vera, A.M. (2008). Gender diversity in the boardroom and firm financial
performance. Journal of Business Ethics, 83, 435-451.
Carpenter, M. A. & Westphal, J. D. (2001). The strategic context of external network ties: Examining
the impact of director appointments on board involvement in strategic decision making.
Academy of Management Journal, 44(4), 639-660.
Carter, D., D’Souza, F., Simkins, B., & Simpson, G. (2010). The gender and ethnic diversity of US
boards and board committees and firm financial performance. Corporate Governance: An
International Review, 18 (5), 396–414.
Carter, D. A., Simkins, B. J. & Simpson, W. G. (2003). Corporate governance, board diversity, and
firm value. The Financial Review, 38, 33–53.
Cha, L. M. (2001, April 18). The future of China’s capital markets and the role of corporate
governance. Luncheon speech at China Business Summit. Presented by Vice Chairman, China
Securities Regulatory Commission.
Chambers, E. G., Foulon, M., Handfield-Jones, H., Franklin, S. M. & Michaels III, E. G. (1998). The
War for Talent, The McKinsey Quarterly, 3, 44– 57.
Chen, C. H., & Al-Najjar, B. (2012). The determinants of board size and independence: Evidence
from China. International Business Review, 21(5), 831-846.
Company Law. (1993). The Company Law of the People’s Republic of China. Beijing: The standing
committee of the National People’s Congress.
Conyon, M. J., & Mallin, C. (1997). Women in the boardroom: Evidence from large UK companies.
Corporate Governance: An International Review, 5, 112–117.
CSRC. (1997). Guidelines on company chapter of listed companies. Beijing: Chinese Securities
Regulatory Commission.
22
CSRC. (1999). Measures on further promoting standardized operations and deepening the reform in
overseas-listed companies. Beijing: Chinese Securities Regulatory Commission.
CSRC. (2001). Guidelines for establishing independent directors of listed companies. Beijing:
Chinese Securities Regulatory Commission.
Deloitte (2011). Women in the Boardroom: A Global Perspective.
Dobbin, F., & Jung, J. (2011). Corporate board gender diversity and stock performance: The
competence gap or institutional investor bias? North Carolina Law Review, 89(3), 809–838.
Erhardt, N. L., Werbel, J. D. & Shrader, C. B. (2003). Board of director diversity and firm financial
performance. Corporate Governance: An International Review, 11 (2), 102–11.
Falkenberg, L., & Monachello, M. (1990). Dual-career and dual income families: Do they have
different needs? Journal of Business Ethics, 9(4–5), 339–351.
Farag, H., & Mallin, C.A. (2014). Board Diversity in European Banks: The Influence of Corporate
Governance, Bank Characteristics, and Performance, Working Paper.
Farrell, K. A., & Hersch, P. L. (2005). Additions to corporate boards: The effect of gender. Journal of
Corporate Finance, 11(1–2), 85–106.
Firth, M., Fung, P. M., & Rui, O. M. (2007). Ownership, two-tier board structure, and the
informativeness of earnings–Evidence from China. Journal of Accounting and Public
Policy, 26(4), 463-496.
Guariglia, A., Liu, X., & Song, L. (2011). Internal finance and growth: microeconometric evidence on
Chinese firms. Journal of Development Economics, 96(1), 79-94.
Gul, F. A., Srinidhi, B., & Ng, A. C. (2011). Does board gender diversity improve the informativeness
of stock prices? Journal of Accounting and Economics, 51(3), 314–338.
Haslam, S. A., Ryan, M. K., Kulich, C., Trojanowski, G., & Atkins, C. (2010). Investing with
prejudice: The relationship between women’s presence on company boards and objective and
subjective measures of company performance. British Journal of Management, 21, 484–497.
Hermalin, B. E., & Weisbach, M. S. (1998). Endogenously chosen boards of directors and their
monitoring of the CEO. American Economic Review, 88(1), 96–118.
Hillman, A. J., Cannella, J. A. A., & Paetzold, R. L. (2000). The resource dependence role of
corporate directors: Strategic adaption of board composition in response to environmental
change. Journal of Management Studies, 37, 235–255.
Hillman, A. J., & Dalziel, T. (2003). Boards of directors and firm performance: Integrating agency
and resource dependence perspectives. Academy of Management Review, 28, 383–396.
Jensen, M.C. (1993).The modern industrial revolution, exit, and the failure of internal control
systems. Journal of Finance 48, 831-880.
Jia, M., & Zhang, Z. (2013). Critical mass of women on BODs, multiple identities, and corporate
philanthropic disaster response: Evidence from privately owned Chinese firms. Journal of
Business Ethics, 118(2), 303-317.
Kandel, E. & Lazear, E.P. (1992). Peer Pressures and Partnerships. Journal of Political Economy,
100, 801-817.
Lang, K. (1986). A Language theory of discrimination. Quarterly Journal of Economics, 101, 363-
382.
Lin, C., Shen, W., & Su, D. (2005). Corporate tournament and executive compensation in a
transitional economy (Working paper). University of Florida and University of Otago.
Lin, T. W. (2004). Corporate governance in China: Recent developments, key problems, and
solutions. Journal of Accounting and Corporate Governance, 1, 1–23.
Luckerath-Rovers, M. (2011). Women on board and firm performance. Journal of Management &
Governance, 1–19.
Mahadeo, J. D., Soobaroyen, T., & Hanuman, V. O. (2012). Board composition and financial
performance: Uncovering the effects of diversity in an emerging economy. Journal of
Business Ethics, 105, 375–388.
Mallin, C. A. (2013). Corporate governance. 4th Edition, Oxford: Oxford University Press.
Mateos de Cabo R., Gimeno, R., & Nieto, M.J. (2012). Gender diversity on European banks’ board of
directors. Journal of Business Ethics, 109:145-162.
23
Miller, T., & del Carmen Triana, M. (2009). Demographic diversity in the boardroom: Mediators of
the board diversity-firm performance relationship. Journal of Management Studies, 46(5),
755–786.
Morck, R., A. Shleifer and R. Vishny, (1988). Managerial ownership and market valuation: An
empirical analysis, Journal of Financial Economics, 20, 293–315.
Nekhili, M & Gatfaoui, H. (2013). Are demographic attributes and firm characteristics drivers of
gender diversity? Investigating women’s positions on French boards of directors. Journal of
Business Ethics, 118, 1573-0697.
OECD. (2011). Corporate Governance of Listed Companies in China: Self-Assessment by the China
Securities Regulatory Commission, OECD Publishing.
http://dx.doi.org/10.1787/9789264119208-en
O’Reilly III, C.A., Caldwell, D.F. & Barnett W.P. (1989). Workgroup demography, social integration,
and turnover. Administrative Science Quarterly, 34, 21-37.
Pathan, S., & Faff, R. (2012). Does board structure in banks really affect their performance? Journal
of Banking and Finance, 37(5), 1573-1589..
Peasnell, K.V., Pope, P.F., &Young, S. (2005). Board monitoring and earnings management: do
outside directors influence abnormal accruals? Journal of Business Finance and Accounting,
32, 1311–1346.
Peterson, C. A., & Philpot, J. (2007). Women’s role on US fortune 500 boards: Director expertise and
committee memberships. Journal of Business Ethics 72(2), 177–196.
Putnam, R.D. (2007). E Pluribus Unum: Heterogeneity and Community in the Twenty-First
Century—The 2006 Johan Skytte Prize Lecture, Scandinavian Political Studies, 30, (2), 137-
174.
Raheja, C. G. (2005). Determinants of board size and composition: A theory of corporate boards.
Journal of Financial and Quantitative Analysis, 40(2), 283–306.
Randøy, T., Thomsen, S. & Oxelheim, L. (2006). A Nordic perspective on corporate board diversity.
Nordic Innovation Centre Project, Agder University College, Norway.
Reagans, R., & Zuckerman E.W. (2001). Networks, Diversity, and Productivity: The Social Capital of
Corporate R&D Teams. Organization Science 12, 502-517.
Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata.
Stata Journal, 9: 86-136.
Ryan, M.K., & Haslam, A.S. (2005). The Glass cliff: evidence that women are over- represented in
precarious leadership positions. British Journal of Management, 16, 81–90.
Singh, V., Kumra, S., & Vinnicombe, S. (2002). Gender and impression management: Playing the
promotion game. Journal of Business Ethics, 37(1), 77–89.
Terjesen S., Sealy R., & Singh V. (2009). Women directors on corporate boards: A review and
research agenda. Corporate Governance: An International Review, 17(3):320-337.
Vafeas, N. (2000). Board structure and the informativeness of earnings. Journal of Accounting and
Public Policy, 19, 139–160.
Vafeas, N. (2005). Audit committees, boards, and the quality of reported earnings. Contemporary
Accounting Research 22 (4), 1093–1122.
van der Walt, N. and Ingley, C. (2003). Board dynamics and the influence of professional
background, gender and racial diversity of directors. Corporate Governance: An International
Review, 11, 218–34.
Wintoki, M. B., Linck, J. S., & Netter, J. M. (2012). Endogeneity and the dynamics of internal
corporate governance. Journal of Financial Economics, 105(3), 581-606.
Xu, X., & Wang, Y. (1999). Ownership structure and corporate performance in Chinese stock
companies. China Economic Review, 10, 75–98.
Yi A. (2011). Mind the gap: Half of Asia’s boards have no women, a risky position for governance
and growth. The Korn Ferry Institute.
Yuan, R., Xiao, J. Z., Milonas, N., & Zou, J. H. (2009). The role of financial institutions in the
corporate governance of listed Chinese companies. British Journal of Management, 20(4),
562-580.
Zou, H., & Adams, M. B. (2008). Corporate ownership, equity risk and returns in the People's
Republic of China. Journal of International Business Studies, 39(7), 1149-1168.
24
Table 1: Descriptive Statistics
Mean
SD
Min
Max
Obs
Panel A: Board of Directors (BoD)
B. size
9.40
2.00
4
19
8006
INED
0.33
0.10
0
0.80
7941
CEO/Chair
0.17
0.38
0
1
8006
# Com
3.82
0.63
1
8
6281
% Female
0.10
0.10
0
0.83
8006
DirAge
49.00
4.13
34.4
64.75
8002
MultDir
0.58
0.36
0
1.00
8006
PGDir
0.23
0.26
0
1
8006
Panel B: Supervisory Board (SB)
SB. size
4.19
1.55
3
15
8004
NED
0.34
0.29
0
1
8004
% Female.SB
0.22
0.23
0
1
8004
SB.DirAge
45.65
5.27
24.33
67
6296
MultDir.SB
0.36
0.32
0
1
7929
PGDir.SP
0.10
0.19
0
1
8004
Panel C: Ownership Structure
% StateOwn
0.22
0.27
0
0.86
7976
% EmpOwn
0.004
0.02
0
0.36
7976
% DirOwn
0.06
0.14
0
0.74
7975
%SBDirOwn
0.002
0.013
0
0.271
7976
Panel D: Financial information and company specific variables
ROA
0.06
0.07
-0.97
0.98
7973
ROE
0.07
0.11
-0.94
0.98
7844
lnTA
21.48
1.24
17.27
28.41
7990
Coage
5.60
3.47
1
14
8006
MTB
1.71
1.21
0.42
31.03
7967
LTD/TA
0.401
0.09
0
0.80
7955
lnS.holders
10.27
0.91
1.61
14.45
8000
H. shares
0.03
0.18
0
1
8006
B. size: Board of Directors size; INED: Percentage of independent non-executive directors on BoD; CEO/Chair:
Dummy variable takes the value of 1 if the CEO and Chairman of the BoD is the same person and 0 otherwise;
# Com: Number of BoD sub-committees; % Female: Proportion of female directors sitting on the BoD. DirAge:
Average BoD’s age; MultDir: Percentage of directors who hold multiple directorship positions; PGDir:
Percentage of directors with Postgraduate qualifications e.g. Master and PhD; SB. Size: Supervisory board size;
NED: Percentage of non-executive directors on SB; % Female.SB: Proportion of female directors sitting on the
SB; SB.DirAge: Average SB directors’ age; MultDir.SB: Percentage of directors on SB who hold multiple
directorship positions; PGDir.SP: Percentage of directors on SB with Postgraduate qualifications e.g. Master
and PhD; %StateOwn: Percentage of state-owned shares; % EmpOwn: Percentage of employees’ shares;
%DirOwn: Percentage of directors’ shares; %SBDirOwn: Percentage of supervisory board members’ shares;
ROA: Return on assets calculated as (net profits + financial expenses)/average total assets; ROE: Return on
equity calculated as (net profits + financial expenses)/average shareholders’ equity; lnTA: Natural logarithm of
company’s total assets as a proxy for company size; Coage: Company age since IPO; MTB: Market value to
book value ratio as a proxy for growth; LTD/TA: Long-term debt/total assets ratio; lnS.holders: Natural
logarithm of company’s total number of shareholders and H.shares: Dummy variable equals 1 if the company
cross listed in Hong Kong Stock Exchange and 0 otherwise.
25
Table 2: Correlation matrix
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
1
% Female
1.00
2
B size
-0.15
1.0
3
DirAge
-0.09
0.12
1.00
4
MultDir
0.04
-0.08
0.10
1.00
5
ROA
0.02
0.03
0.06
0.08
1.00
6
ROE
0.003
0.03
0.06
0.08
0.83
1.00
7
lnTA
-0.15
0.30
0.39
0.10
0.08
0.12
1.00
8
%StateOwn
-0.15
0.24
0.07
-0.23
-0.05
-0.04
0.18
1.00
9
INEDs
0.003
-0.30
0.16
0.18
0.02
0.04
0.11
-0.10
1.00
10
CEO/Chair
0.11
-0.18
-0.09
0.02
0.05
0.03
-0.17
-0.18
0.12
1.00
11
Coage
-0.01
0.02
0.09
0.12
0.12
-0.09
0.24
-0.12
0.003
-0.16
1.00
12
#com
-0.03
-0.01
0.04
0.12
-0.01
-0.01
-0.001
-0.09
0.10
-0.01
0.08
1.00
13
Hshares
-0.09
0.14
0.28
0.03
0.03
0.03
0.42
0.12
0.11
-0.08
-0.06
-0.05
1.00
14
% EmpOwn
0.01
0.05
-0.03
-0.12
-0.03
-0.02
-0.02
0.03
-0.07
-0.02
-0.07
-0.06
-0.02
1.00
15
% Female.SB
0.13
-0.11
-0.05
0.04
0.03
0.01
-0.11
-0.11
0.02
0.06
-0.10
-0.05
-0.08
-0.03
1.00
16
SB. Size
-0.12
0.37
0.10
-0.06
0.02
0.003
0.23
0.29
-0.13
-0.17
0.03
0.002
0.11
0.02
-0.11
1.00
17
SB.DirAge
-0.10
0.15
0.25
-0.05
-0.07
-0.06
0.26
0.21
-0.02
-0.11
0.13
0.01
0.19
0.03
-0.20
0.14
1.00
18
MultDir.SB
-0.04
0.11
0.07
0.14
0.04
0.05
0.04
0.17
-0.02
-0.04
-0.29
0.03
0.09
-0.05
0.01
0.08
0.08
1.00
19
PGDir.SB
0.002
-0.01
0.06
0.10
0.05
0.05
0.07
0.01
0.02
0.05
-0.16
-0.07
0.12
-0.02
0.08
-0.005
-0.03
0.18
1.00
20
NEDSB
-0.08
0.15
0.08
0.04
-0.05
-0.03
0.11
0.20
0.11
-0.14
0.12
-0.03
0.02
-0.01
-0.07
0.17
0.17
0.27
0.02
1.00
B. size: Board of Directors size; INED: Percentage of independent non-executive directors on BoD; CEO/Chair: Dummy variable takes the value of 1 if the CEO and Chairman of the
BoD is the same person and 0 otherwise; # Com: Number of BoD sub-committees; % Female: Proportion of female directors sitting in the BoD. DirAge: Average BoD’s age; MultDir:
Percentage of directors who hold multiple directorship positions; PGDir: Percentage of directors with Postgraduate qualifications e.g. Master and PhD; SB. Size: Supervisory board size;
NED: Percentage of non-executive directors on SB; % Female.SB: Proportion of female directors sitting in the SB; SB.DirAge: Average SB directors’ age; MultDir.SB: Percentage of
directors on SB who hold multiple directorship positions; PGDir.SP: Percentage of directors on SB with Postgraduate qualifications e.g. Master and PhD; %StateOwn: Percentage of
state-owned shares; % EmpOwn: Percentage of employees’ shares; %DirOwn: Percentage of directors’ shares; ROA: Return on assets calculated as (net profits + financial
expenses)/average total assets; ROE: Return on equity calculated as (net profits + financial expenses)/average shareholders’ equity; lnTA: Natural logarithm of company’s total assets as a
proxy for company size; Coage: Company age since IPO; LTD/TA: Long-term debt/total assets ratio; and H.shares: Dummy variable equals 1 if the company cross listed in Hong Kong
Stock Exchange and 0 otherwise. SB. Size: Supervisory board size; NEDSB: Percentage of non-executive directors on SB; % Female.SB: Proportion of female directors sitting on the SB;
SB.DirAge: Average SB directors’ age; CrosDir.SB: Percentage of directors on SB who hold multiple directorship positions; PGDir.SB: Percentage of directors on SB with Postgraduate
qualifications e.g. Master and PhD. Bold figures indicate significance at the 5% or lower.
26
Table 3: Determinants of Board of Directors Diversity
Panel A: FE
Panel B: GMM
Model 1
Model 2
Model 3
Model 4
Dependent variable
%Female
%Female
%Female
%Female
Lagged % Female
0.722***
(0.006)
0.727***
(0.006)
ROA
0.029***
(0.011)
0.011***
(0.004)
ROE
0.014**
(0.006)
0.006**
(0.003)
B.Size
0.0002
(0.001)
0.0002
(0.0009)
0.0001
(0.002)
0.0001
(0.0002)
INED
-0.029
(0.025)
-0.033
(0.024)
-0.011
(0.009)
0.008
(0.023)
# Com
0.006***
(0.002)
0.006***
(0.002)
0.004***
(0.0007)
0.008***
(0.0007)
CEO/Chair
0.002
(0.003)
0.002
(0.003)
-0.003
(0.002)
-0.002
(0.003)
DirAge
-0.002***
(0.0004)
-0.001***
(0.0004)
-0.0006***
(0.0002)
-0.0004***
(0.0001)
MultDir
0.0002
(0.004)
-0.0003
(0.004)
-0.004***
(0.0006)
-0.004***
(0.0006)
PGDir
0.007**
(0.003)
0.008**
(0.004)
0.004**
(0.002)
0.004**
(0.002)
% StateOwn
-0.013**
(0.006)
-0.013**
(0.005)
-0.009***
(0.002)
-0.007***
(0.002)
% DirOwn
0.091***
(0.022)
0.087***
(0.022)
0.038***
(0.008)
0.024***
(0.009)
% EmpOwn
0.133*
(0.076)
0.131*
(0.074)
0.011
(0.021)
0.035*
(0.021)
lnTA
-0.008***
(0.002)
-0.009***
(0.002)
-0.005***
(0.0006)
-0.003***
(0.0006)
Coage
0.004***
(0.001)
0.004***
(0.001)
-0.013
(0.027)
-0.035
(0.024)
MTB
-0.002
(0.004)
-0.004
(0.004)
-0.006***
(0.002)
-0.005***
(0.001)
LTD/TA
-0.021
(0.016)
-0.025
(0.016)
0.023***
(0.005)
0.011*
(0.006)
H. shares
0.061*
(0.033)
0.063*
(0.033)
0.042***
(0.002)
0.026***
(0.002)
R-sq
0.025
0.022
Obs
6163
6066
5814
5716
Industry dummies
No
No
Yes
Yes
Company Fixed Effects
Yes
Yes
Yes
Yes
Year Fixed Effects
Yes
Yes
Yes
Yes
F.stat p.value
0.000
0.000
Wald test p.value
0.000
0.000
Arelleno-bond test for AR(1) p.value
0.000
0.000
Arelleno-bond test for AR(2) p.value
0.956
0.846
Hansen test p.value
0.446
0.219
The Table presents the FE and GMM regressions for the determinants of diversity on the BoD. The dependent variable is the
proportion of female directors sitting in the BoD. Lagged % Female: Lagged proportion of female directors sitting on the BoD;
ROA: Return on assets calculated as (net profits + financial expenses)/average total assets; ROE: Return on equity calculated as (net
profits + financial expenses)/average shareholders’ equity; B.size:Board of Directors size; INED: Percentage of independent non-
executive directors on BoD; # Com: Number of BoD subcommittees; CEO/Chair: Dummy variable takes the value of 1 if the CEO
and Chairman of the BoD is the same person and 0 otherwise; DirAge: Average BoD’s age; MultDir: Percentage of directors who
hold multiple directorship positions; PGDir: Percentage of directors with Postgraduate qualifications e.g. Master and PhD;
%StateOwn: Percentage of state-owned shares; %DirOwn: Percentage of directors’ shares; % EmpOwn: Percentage of employees’
shares; lnTA: Natural logarithm of company’s total assets as a proxy for company size; Coage: Company age since IPO; MTB:
Market value to book value ratio as a proxy for growth ;LTD/TA: Long-term debt/total assets ratio; H.shares: Dummy
variable equals 1 if the company cross listed in Hong Kong Stock Exchange and 0 otherwise. ***, **,and * indicates significance at
the 1%, 5% and 10% levels respectively. Clustered standard errors are presented between parentheses.
27
Table 4: Determinants of Supervisory Board Diversity
Panel A: FE
Panel B: GMM
Model 1
Model 2
Model 3
Model 4
%Female
%Female
%Female
%Female
Lagged % Female.SB
0.705***
(0.003)
0.860***
(0.002)
ROA
0.003
(0.021)
0.003
(0.003)
ROE
0.004
(0.012)
0.006
(0.01)
SB. size
0.004**
(0.002)
0.004**
(0.002)
0.004***
(0.0003)
0.001***
(0.0001)
NED
-0.0007
(0.002)
-0.0005
(0.002)
-0.004***
(0.0001)
-0.0004**
(0.0002)
SB.DirAge
-0.007***
(0.0005)
-0.007***
(0.0005)
-0.004***
(0.0001)
-0.003***
(0.0009)
MultDir.SB
-0.005
(0.007)
-0.003
(0.007)
-0.008***
(0.0008)
-0.007***
(0.0005)
PGDir.SB
0.043***
(0.013)
0.045***
(0.014)
0.022***
(0.002)
0.019**
(0.008)
% StateOwn
-0.002**
(0.001)
-0.002
(0.011)
-0.024***
(0.002)
-0.016***
(0.002)
% EmpOwn
0.104
(0.087)
0.084
(0.085)
-0.002
(0.005)
0.031
(0.022)
%SBDirOwn
0.121
(0.265)
0.137
(0.264)
-0.068
(0.048)
0.204
(0.294)
lnS.holders
0.011***
(0.003)
0.009***
(0.003)
0.003***
(0.0004)
0.003***
(0.0006)
lnTA
-0.014***
(0.004)
-0.015***
(0.004)
-0.007***
(0.0004)
-0.002***
(0.0005)
Coage
-0.006***
(0.001)
-0.006***
(0.001)
-0.051***
(0.004)
-0.034***
(0.004)
MTB
-0.006
(0.008)
-0.008
(0.008)
0.003***
(0.0009)
0.003***
(0.0006)
LTD/TA
-0.049*
(0.028)
-0.041
(0.028)
-0.031***
(0.004)
-0.064***
(0.004)
H. shares
0.121*
(0.070)
0.116*
(0.070)
0.056***
(0.002)
0.053***
(0.001)
R-sq
0.055
0.056
Obs
7699
7660
6951
6840
Industry dummies
No
No
Yes
Yes
Company Fixed Effects
Yes
Yes
Yes
Yes
Year Fixed Effects
Yes
Yes
Yes
Yes
F.stat p.value
0.000
0.000
Wald test p.value
0.000
0.000
Arelleno-bond test for AR(1) p.value
0.000
0.000
Arelleno-bond test for AR(2) p.value
0.546
0.516
Hansen test p.value
0.665
0.747
The Table presents the FE and GMM regressions for the determinants of diversity on the SB. The dependent variable
is the proportion of female directors sitting in the SB. Lagged % FemaleSB: Lagged proportion of female directors
sitting in the SB; ROA: Return on assets calculated as (net profits + financial expenses)/average total assets; SB. Size:
Supervisory board size; NED: Percentage of non-executive directors on SB; % Female.SB: Proportion of female
directors sitting on the SB; SB.DirAge: Average SB directors’ age; MultDir.SB: Percentage of directors on SB who
hold multiple directorship positions; PGDir.SB: Percentage of directors on SB with Postgraduate qualifications e.g.
Master and PhD; %StateOwn: Percentage of state-owned shares; % EmpOwn: Percentage of employees’ shares;
%SBDirOwn: Percentage of supervisory board members’ shares; shareholders; lnTA: Natural logarithm of
company’s total assets as a proxy for company size; Coage: Company age since IPO; MTB: Market value to book
value ratio as a proxy for growth ; LTD/TA: Long-term debt/total assets ratio; lnS.holders: Natural logarithm of
company’s total number of shareholders; H.shares: Dummy variable equals 1 if the company cross listed in Hong
Kong Stock Exchange and 0 otherwise. ***, **,and * indicates significance at the 1%, 5% and 10% levels
respectively. Clustered standard errors are presented between parentheses.
28
Table 5: The impact of Board Diversity on Financial Performance
Panel A: FE
Panel B: GMM
Dependent variable
ROA
ROE
ROA
ROE
Lagged FP
0.194***
(0.062)
0.121***
(0.009)
% Female
0.049***
(0.017)
0.069**
(0.031)
0.197***
(0.063)
0.109***
(0.041)
B.Size
0.0005
(0.001)
0.0008
(0.002)
0.003
(0.004)
0.0001
(0.0009)
INED
0.017
(0.032)
0.086
(0.056)
0.294**
(0.144)
0.458***
(0.035)
# Com
0.002
(0.003)
0.007*
(0.004)
0.006
(0.009)
0.002
(0.002)
CEO/Chair
-0.002
(0.005)
0.009
(0.008)
-0.016
(0.032)
-0.009
(0.006)
DirAge
-0.002***
(0.0006)
-0.002**
(0.001)
-0.003***
(0.0006)
-0.0002**
(0.0001)
MultDir
0.001
(0.005)
0.008
(0.009)
0.005
(0.011)
0.013***
(0.001)
PGDir
0.021***
(0.007)
0.022*
(0.012)
0.004**
(0.002)
0.005**
(0.002)
% StateOwn
0.023***
(0.007)
0.026**
(0.013)
0.015***
(0.005)
0.026***
(0.005)
% DirOwn
0.133***
(0.029)
0.151***
(0.051)
0.024
(0.078)
0.047*
(0.028)
% EmpOwn
0.018
(0.097)
0.039
(0.167)
2.279
(3.188)
0.032
(0.037)
lnTA
0.011***
(0.003)
0.051***
(0.006)
0.014***
(0.003)
0.034***
(0.002)
Coage
-0.003***
(0.0008)
-0.004**
(0.002)
-0.025***
(0.006)
-0.051***
(0.002)
MTB
-0.071***
(0.005)
-0.126***
(0.010)
-0.067***
(0.012)
-0.094***
(0.003)
LTD/TA
0.036*
(0.021)
0.151***
(0.036)
0.088***
(0.011)
0.153***
(0.014)
H. shares
-0.026
(0.043)
-0.119*
(0.071)
-0.012
(0.041)
-0.092
(0.065)
R-sq
0.142
0.166
Obs
6133
6066
5809
5684
Industry dummies
No
No
Yes
Yes
Company Fixed Effects
Yes
Yes
Yes
Yes
Year Fixed Effects
Yes
Yes
Yes
Yes
F.stat p.value
0.000
0.000
Wald test p.value
0.000
0.000
Arelleno-bond test for AR(1) p.value
0.000
0.000
Arelleno-bond test for AR(2) p.value
0.197
0.236
Hansen test p.value
0.141
0.133
Lagged FP: Lagged return on assets and return on equity; % Female: Proportion of female directors sitting
on the BoD; B. size:Board of Directors size; INED: Percentage of independent non-executive directors on
BoD; # Com: Number of BoD subcommittees; CEO/Chair: Dummy variable takes the value of 1 if the
CEO and Chairman of the BoD is the same person and 0 otherwise; DirAge: Average BoD’s age; MultDir:
Percentage of directors who hold multiple directorship positions; PGDir: Percentage of directors with
Postgraduate qualifications e.g. Master and PhD; %StateOwn: Percentage of state-owned shares;
%DirOwn: Percentage of directors’ shares; % EmpOwn: Percentage of employees’ shares; lnTA: Natural
logarithm of company’s total assets as a proxy for company size; Coage: Company age since IPO; MTB:
Market value to book value ratio as a proxy for growth;LTD/TA: Long-term debt/total assets ratio;
H.shares: Dummy variable equals 1 if the company cross listed in Hong Kong Stock Exchange and 0
otherwise. ***, **,and * indicates significance at the 1%, 5% and 10% levels respectively. Clustered
standard errors are presented between parentheses.
