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BIJ
25,3
1028
Received 30 July 2017
Revised 30 January 2018
Accepted 5 February 2018
Benchmarking: An International
Journal
Vol. 25 No. 3, 2018
pp. 1028-1058
© Emerald Publishing Limited
1463-5771
DOI 10.1108/BIJ-07-2017-0203
Does board demographic diversity
influence firm performance?
Evidence from Indian-knowledge
intensive firms
Muneza Kagzi and Mahua Guha
Indian Institute of Management Rohtak, Rohtak, India
Abstract
Purpose – In the wake of inconsistent findings between board diversity and firm performance, the purpose
of this paper is to advance the research by examining the linear and non-linear nature of the relationship
between board demographic diversity (gender, age, tenure, and education) and firm performance in Indian
knowledge-intensive firms (KIFs).
Design/methodology/approach – This study uses a panel data set of top KIFs in India that is listed in
National Stock Exchange’s Top-200 list for the period 2010-2014.
Findings – Results indicate that there exists a positive linear relationship between the overall board
demographic diversity index (board gender, age, tenure, and education) and firm performance. Among the
effects of individual board diversity variables, the authors have found that board age diversity positively
whereas education diversity negatively influences firm performance. Furthermore, gender diversity and
tenure diversity do not significantly influence the firm performance.
Research limitations/implications – This study is based on the following demographic factors: gender,
age, tenure, and level of education. The authors did not include other demographic variables such as
nationality and language.
Practical implications – This research would help knowledge-intensive companies in designing their corporate
boards. The results indicate that companies should have more diverse boards to enhance firm performance.
Originality/value – To the best of the authors’ knowledge, this is the first research to examine the effect of
the overall board diversity index and individual board demographic diversity indices (gender, age, education,
and tenure) on firm performance in the context of KIFs in India.
Keywords Board demographic diversity, Firm performance, Emerging markets,
Knowledge-intensive firms (KIFs’), India
Paper type Research paper
1. Introduction
After the liberalization era, the Indian Government transformed the economy from
agriculture to knowledge based which resulted into more number of knowledge-intensive
firms (KIFs) in India (Byres, 1998; Majumdar and Bhattacharjee, 2014; Pandey et al., 2004).
Along with India, KIFs also emerged as key drivers of the global economic system
(Alvesson, 2004; Hershberg et al., 2007; Oehmichen et al., 2017), because knowledge emerged
as a source of competitive advantage (Grant, 1996; Tallman et al., 2004). In this competitive
world that is highly connected, imitation of products and services has negatively affected
KIFs’ performance. Many profitable developed market firms are entering emerging nations
like India. This aggravates competition and poses a threat of sustaining superior
performance for Indian companies (Bhaumik et al., 2016; Chittoor et al., 2009; Singh, 2010).
In order to successfully compete with global firms, the boards of Indian KIFs need to pay
particular attention to strategic decisions which can enhance firm performance.
Boards of directors play vital roles in terms of establishing vision, mission, and values,
setting strategies, and determining strategic options to enhance firm performance (Carroll and
Buchholtz, 2014; Liao et al., 2015; Zahra and Pearce, 1989). These functions are influenced by
demographic attributes of board members, such as gender, tenure, age, and education
(Hambrick and Mason, 1984; Johnson et al., 2013; Post and Byron, 2015). Therefore, it is essential
to examine how demographic diversity in boardroom influences firm performance. In addition, Board
in recent years, several countries including India have enacted guidelines and/or mandatory demographic
laws to improve board diversity (Chapple and Humphrey, 2013; Dezső et al., 2016; Terjesen et al., diversity
2015). This has catalyzed discussions on board demographic diversity among practitioners,
regulators, and scholars (Hillman, 2015; Mahadeo et al., 2012; Zahra and Pearce, 1989).
Research scholars have long been concerned with the relationships between various
dimensions of board diversity, and various firm-level outcomes including firm performance 1029
(Levi et al., 2014; Zona et al., 2013). Prior scholars majorly studied gender diversity in
corporate boards and reported inconsistent evidence (Bear et al., 2010; Hillman and Dalziel,
2003; Mahadeo et al., 2012; Post and Byron, 2015). Some studies reported a positive linear
relationship between gender diversity and firm performance (Bear et al., 2010; Mahadeo
et al., 2012; Post and Byron, 2015). Some other scholars found a negative linear relationship
between gender diversity in boards and firm performance (Adams and Ferreira, 2009;
Haslam et al., 2010). Other scholars did not find any significant relationship between gender
diversity in boards and firm performance ( Jhunjhunwala and Mishra, 2012; Rose, 2007; Rose
et al., 2013) (refer Table AI for more details on prior board gender diversity studies).
When compared to the extensive research on board gender diversity, fewer scholars
have examined the impact of age diversity of corporate boards with mixed findings
(Ali et al., 2013; Bonn et al., 2004; Hafsi and Turgut, 2013). The benefits of board age
diversity include higher donations, higher firm performance, and improved decision making
(Ali et al., 2013; Mahadeo et al., 2012; Sekiguchi et al., 2011; Li et al., 2011; Siciliano, 1996).
In contrast, a disadvantage of board age diversity is that it leads to low corporate social
performance (Hafsi and Turgut, 2013). However, a few researchers did not find any
significant relationship between board diversity and firm performance (Bonn et al., 2004)
(refer Table AII for details on some board age diversity studies).
Similar to board age diversity, board education and tenure diversities are less studied
(Ben-Amar et al., 2013; Brown et al., 2017; Golden and Zajac, 2001; Hafsi and Turgut, 2013).
Scholars have reported inconsistent findings related to board tenure and educational
diversity. Tenure diversity’s benefits include improvement in efficiency (Bell et al., 2011).
In contrast, adverse effects of tenure diversity in boards include hampering of firm
performance (Michel and Hambrick, 1992). There are some studies which found no
relationship between board tenure diversity and firm performance (Hafsi and Turgut, 2013)
and between board education diversity (Rose, 2007) and firm performance. Refer Table AIII
for details on prior studies on the effects of educational diversity in corporate boards and refer
Table AIV for details on prior studies on the effects of tenure diversity in corporate boards.
These inconsistent findings suggest that future research should focus on competing
prediction based on contrasting theories and sophisticated models (Ali et al., 2011, 2013;
Van Knippenberg et al., 2011). This paper aims to provide new evidence on how board
demographic diversity influences firm performance in Indian KIFs between 2010 and 2014.
To examine this, we have investigated the competing linear and curvilinear nature of the
relationship between board diversity and firm performance. We have taken multiple
theoretical perspectives to establish this nature of the relationship. Resource dependence
theory suggests a positive linear relationship (Hillman and Dalziel, 2003; Kim and Kim, 2015;
Pfeffer and Salancik, 1978; Singh, 2007). In contrast, social identity theory suggests a
negative linear relationship (Cannella et al., 2015; Hogg and Terry, 2000; Tajfel, 1978). The
combined use of resource dependence and social identity theories suggests an inverted
U-shaped relationship (Ali et al., 2013). We have considered the following four aspects of
board demographic diversity: gender, age, tenure, and education. We have used the Blau
diversity index to measure diversity in two ways. First, we have computed the total
board diversity index (TBDI) which combines the following four demographic criteria:
gender, age, tenure, and education. Second, we have also examined each of the following
BIJ diversity variables (Blau index) separately: gender index (GI), age index (AI), tenure index
25,3 (TI), and education index (EI). We have used generalized methods of moment (GMM)
estimator method to examine the hypotheses. We have considered companies that are listed
on the National Stock Exchange’s (NSE) top-200 list from the year 2010 to 2014.
We have organized the paper into the following sections: Introduction; Conceptual
background; Theoretical background and hypothesis development; Data and
1030 methodology; Analysis and results; Discussions and conclusions; Contribution; and
Limitations and future research.

1.1 Research context: India

Till 1975, India had an active stock market but was characterized by non-existent corporate
governance structure. This includes ineffective boards, inconsistent disclosures, and
diversion of funds for personal use by owners (Dharmapala and Khanna, 2013; Henry, 2000).
This scenario was changed around the year 1990 when India adopted an economic reform
policy known as Liberalization, Privatization, and Globalization (Byres, 1998; Coale and
Hoover, 2015; Jackling and Johl, 2009; Kotwal et al., 2011). The primary aim of this policy
was to make India one of the fastest developing economies in the world. This resulted into a
chain of reforms, which in turn, influenced the overall economic growth and corporate
governance standards. During this time, the private sector grew very well and so did KIFs.
Corporate practices in India are majorly influenced by two regulations, i.e. the Security
Exchange Board of India (SEBI) and The Companies Act. First, SEBI implemented and
revised Clause 49 of the Listing Agreement for listed companies in Indian stock markets.
The listing agreement primarily aimed to protect the rights of shareholders by
strengthening the role of independent directors on the company’s board and disclosure
practices. Clause 49 mentions the corporate governance standards under which the
companies are ordered to work. After the enactment of the new Companies Act, 2013, SEBI
has amended Clause 49 of the Listing Agreement to bring it into conformity with the new
Act. These amendments include an optimum combination of executive and non-executive
directors with at least one woman director on boards, constitution of board committees,
disclosure requirements of the companies, clarity on boards’ responsibilities, and
compensation and whistle blower policy (Nagar and Sen, 2016).
Second, the Companies Act, 2013, regulates incorporation of a company, responsibilities of
a company, directors, and dissolution of a company. This Companies Act was revised to
mandate the presence of at least one woman on board. Other demographics aspects of the
boards, such as tenure, age, and education of the boards, are managed internally by companies.
In India, being an emerging nation, the recent reforms in the corporate governance area
reflect a positive attitude by the national government to improve the effectiveness of board’s
functioning in Indian companies. The political, social, legal, and economic environments of
emerging nations and developed nations differ. But, the majority of the corporate
governance studies are based on developed nations (Darmadi, 2011; Mahadeo et al., 2012;
Post and Byron, 2015). To further enrich the literature, in the recent years, scholars have
been focusing on studying corporate governance in the emerging nations.
For the following reasons, we believe that India represents an interesting research setting.
First, there are many economic advantages associated with India as an emerging market.
Presently, India is growing at 7.1 percent and also projected with high growth potential in future
too (International Monetary Fund (IMF), 2017). As per the IMF (2017) forecast, India is emerging
as a lucrative destination for business at the international level among the advanced and
emerging nations (refer Figures 1 and 2). Apart from its growth potential, India is also benefited
by the presence of a young population with professional skill sets, an emerging middle class
population that provides market opportunities and affluent clienteles for massive sales (Coale
and Hoover, 2015; Dahlman and Utz, 2005; Kidrond, 2015; Kotwal et al., 2011). This is coupled
 Real GDP growth rate Board
(annual percentage rate)
12 demographic
10
diversity
8

4
1031
2

0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010

2014
2016
2018
2020
2022
2012
–2 Figure 1.
India World
Real GDP growth rate:
India and world
Source: IMF (2017) report

Real GDP growth rate

(annual percentage rate)
12

10

0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010

2014
2016
2018
2020
2022
2012

–2

–4 Figure 2.
–6 Real GDP growth rate:
India Advanced economies
Indian and advanced
economies
Source: IMF (2017) report

with the Indian Government’s initiative to open up the economy which attracted many MNCs to
invest in India to tap growing opportunities (Chittoor et al., 2009; Pandey et al., 2004).
Second, a few characteristics of firm ownership and managerial control for Indian firms
are very different from those of developed nations. Some of these characteristics are: the
dominance of business groups, a large number of family-owned firms with concentrated
ownership structure, and high levels of related-party transactions ( Jackling and Johl, 2009;
Khanna and Palepu, 2000; Singla et al., 2014). The characteristics mentioned above are very
often found in many other emerging nations (Sun et al., 2017; Yildirim-Öktem and Üsdiken,
2010). Ownership structures of firms in developed nations are different and majorly involve
dispersed ownership (Ararat et al., 2015; Manikandan and Ramachandran, 2015). This leads
to the principal-principal issue (agency problem) in emerging nation firms, unlike the
principal-agent issue which prevails in developed nation firms with diffused ownership
(Singla et al., 2014; Sun et al., 2017; Yoshikawa and Phan, 2005). Principal-principal agency
problem implies that there are conflicts of interest between the large controlling
shareholders and minority shareholders (Sun et al., 2017).
Third, Indian culture is characterized by high collectivism according to Hofstede’s (2018)
typology. This is similar to other emerging nations but is different from developed
nations, such as the USA and the UK which are characterized by high individualism.
BIJ National culture is one of the driving forces which influences board diversity (Du, 2014;
25,3 Dwyer et al., 2003; Seierstad et al., 2017). Researchers have reported that in firms of countries
with collective culture, the effects of demographic diversity on task performance is more
likely to emerge positive than negative (Ararat et al., 2015; Chatman et al., 1998).
Fourth, emerging nations and developed nations differ in terms of enforcement
standards. Such standards are stricter and more transparent in developed nations in
1032 comparison to emerging nations (Xu and Meyer, 2013). So the transparency and disclosure
change can have some implications on the board diversity-firm performance ( Jackling and
Johl, 2009; Xu and Meyer, 2013).
Combining the above-mentioned reasons, we believe that India provides a suitable
setting for us to examine the role of board demographic diversity on firm performance.

2. Conceptual background: board diversity and KIFs

Board diversity indicates heterogeneity in corporate board composition with respect to
specific attributes (Ararat et al., 2015; Harrison and Klein, 2007; Srivastava, 2015). Researchers
have broadly classified board diversity in two categories. One is board structural diversity
and second is board demographic diversity. Board Structural diversity is associated with
attributes, such as board size, leadership structure (duality of chairman and CEO), number of
independent board members, and board model (Bertoni et al., 2014; Farag and Mallin, 2016;
Pathan and Faff, 2013). On the other hand, board demographic diversity is based on
demographic criteria, such as board’s background, nationality, gender, age, educational,
functional, and occupational backgrounds (Du, 2014; Hafsi and Turgut, 2013).
Out of these two broad classifications of board diversity, we have considered board
demographic diversity in for the following two reasons. First, literature has reported that
board demographic diversity influences board functioning in terms of strategy designing and
firm performance (Hambrick, 2007; Post and Byron, 2015; Zahra and Pearce, 1989). Second,
structural diversity on board is very weak in emerging countries (Ararat et al., 2015).

2.1 KIFs
KIFs are firms whose outputs are highly dependent on a complex body of knowledge
(Coff, 1999; Ghosh and Ghosh, 2009). KIFs are further characterized by specialized human
capital, innovation processes, and specific structural arrangements to perform highly
intellectual and complex tasks (Oehmichen et al., 2017; Starbuck, 1992; Swart and Kinnie,
2003). Researchers have further reported that KIF operations usually do not involve highly
routine tasks rather they require more creativity and quick adaptation the changing
competitive environment (Alvesson, 2004; Javalgi et al., 2011; Kumar, 2013). KIFs also
involve high investment in knowledge resources and require consideration of broader
alternatives, taking higher risk and more resources for R&D to continuously focus on
innovation (Oehmichen et al., 2017; Starbuck, 1992).

2.2 Why board demographic diversity is essential for KIFs?

Board of directors acts as a mechanism for aligning their organization with the
requirements of the competitive environment (Adams and Ferreira, 2007; Mathisen et al.,
2013; Zahra and Pearce, 1989). Researchers have stated that the impact of board diversity
can vary as per the context (Aguilera et al., 2008). Therefore, it would be interesting to
investigate the effect of board diversity in the context of Indian KIFs.
Boards play more crucial roles in KIFs because these kinds of firms require boards to
identify the opportunities and threats in highly competitive markets to decide on strategic
decisions (Oehmichen et al., 2017; Starbuck, 1992). In the KIFS, boards need to assess and include
early warning signs, such as technological changes, and changes in consumer preferences to Board
ensure the sustainability of their firms (Heyden et al., 2015; Oehmichen et al., 2017). demographic
Furthermore, KIFs employee base has more gender diversity than the employee base of diversity
other firms (Dezsö and Ross, 2012). Although there are some studies on the relationship
between board demographic diversity and firm performance, they have examined listed
firms. However, researchers have mentioned that firms vary in terms of the requirements of
resources where some firms require more knowledge resources than other firms (Coff, 1999). 1033
In this study, we aim to provide specific insights into the effects of board diversity in KIFs
where the use of knowledge resources is higher and diverse boards may have more
significant effect in facilitating access to knowledge resources.
Therefore, diverse boards are expected to provide assessment and judgment of best
practices to design the strategies. However, board diversity has reported both benefits and
costs (Hillman, 2015).

3. Theoretical background and hypothesis development

The vast majority of academic literature on board diversity does not explicitly employ any
theoretical framework to support positive or negative effects of board diversity on firm
performance. Furthermore, the majority of the literature is descriptive (Terjesen et al., 2009).
From the available literature on board diversity and firm performance, we have identified 13
theories which have established positive or negative effects of board diversity on firm
performance. Refer Table I for a summary of theoretical perspectives.

3.1 Positive linear relationship: board diversity and firm performance

The following theories discuss and find evidence of positive effects of board diversity:
resource dependence theory, critical mass theory, agency theory, signaling theory,
behavioral theory of the firm, contingency theory, resource-based view (RBV ), upper
echelons theory, Stewardship theory, human capital theory, and social capital theory.
In contrast, social identity theory and social categorization theories discuss adverse effects
of board diversity and firm performance.
Among many theories establishing a positive relationship between board diversity and
firm performance, agency theory is highly referred in the literature. Agency theory is
concerned with aligning the interests of owners and managers (Fama and Jensen, 1983;
Jensen and Meckling, 1976) and is based on the premise that there is an inherent conflict
between the interests of a firm’s owners and its management (Fama and Jensen, 1983). This
conflict can be resolved by having more number of independent directors in the
organization to enhance firm performance.
In contrast to agency theory, stewardship theory claims that managers are inherently
trustworthy individuals, and therefore, are good stewards of the resources entrusted to them
(Donaldson and Davis, 1994; Muth and Donaldson, 1998). Stewardship theory proposes that
superior corporate performance will be realized when there are a majority of inside directors
on the board. This is because inside directors are more familiar with the firm and business
compared to outsider directors therefore they can make better decisions (Donaldson and
Davis, 1994; Muth and Donaldson, 1998).
Agency theory and stewardship theory have been used in corporate governance research
extensively because many scholars apply these theories to examine the effects of structural
board diversity on firm performance (Barnhart and Rosenstein, 1998; Coles et al., 2001).
In this research, we have focused on the demographic diversity of boards.
Researchers have also described the benefits of board diversity in terms of capital,
i.e. human capital and social capital. Human capital theory proposes that a board comprises
of insiders, business experts, business support specialists, and community influentials who
facilitate board functioning (Singh, 2007). On the other hand, board social capital focuses on
BIJ Sr. no. Name of the theory Theoretical explanation Research question
25,3
1 Resource dependence Resource dependence theory offers a How board diversity facilitates
theory (Pfeffer and rationale for a board’s function of broad range of internal and external
Salancik, 1978) providing critical resources to the firm resources to enhance firm
performance?
2 Upper echelons theory According to upper echelons theory, How board characteristics influence
1034 (Hambrick and directors differ in their cognitive strategic decision making?
Mason, 1984) frames, and these cognitive frames, in
turn, influence firm outcomes
3 Agency theory As per agency theory, a key activity How board structural diversity
( Jensen and Meckling, for boards is to monitor management (number of independent/outsider
1976) on behalf of shareholders and that directors on boards) influences firm
effective monitoring can improve firm performance?
performance by reducing agency costs
4 Stewardship theory Stewardship theory claims that How board structural diversity
(Donaldson and directors are essentially trustworthy (number of inside directors on
Davis, 1994) individuals and therefore good boards) influences firm
stewards of the resources entrusted to performance?
them. This theory proposes that more
number of insider directors can
enhance firm performance
5 Resource-based view According to the resource-based view, How board diversity facilitates the
(RBV ) (Barney, 1991) a firm can gain a sustained use of internal resource for
competitive advantage if it takes improving firm performance?
advantage of its valuable, rare,
inimitable, and non-substitutable
resources. Board diversity facilitates
these resources to improve firm
performance
6 Human capital theory Human capital theory focuses upon How board’s expertise influences
(Singh, 2007) the director’s expertise for the firm. firm performance?
Directors in terms of insiders,
business experts and community
influential, business support
specialists, and community
influentials facilitate board
functioning which can influence firm
performance
7 Social capital theory Social capital theory puts emphasis How board’s social networks
(Singh, 2007) upon a board’s social ties to other influence firm performance?
sources of influence. This includes
links to government and politics,
business institutions, educational
institutions, international bodies,
financial institutions, and charity/
voluntary sector
8 Critical mass theory Critical mass theory suggests that the What minimum number of women is
(Liu et al., 2014) minimum number of women directors needed to influence firm
(at least three women) constitute the performance?
desired critical mass to influence firm
performance
9 Signaling theory Signaling theory to explain how firms Does board diversity provide signals
(Miller and Triana, use heterogeneous boards to to the stakeholders of the firm?
Table I. 2009) communicate visible signals to gain
Summary of
theoretical
perspectives (continued )
Sr. no. Name of the theory Theoretical explanation Research question
Board
demographic
reputation and status among the diversity
stakeholders
10 Behavioral theory of The behavioral theory of the firm How board diversity influences the
the firm (Cyert and posits that the extensiveness of the decision making process?
March, 1963) search and decision-making processes
can be influenced by board 1035
demographic attributes
11 Contingency theory Contingency theory looks at the How board diversity is pronounced
(Zona et al., 2013) specific contingency variables which in the presence of some specific
facilitate the board diversity and firm contextual factors, such as firm size?
performance relationship
12 Self-categorization Self-categorization theory suggests How different individuals categorize
theory (Brown and that people categorize themselves into based on similar attributes?
Turner, 1981; Hogg various social and psychological
and Reid, 2006) identity groups based on specific
attributes, such as gender, age etc.
The categories available for self-
categorization operate at multiple
levels. The narrowest level of category
relates to an individual’s self-identity,
and wider group-level categories
create the individual’s social identity
13 Social identity theory The social identity perspective is a How board members categorization
(Tajfel, 1978) social psychological analysis of group at the group level hampers the firm
processes, intergroup relations, and performance?
the self-concept Table I.

the social ties and networks of boards with important stakeholders. These stakeholders
include government and political leaders, business institutions, educational institutions,
international bodies, financial institutions, and charity/voluntary sector (Singh, 2007).
Similarly, as per signaling theory, greater board diversity allows those firms to send signals
to the stockholders to gain reputation in the industry (Miller and Triana, 2009). According to
the behavioral theory of the firm, board demographic diversity leads to an extensive search
and better decision making (Miller and Triana, 2009).
In addition to the above-mentioned theories, contingency theory argues that the specific
conditions or factor (i.e. contingencies) is necessary to facilitate the board diversity-firm
performance relationship. Zona et al. (2013) found that boards with demographic diversity
enhance firm innovation when the firm size is small. Similar to this, critical mass theory
states that a minimum of three women on boards is necessary to constitute the desired
critical mass which can influence firm performance (Liu et al., 2014).
To further provide the business case for increasing board diversity, researchers have
looked at how diverse boards carry out various functions. These board functioning include
information-seeking and information evaluation processes regarding various strategic
decisions (Hambrick, 2007) which can enhance firm performance. These processes are
cognitive which are majorly influenced by the various demographic factors, such as gender,
age, education, and tenure. This is well explained with the help of upper echelons theory
(Hambrick and Mason, 1984).
Researchers have also looked at how diverse boards facilitate access to various resources
to their firm which in turn enhances firm performance. There are mainly two theories
emphasizing the resource provision role of diverse boards. One is RBV (Barney, 1991) and
another is resource dependency theory (Pfeffer and Salancik, 1978). According to the RBV
BIJ (Barney, 1991), firms need internal resources which are valuable, rare, inimitable, and
25,3 non-substitutable to enhance firm performance. Moreover, diverse boards provide easy
access to these internal resources to the firm (Ali et al., 2011; Li et al., 2011).
On the other hand, resource dependency theory (Pfeffer and Salancik, 1978) discusses that
firms require various internal and external resources to enhance firm performance. Board of
directors facilitates access to various internal and external resources required for improving
1036 firm performance. Out of these theories mentioned above, we believe that the resource
dependence theory is more appropriate in the context of KIFs for the following reasons.
First, resource dependence theory focuses on the broader set of internal and external
resources which are necessary for KIFs. A few of the internal resources are advice and
counseling to managers for decision making, and monitoring of the top management to
facilitate the firm to function better. In contrast, external resources include providing
linkage to external stakeholders, such as government, banks, and shareholders (Ali et al.,
2013; Hillman and Dalziel, 2003; Pfeffer and Salancik, 1978).
Second, a board of director’s primary function is to choose appropriate strategies to
enhance firm performance. KIFs face higher competition in the market which requires
particular attention from the board of directors. Resource dependence theory posits that
diverse boards are good at identifying and evaluating strategies by considering more
comprehensive alternatives (Haynes and Hillman, 2010; Kim and Kim, 2015; Singh, 2007).
Third, KIFs demand continuous innovation which is facilitated by diverse boards (Dezsö
and Ross, 2012; Oehmichen et al., 2017; Starbuck, 1992).

3.2 Negative linear relationship: board diversity and firm performance

The negative linear board diversity-performance relationship is based on the following two
theories: self-categorization and social identity theory. Self-categorization theory discusses
that people categorize themselves into various groups based on similar demographic
attributes such as gender, age, tenure, education, or of structural attributes such as board
insider or outsider independent members (Brown and Turner, 1981; Hogg and Reid, 2006).
The categories available for self-categorization operate at multiple levels (Haslam et al.,
2000). The narrowest level of category relates to an individual’s self-identity, and wider
group-level categories create the individual’s social identity.
Similarly, social identity is the part of an individual’s self-categorization theory at the
group level (Tajfel, 1978). This theory states that board member will categorize themselves
with a group of people having similar attributes. For instance, all young board members will
categorize themselves into a same group and develop a psychological association.
Furthermore, this younger board member group will prefer to interact with the same group
people leaving aside the older board members. Board of directors is a group of members
with varying attributes; therefore, we have considered the social identity for this research
(Hogg and Reid, 2006; Tajfel, 1978).

3.3 Hypothesis development

3.3.1 Board demographic diversity: linear prediction. Resource dependence theory posits that
the external environment of an organization influences firm performance (Pfeffer and Salancik,
1978). Hence, to enhance firm performance, the board of directors should act as a catalyst
between external shareholders and the firm. This theory discusses how the board of directors
facilitates the acquisition and use of resources to improve firm performance (Zhang, 2012).
Companies with diverse boards provide various resources to organizations. For example,
they develop links with key external stakeholders, such as banks, customers, and suppliers.
They also help in attracting talented human resources to their organization (Ali et al., 2013).
Researchers have also reported other benefits of diversity which include better decision
making (Adams et al., 2015; Pérez-Calero et al., 2016), more innovation (Miller and Triana, Board
2009), and better monitoring (Adams and Ferreira, 2009; Ararat et al., 2015). Boards with demographic
gender diversity consider wider decision criteria to improve decision making (Campbell diversity
and Mínguez-Vera, 2008; Hillman, 2015; McIntyre et al., 2007). Similarly, boards with
younger people are associated with higher education (Hatfield, 2002) and are well equipped
with new technology ( Jhunjhunwala and Mishra, 2012). Furthermore, boards with
age diversity enhance firm performance (Mahadeo et al., 2012). Also, boards with tenure 1037
diversity stimulate healthy discussions (Leaders, 2007). Again, boards with educational
diversity bring different viewpoints for better decision making (Bantel, 1993).
Diverse boards are more effective in creating linkages with critical external stakeholders,
such as banks, suppliers, and customers. These linkages reduce the dependencies and
uncertainties (Pfeffer and Salancik, 1978). Boards with gender diversity can access more
diverse consumer base and more network ties with stakeholders (Ali et al., 2013). These then
enable the firms to serve wider consumer bases with lesser dependency on a small number of
suppliers. Firms can also access more comprehensive resources to develop broader product
values for larger and diverse consumer base (Ali et al., 2013). It is likely that boards with
younger members will have more linkages with early entrepreneurs, whereas boards with
older members will have linkages with senior contacts in well-established firms. These ties will
enable the firm to have wider networks for suppliers to reduce the uncertainties. Researchers
have also reported that younger board members lead to the better financial performance of the
firm (Darmadi, 2011). An organization with different tenure of its board members also brings
different network ties. For example, the long-tenured board members have existing contacts
whereas the newly joined members have contacts from the previous organizations.
An organization with diverse board conveys its commitment toward the diverse workforce
that in turn attracts human resources from diverse backgrounds (Spence, 1973). For instance,
female presence on boards attracts more females at all levels in the organization (Dezsö and
Ross, 2012). A diverse board of director signals that the organization is diversity conscious and
that it values diversity. This then motivates a diverse body of job applicants to apply for the job.
Boards with younger members will act as role models to the new entrants. Employees will then
feel that skills matter for growth in organizations. This will lead to better firm performance.
In sum, diverse boards will improve the strategic decisions, create broader linkages with
stakeholders and attract talented human resource, which will facilitate better decision
making. Thus we propose that:

H1. There will be a positive linear relationship between board demographic diversity
(gender, age, tenure, and education) and firm performance.
In contrast to the resource dependency perspective, there is a social identity theory (Tajfel,
1978) which posits that demographic attributes such as gender, age, education, and tenure
result in a self-categorization process. Through this process, group members only associate
themselves with other group members with similar characteristics. Hence, people with
similarities in terms of age, gender, education, and tenure create in-group, and those with
dissimilarities are in out-group category (Veltrop et al., 2015). Social categorization gives rise
to stereotyping (Van Knippenberg and Schippers, 2007), hampers communication, and
finally hinders the overall group functioning (Chen et al., 2016).
As per social identity theory, gender diverse boards are likely to have one group
consisting only of men thereby isolating women. Board members with higher tenure would
prefer to interact more with board members who have been in the organization for long
rather than with newly joined members (Tuggle et al., 2010). Similarly, engineers would
flock to engineers and lawyers congregate with lawyers. Again, younger board members
will engage in discussions with younger members because research has found that same age
BIJ individuals find it easy to interact and share their values and expectations (Twenge, 2010).
25,3 On the other hand, out-group or dissimilar attribute members are seen as less trustworthy,
more dishonest, and less cooperative when compared with in-group members (Brewer,
1979). This suggests that there exists a positive bias toward in-group members only. Hence,
it is likely that boards having diverse background will engage in restricted communication
(Ali et al., 2013). Thus, according to social identity theory, the earlier mentioned advantages
1038 of diversity are not likely to happen (Richard et al., 2013), and the negative outcomes
(e.g. dissatisfaction and conflict) are likely to diminish the firm performance.
Researchers have stated that gender, age, education, and tenure of corporate board
members negatively influenced firm performance. For instance, Adams and Ferreira (2009)
found that board gender diversity is linked to low Tobin’s Q and return on assets (ROA).
Hafsi and Turgut (2013) found a negative relationship between board age diversity and
corporate social performance. Mahadeo et al. (2012) and Ujunwa (2012) reported that boards
with higher educational diversity would negatively impact firm performance. Similarly,
Chen et al. (2016) reported that gender diversity is negatively related to the acquisition
intensity and acquisition size. Thus, we propose the following:
H2. There will be a negative linear relationship between board demographic diversity
(gender, age, tenure, and education) and firm performance.
Refer Figure 3 for the understanding about hypothesis development.
3.3.2 Board demographic diversity: curvilinear prediction. As is evident from the
discussions in the previous two sections, till date, there is a mixed bag of evidence of the
nature of the relationship between corporate board diversity and firm performance (Adams
et al., 2015). Researchers have mentioned that the level of diversity influences firm
performance (Adams and Ferreira, 2009; Ben-Amar et al., 2013). Therefore, we propose that
the effect of board diversity on firm performance is a function of the magnitude of diversity
in terms of low or moderate or high.
Researchers have argued that no single theory can explain the association between
board diversity and firm performance because the relationship is complex in nature
( Jackling and Johl, 2009). Hence, we take the logical argument of two competing theories:
resource dependence theory (Pfeffer and Salancik, 1978) and social identity theory (Tajfel,
1978) to arrive at plausible hypotheses.
Resource dependence theory supports the view that higher level of diversity enhances
firm performance while social identity theory contradicts this. However, the views of the
conflicting theories can be bridged by suggesting a curvilinear relationship between
corporate board diversity and firm performance. There exist a few research studies which
propose a non-linear approach (Ali et al., 2013; Ararat et al., 2015; Engelen et al., 2012;
Ooi et al., 2015). Integrating resource dependence theory (Pfeffer and Salancik, 1978) with
social identity theory (Tajfel, 1978), we propose an inverted U-shaped relationship between
board diversity and organizational performance. The theoretical integration suggests that

Board demographic diversity

+H1

Gender Age –H2

Firm performance
Figure 3. 5H3 Tobin’s Q
Conceptual model: Tenure Education
hypothesis
development
the impact of diversity on outcomes depends on the level of diversity (Ali et al., 2013; Board
Richard et al., 2002). Resource dependence theory indicates that there is a positive linear demographic
relationship between diversity and firm performance. Researchers have found that diversity
homogeneous boards maintain a status quo (Murray, 1989; Wiersema and Bantel, 1992).
Such homogeneous boards are not open to new information (Wiersema and Bantel,
1992). However, as board diversity increases, it provides access to new information and
resources to enhance firm performance (Ararat et al., 2015). Further increases in diversity 1039
from low to moderate level enhance the benefits of demographic diversity (Knouse and
Dansby, 1999). However, after a moderate level (25 percent of demographic diversity),
further increase (high level to 25-50 percent) in demographic diversity can result in social
categorization based on specific demographic attributes (Ali et al., 2013). The high
representation of gender, younger or older age, specific tenure, and education can create a
sense of threat or insecurity and can result in conflicts among the minority and majority
groups. This can lead to poor performance. Hence, we offer the following hypothesis:
H3. There will be an inverted U-shaped relationship between board demographic
diversity (gender, age, tenure, and education) and firm performance.

4. Data and methodology

4.1 Sample and data sources
The initial sample of our study comprised of the top 200 NSE listed firms in India over the
time period 2010-2014. We then applied the following restrictions:
(1) we included high-tech manufacturing and service KIFs (Coff, 1999);
(2) we excluded financial firms (e.g. banks and insurance companies), as they account
and report under different rules than other companies, and also tend to have a
different capital structure ( Jackling and Johl, 2009; Sun et al., 2017); and
(3) we eliminated the firms that do not have required data for the study period.
The above criteria yielded a usable sample of 126 firms’ observations covering the period
from 2010 to 2014. We have collected data from different sources. Our source of
demographic variables is NSE’s Infobase database which contains information on board of
directors of NSE listed companies in India. In addition, we have collected accounting
variables from Center for Monitoring Indian Economy Prowess.

4.2 Measures
The dependent variable for our study is firm performance. To assess the firm performance,
researchers have generally used either accounting-based measures of profitability such as
ROA, return on sales, or stock-market-based measures such as Tobin’s Q or return on stock
prices (Bhagat and Bolton, 2009; Carter et al., 2010; Dezsö and Ross, 2012; Jackling and Johl,
2009). For this study, we have considered the stock-based performance measure, Tobin’s Q. It is
defined as the ratio of market value of firm assets to their replacement value (Tobin, 1969).
Tobin’s Q considers the expected value of future cash flows, which are captured in the market
value of firm’s assets. KIFs generally rely more on human assets compared to physical assets to
compete in the marketplace (Alvesson, 1993; Coff, 1999; Swart and Kinnie, 2003). This value of
intellectual capital and intangible assets is reflected in a high Tobin’s Q which is not considered
in accounting-based firm performance (Bhagat and Bolton, 2009). Accounting-based firm
performance measures are more suitable for physical-capital-intensive firms (Khanna and
Palepu, 1997). Therefore, Tobin’s Q is an appropriate measure of firm performance in the
context of KIFs (Swart and Kinnie, 2003).
BIJ The independent variable for this study is board demographic diversity. Existing
25,3 literature has measured board diversity in either of the following two ways. The first way is
to examine the combined effect of various board diversity attributes, such as board gender,
age, nationality, and tenure (Ararat et al., 2015; Ben-Amar et al., 2013). The second way is to
examine the effect of a specific board diversity attribute, such as board gender diversity
(Ali et al., 2013; Brown et al., 2017; Windscheid et al., 2016). For this study, we have examined
1040 board demographic diversity in both of the ways mentioned above. First, we have examined
the effect of total board diversity by combining the following four board demographic
attributes: board gender, board age, board tenure, and board education. For this purpose, we
have developed an index called the TBDI. In addition, we have also examined the effect of
each of the following individual board diversity variables by creating their corresponding
diversity indexes: gender (board gender diversity index – GI), age (board age diversity
index – AI), tenure (board tenure diversity index – TI), and education (board education
diversity index – EI).
We have studied the effect of board demographic diversity by creating an index using
the Blau (1977) index:

X
n
Blau index ¼ 1 P 2i
i¼1

where Pi is the percentage of board members in each category and n is the total number of
board members.
A Blau diversity index takes on values between 0 and 1. Zero value of this index
represents complete homogeneity, and larger values of this index indicate greater diversity
(Miller and Triana, 2009). For instance, a board with no gender diversity would score a 0 for
board gender diversity index (GI), and an equal gender distributed board would be a 0.5
for board gender diversity index (GI). Refer Appendix 5 for a detailed discussion on the
calculation of these indexes.
Our analysis includes several controls in the multivariate model. We have controlled for
the effect of organization size (log of total assets), organization’s age (log of a number of
years of existence), R&D investment (log of R&D investment), and leverage (debt-equity
ratio). We have controlled for firm size (log of total assets) and firm age (log of a number of
years of existence) because older and larger firms tend to follow different strategies
(Tushman et al., 1985). Next, we have controlled for R&D investment as a proxy for
innovation capabilities of the firm (Heyden et al., 2015). For firm performance, we have
controlled for one additional variable – leverage (debt/equity) ratio (Dezsö and Ross, 2012)
which influences firm performance. We have included year dummies and company
dummies to control for unobserved time and company effects (Dezsö and Ross, 2012). Please
refer Table II for the definitions of variables.

4.3 Methodology
Testing our hypotheses using a dynamic longitudinal panel data model required us to
control for endogeneity and unobserved heterogeneity. Therefore, we have tested our
hypothesis using the GMM technique (Arellano and Bond, 1991). We have used system
GMM estimator (Arellano and Bover, 1995) instead of difference GMM estimator because
the persistence of dependent variable could result into severe weak instrumental problem in
the difference GMM approach. Consistent with the prior research, we have taken the lagged
value as an instrument (Uotila et al., 2009). Furthermore, to assess the instruments’ validity,
we computed Hansen’s (1982) J statistic test for each of the estimated models. The results
strongly suggest that the set of instruments is valid.
Sr. no. Variable Measure
Board
demographic
1 Dependent variable: firm performance diversity
Tobin’s Q Stock market capitalization plus book value of liabilities
as a ratio of total assets
2 Endogenous variables
2.1 Total board diversity index (TBDI) Blau index combining four demographic diversity
variables such as gender, age, tenure, and education 1041
2.2 Gender diversity index (GI) Blau index
2.2.1 Gender diversity index2 Square of gender diversity index
2.3 Age diversity index (AI) Blau index
2.3.1 Age diversity index2 Square of age diversity index
2.4 Tenure diversity index (TI) Blau index
2.4.1 Tenure diversity index2 Square of tenure diversity index
2.5 Education diversity index (EI) Blau index
2.5.1 Education diversity index2 Square of education diversity index
3 Control variables
3.1 Firm size Natural logarithm of total assets
3.2 Firm’s age Natural logarithm of firm’s age
3.3 Leverage Debt to equity ratio
3.4 R&D investment Natural logarithm of R&D investment Table II.
3.5 Board size Natural logarithm of the number of directors on the board Definition of variables

The GMM method also deals with the endogeneity and reverse causality. This implies that
diverse boards improve firm performance; there can be some reasons to believe that the better
performing firms may have more diverse boards. These theoretical arguments suggest that
diverse boards endogenously depend on firm performance, and thus, the association between
diverse boards and firm performance may be driven by reverse causality.

4.4 Mathematical equations

Firm performance ¼ b0 þb1ðboard diversityÞþb2ðR&D investmentÞþb3ðfirm sizeÞ

þb4ðfirm’s ageÞ þb5ðleverageÞþb6 ðboard sizeÞ

þb7ðprevious year’s firm performanceÞþb8 ðyear dummyÞþe (1)

4.5 Statistical analysis

Table I presents the descriptive statistics for the variables used in this study. This includes
means, standard deviations, and correlation coefficients.

5. Analysis and results

Table III provides the descriptive statistics for the variables used in the study, as well as
their correlations. It reports that out of all diversity indexes, gender diversity index (GI) has
a low mean value thereby indicating that the level of gender diversity is very less on the
company boards.
Table IV represents the results of GMM regression. H1 proposes that board
demographic diversity would be positively and linearly related to firm performance.
H2 proposes that board demographic diversity would be negatively and linearly related to
firm performance. In order to test H1 and H2, we ran the regression Model 2 with the
 BIJ
25,3

1042

Table III.
Descriptive statistics
Variable Mean SD 1 2 3 4 5 6 7 8 9 10 11

Tobin’s Q 3.9098 5.67885 1

Board size 10.126 0.31621 −0.205** 1
Gender diversity index 0.1988 0.24367 −0.086* 0.129** 1
Age diversity index 0.7048 0.14727 0.023 0.081 0.026 1
Tenure diversity index 0.6346 0.38464 0.165** −0.084* 0.025 0.217** 1
Education diversity index 0.6274 0.18821 −0.066 −0.018 −0.044 −0.03 0.028 1
Total board diversity index 2.5827 1.00594 0.055 0.008 0.320** 0.325** 0.619** 0.146** 1
Firm size 29.43 1.44121 −0.483** 0.267** 0.06 −0.125** −0.388** 0.201** −0.138** 1
Leverage 0.699 4.88078 −0.032 −0.036 −0.135** −0.06 −0.014 0.085* −0.073 0.041 1
R&D 325.024 1.77876 −0.045 0.149** −0.029 −0.072 −0.066 0.120* −0.016 0.332** 0.001 1
Firm’s age 3.382 0.68035 −0.136** 0.246** 0.100* −0.107* 0.148** −0.014 0.101* 0.163** −0.038 −0.027 1
Notes: *p o0.05; **po 0.01
Method GMM
Dependent variable Tobin’s Q
Models Model 1 linear relationship Model 2 curvilinear relationship Model 3 linear relationship Model 4 curvilinear relationship

Tobin’s Q (Lag 1) 0.533 (0.126)*** 0.551544 (0.124973)*** −3.033952 (0.336024)*** −0.179765 (0.044631)***
R&D −0.403 (0.223) −0.403476 (0.0869) 1.733275 (0.869085) −0.009097 (0.152297)*
Firm size 2.358 (0.291) 2.223754 (2.166043) −12.6995 (3.982404) −1.617735 (1.448521)**
Leverage 0.018 (0.643) 0.016676 (0.6837) 1.09444 (1.64438) 0.015466 (0.070028)
Board size 1.0257 (0.194) 1.0994 (0.1766) 2.042259 (1.729136) 0.737138 (0.757898)
Firm’s age 0.076 (0.7797) 0.080675 (0.264096) 1.128691 (0.536195)* 0.466578 (0.230761)**
Total board diversity index 0.510125 (0.0067)*** −0.865245 (0.3003)
Total board diversity index2 0.220638 (0.0979)
Gender diversity index −5.558695 (2.772784) 3.311772 (2.647106)
Gender diversity index2 −4.13129 (3.701011)
Age diversity index 6.638171 (2.966054)* −5.816336 (11.99044)
Age diversity index2 6.071332 (8.512624)
Tenure diversity index 4.019924 (6.043496) −3.370542 (3.75419)
Tenure diversity index2 2.84666 (3.660576)
Education diversity index −6.436538 (2.681831)* −1.044336 (4.693702)
2
Education diversity index 1.148665 (4.918951)
Hansen J-statistica 5.587378 5.477926 6.103356 8.936703
Wald χ2b 14.80742 (6)** 11.11494 (8) 12.52964 (9) 20.30879 (11)
▯1c −1.817569* 0.634882 −1.874664* −2.072774**
▯2c 0.759157 −0.556486 −0.623058 0.220124
Notes: Robust standard errors in parenthesis. aH0: instruments are valid; bdegree of freedom in parenthesis; c▯1 and ▯2 are values for Arellano-Bond tests for AR (1) and
AR (2) in first differences, respectively. *p o0.01; **po 0.05; ***po 0.001
diversity

1043
demographic
Board

Tobin’s Q
GMM analysis with
Table IV.
BIJ dependent variable – Tobin’s Q. The results indicate that the overall board demographic
25,3 diversity has a significantly positive linear relationship with Tobin’s Q.
H3 proposes that board demographic diversity would have an inverted U-shaped
relationship with firm performance. TBDI and its squared terms (Haans et al., 2016) were
entered in Model 3 to examine H3. The results shown under Model 3 in Table III suggest
that board diversity did not have a significant non-linear effect on firm performance.
1044 To further test these hypotheses, we conducted regressions with board GI, AI, TI, and EI
as independent variables and Tobin’s Q as a dependent variable. The positive coefficient of
AI and EI in Model 4 indicates a significant positive linear relationship between Tobin’s Q
and education and age diversity index.
Furthermore, to examine the impact of Companies Act, 2013, mandating the presence of
at least one woman on the corporate boards of all publicly listed firms in India, we have run
regression analysis on a subset of our total sample (i.e. for the time period 2010 to 2012) in
order to examine the impact of board gender diversity on firm performance. The results are
reported in Table V which suggests that board gender diversity does not have a significant
effect on firm performance for our sample of firms from 2010 to 2012 (i.e. prior to the
Companies Act, 2013) (refer Table V ).

6. Discussions and conclusions

The main purposes of testing the competing linear and curvilinear nature of relationship
between board demographic diversity and firm performance were to provide additional
evidence on the relationship between board demographic diversity (gender, age tenure, and
education) and performance in KIFs’ context; and to perform a rigorous test of the
curvilinear relationship between both board demographic diversity and performance, which
may reconcile some of the inconsistent findings of past research. The results of this study
indicate that overall board demographic diversity index comprising of gender, age,
education, and tenure has a significant positive linear relationship with firm performance.
For all four individual demographic diversity, we found the following three results:
we found that age diversity significantly and positively influenced both firm performance
criteria; education diversity significantly and negatively impacted Tobin’s Q; and gender
and tenure diversity were not related to the firm performance. Refer Table VI for the
summary of the results.

Method GMM
Dependent variable Tobin’s Q
Models Model 9 linear relationship Model 10 curvilinear relationship

Dependent variable (Lag 1) −0.163 (0.146)** −0.106 (0.205)**

R&D −0.059 (0.508) 0.303 (1.110)
Firm size −0.578 (2.436) −2.315 (3.228)
Leverage −0.022 (0.053) 0.015 (0.111)
Board size 0.022 (0.714) 1.252 (2.022)
Firm’s age −5.529 (8.126) −6.294 (9.614)
Gender diversity index 2.244 (2.149) −44.818 (83.050)
Gender diversity index2 89.970 (165.552)
Hansen J-statistica 1.364 0.537
Wald χ 2b
25.724 (5) 185.961 (6)
▯1c −0.552** 0.935**
Table V.
GMM analysis with ▯2c −0.989 −0.964
gender diversity Notes: Robust standard errors in parenthesis. aH0: instruments are valid; bdegree of freedom in parenthesis;
index (time period: c
▯1 and ▯2 are values for Arellano-Bond tests for AR (1) and AR (2) in first differences, respectively.
2010-2013) **p o 0.05
6.1 Linear effects of board demographic diversity and firm performance Board
We have got the positive linear relationship between board demographic diversity and firm demographic
performance. This finding supports the resource dependence perspective which suggests diversity
that board members are in an excellent position to facilitate critical resources to the KIFs to
perform better (Boyd, 1990; Kim and Kim, 2015; Pfeffer and Salancik, 1978; Zhang, 2012).
This study also suggests that boards with demographic diversity are better aligned with
the need of KIFs. This implies that boards with higher demographic diversity are good at 1045
complex problem solving (Campbell and Mínguez-Vera, 2008; Dezsö and Ross, 2012;
Oehmichen et al., 2017), more innovative (Ali et al., 2013; Perryman et al., 2015; Zona et al.,
2013), and better at identifying opportunities and threats in the market to take strategic
decisions (Hambrick, 2007; Oehmichen et al., 2017; Post and Byron, 2015). Diverse boards
also help in attracting talented employees for KIFs to sustain in this globalized competitive
market (Ali et al., 2013; Hillman, 2015; McIntyre et al., 2007). Another essential advantage of
board demographic diversity is the consideration of a broader range of information to make
more informed decisions (Buse et al., 2016; Haynes and Hillman, 2010). This is also very
crucial for the sustainability of KIFs (Von Nordenflycht, 2010; Starbuck, 1992). Findings of
this research strengthen the business case for board demographic diversity by quantifying
the impact of board diversity on firm performance.
6.1.1 Effects of individual diversity measures. Different dimensions of board diversity
affect firm performance differently (Adams et al., 2015). Therefore, after investigating the
effect of overall board diversity index on firm performance, we have also examined the effects
of four diversity indexes on firm performance separately. The first index is gender diversity
index. The result indicates that there exists no association between gender diversity and firm
performance for the period of 2010 to 2014. To further examine the impact of Companies Act,
2013, mandating women on board, we run the analysis on the sub-sample with all data
till 2012. We got the similar results that the boards with gender diversity are not significantly
influencing firm performance before and after the Companies Act, 2013 (refer Table V ). This
finding is consistent with some prior research (Carter et al., 2010; Rose, 2007; Rose et al., 2013)
which reported that gender diversity on board does not significantly affect firm performance.
One possible explanation for this can be that there are very few females on the boards
(Catalyst Information Center, 2012) and this small number does not have sufficient power to
influence the decision making of the organizations. There is a pipeline leakage in terms of high
dropout rate of the female in the job market. Out of 36 percent of women employed in the
organization, only 4.9 percent female are present on the boards.
The second diversity index is related to the age of the board members. Age diversity
index was found to have significant positive relationships with the firm performance. This
implies that the boards comprising of young and old boards have unique values upon which
firm performance can be enhanced. Researchers have stated that younger directors tend to
be highly educated, more acquainted with new technologies (Bonn et al., 2004; Hatfield,
2002). On the other hand, older directors bring to the board valuable experience that they
accumulated in the industry ( Jhunjhunwala and Mishra, 2012; Li et al., 2011), which is

Sr. no. Board diversity Firm performance (Tobin’s Q)

1 Total board diversity index (TBDI) +

2 Gender diversity index (GI) Not supported
3 Age diversity index (AI) + Table VI.
4 Education diversity index (EI) − Summary of the
5 Tenure diversity index (TI) Not supported analysis
BIJ required for better decision making. These attributes of younger and older directors
25,3 complement one another and KIFs can leverage this to decide on their strategic choices.
Another diversity variable is related to the level of education of board members.
This education diversity index was found negatively influencing Tobin’s Q. Tobin’s Q
is market-based subjective measure that depends upon the perception of investors. Investors
infer threat from the different education level a possible source of conflict and value negatively
1046 which resulted into negative performance in terms of Tobin’s Q. This implies that
shareholders negatively value company boards with more education diversity.
The last diversity index is related to the tenure of board members. Our results indicate
that this tenure diversity index does not significantly affect firm performance. This result is
in line with the previous research by Hafsi and Turgut (2013). They mentioned that the
boards with tenure diversity could not influence firm performance. Boards with longer
tenure may be too close to other managers, and they may agree to avoid any controversy,
while shorter tenured board members are too shy to speak up. Such a situation may lead
board members to follow rather than take the lead in a decision-making process.

7. Contribution
This research will help management scholars and practitioners in the following ways.

7.1 Academic contribution

First, to the best of our knowledge, this study is one of the first to examine the following:
the relationship between a composite demographic diversity index and firm performance;
and the relationships between each of the four diversity variables – age, tenure, gender,
and education and firm performance. We have created the composite index by combining
multiple dimensions of diversity (gender, age, tenure, and education). Prior research
studies have considered either aggregate measure of board diversity by combining
various board attributes (Ararat et al., 2015; Ben-Amar et al., 2013) or a single board
diversity attribute (Brown et al., 2017; Dezső et al., 2016; Post and Byron, 2015; Yoshikawa
and Phan, 2005). In this research, we have considered both above-mentioned approaches
and our results indicate that the aggregate level of board diversity positively influences
firm performance but it differs when we examined each board diversity attribute
separately. For instance, in our study, board age diversity has a positive influence on firm
performance whereas board education diversity has a negative influence on firm
performance. In contrast, board gender diversity and board tenure diversity each has no
significant influence on firm performance. These findings provide additional insight to the
board diversity research domain.
Second, the majority of the research on corporate governance is based on developed
nations which significantly differ from developing nations in terms of cultural and legal
aspects (Darmadi, 2011). Hence, the present research findings in an Indian context will
provide additional insights to the corporate governance literature.
Third, there are mixed evidence of the relationship between board diversity and
firm performance in the existing body of literature (Hillman, 2015). Till date, we did not
come across any study that examined the competing linear and curvilinear relationships
between corporate board diversity and firm performance. This study helps to uncover
some conflicting findings from the past and suggests that overall board demographic
diversity influences firm performance positively in our sample of large publicly listed
Indian firms.
Fourth, our research strengthens the business case for board demographic diversity by
providing the first evidence (as far as we know) for a positive linear influence of board
demographic diversity on firm performance in the Indian context. It also adds to a small
body of literature that investigates the impact of board age, board education, and board Board
tenure diversity on firm performance. Particularly, findings of our research provide an demographic
additional insight that an increase in board age diversity is beneficial to the KIFs in India. diversity

7.2 Practitioner contribution

The research results from this study have two important ramifications for policy and practice.
First, companies can better develop their corporate boards. This will help them to find a
1047
“board-performance” fit that will ensure better performance of Indian firms. Our study
demonstrates a positive impact of total board demographic diversity on firm performance.
Apart from board demographic diversity, many other factors can also influence firm
performance, such as national economy, global competition, and government support
(Carroll and Buchholtz, 2014). However, these factors are in a firm’s external environment
and hence may be difficult for organizations to influence to enhance the firm performance.
In contrast, organizations can exercise some controls over their board’s composition.
Organizations can carefully design boards focusing on how new board members can
potentially enhance board diversity which, in turn, will further enhance firm performance.
Second, the overall results of our study indicate that board demographic diversity
positively and linearly affects the firm performance of Indian KIFs. Directors are
increasingly held accountable for firm’s key strategic decisions and firm performance.
The characteristics of effective board members in KIFs are typically different from the
characteristics of effective board members in other firms (Oehmichen et al., 2017; Swart
and Kinnie, 2003). A proactive and consultative mindset combined with the right
motivation and a generally “hands-on” attitude makes the ideal board director in a KIF
where typically the rate of change in the industry is higher than in other firms (Oehmichen
et al., 2017; Tenkasi and Boland, 1996). A board with demographic diversity can be
instrumental for the success of a fast-growing KIFs industry, and the rewards for the
individual can be equally significant. This is because KIFs actively engage in new
knowledge discovery and represent higher growth rates (Asian Development Bank, 2014;
Javalgi et al., 2011; Tenkasi and Boland, 1996).
Third, this study will also guide Indian policymakers to formulate recommendations
and laws that will direct the formation of corporate boards with desirable characteristics
of members such as age, education, and tenure. Currently, the Companies Act, 2013,
mandates the presence of at least one woman on the boards of listed companies in India.
However, our findings indicate that board gender diversity does not affect firm
performance for our sample of Indian firms for the time period of our study from 2010 to
2014 i.e. before and even after mandate by Companies Act, 2013. As per the Catalyst
Report 2012, there are very few women who reach top management positions because of
high dropout of women in the middle management level. This requires an attention from
the Indian Government to create a pull initiative along with a push initiative of a female
mandate in India.
Pull initiatives are those by which a government facilitates various benefits to women
employees in order to encourage higher gender diversity in the workforce.
The government should recommend voluntary disclosures on the proportion of women
in the company’s workforce and in the ranks of senior management. Furthermore, the
government should reward the companies with high gender diversity in order to
encourage other companies to increase gender diversity. The most cited reason for
dropout of corporate women is their family responsibilities. Therefore, the government
should focus on leave guidelines, such as more number of maternity and paternity leaves
to the employees to facilitate women employment at all levels. This will result into
the systematic promotion of women in companies.
BIJ 8. Limitations and future research
25,3 The emerging research on board demographic diversity has the potential to become an
important area in the study of board diversity.
Just like any other study, this one also has its limitations. First, we have examined the
effect of the following four board demographic diversity variables – gender, age, education,
and tenure only. But the diversity in India represents the unique research context with vast
1048 diversity in many other aspects such as linguistic diversity, religious diversity, caste
diversity, and regional diversity (Dasgupta, 1970; Hardgrave, 1993). India represents second
highest population of the world with 29 states representing variety in various aspects
related to culture and economic class. India is the land of many languages as the
constitution of India recognizes 22 official languages. Indian population is comprised of
people professing all kinds of major religions of the world. But because of the unavailability
of the data, we could not consider other relevant demographic aspects.
Second, we have examined the effects of board demographic diversity using secondary
data only. Future research can carry out primary research to supplement the findings.
Finally, in this study, we have focused on KIFs based in India, and therefore, our
study findings cannot necessarily be generalized to other industries and other countries.
Future research can compare and contrast the effects of board demographic diversity in
multiple countries.

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BIJ Appendix 1
25,3

Author(s) Country Sample Dependent variables Independent variables Result

Ismail and Malaysia 127 Average abnormal Women director Positive

1056 Manaf (2016) Malaysian return (AAR) demographics, size of
firms (1999- the company, ROA,
2011) leverage, industry
dummy
Terjesen et al. 47 countries 3,876 public ROA, Tobin’s Q Percentage of Positive
(2016) firms in 47 independent directors,
countries percentage of female
directors
Rose et al. Denmark, Sweden, 117 listed ROA, ROE, and Women director, No link
(2013) Norway, Finland, companies ROCE nationality of director,
and Germany industry dummy, firm
size
Hafsi and USA 500 S&P Corporate social Outside directors, Positive
Turgut (2013) listed firms performance board size, ownership,
leadership, duality,
gender, age, ethnicity,
tenure, and
experience
Ahern and Norway 248 Firm performance Ratio of women Negative
Dittmar (2012) Norwegian corporate boards
public
listed firms
Mahadeo et al. Mauritius 39 ROA Ratio of women Positive
(2012) companies director on board
listed on
Mauritius
Stock
Exchange
Gul et al. USA 7,597 US Stock prices Gender diversity ratio Positive
(2011) firms
Torchia et al. Norway 317 Innovation No. of women in four Three plus
(2011) Norwegian groups (1) no woman women –
companies (2) one woman (3) two positively
women (4) three plus related
women
Bøhren and USA, Norway 7,597 US Tobin’s Q, ROA Gender ratio Positive
Strøm (2010) firms, 203 and
Norwegian negative
Firms link
Haslam et al. UK 126 British ROA, ROE, Tobin’s Q Dummy (women), No link
(2010) companies ratio of women and
directors negative
link
Lückerath- Netherland 99 Dutch ROE, ROS Ratio of women on Positive
Table AI. Rovers (2013) companies boards
Board gender Adams and USA 1,939 US Firm characteristics Board characteristics Negative
diversity research Ferreira (2009) firms
Appendix 2 Board
demographic
diversity
Author(s) Country Sample Dependent variables Independent variables Result

Mahadeo Mauritius 47 listed Mauritius ROA Board age diversity, Positive

et al. (2012) firms board size, proportion of 1057
board independence
Ali et al. Australia 84 Australian ROE and market to Org. size, org. age, No link
(2013) manufacturing firm book value ratio industry type,
organization type
(holding/subsidy)
Bonn et al. Japan and 169 Japanese Market to book Board size, outsider ratio, Negative
(2004) Australia manufacturing ratio, ROA coefficient of variation of
organization and 104 director’s age, firm’s age
Australian
organization
Hafsi and USA S&P 500 firms Corporate social Board structural Negative
Turgut performance variables, board’s age, Table AII.
(2013) gender, ethnicity, Board age
experience, tenure diversity research

Appendix 3

Author(s) Country Sample Dependent variables Independent variables Result

Rose Denmark Listed Danish firms – Tobin’s Q Education diversity, gender, No link
(2007) Denmark board level control variables
Engelen Dutch 100 Dutch companies Buy and hold return Education diversity, board No link
et al. listed on Euronext (BHR) during the size, board age, board
(2012) Amsterdam financial crisis gender, board nationality
Kim and Korea All listed companies Tobin’s Q Education diversity, and Positive
Lim on Korea Stock board characteristics
(2010) Exchange
Mahadeo Mauritius 47 listed Mauritius ROA Board age diversity, board Negative Table AIII.
et al. firms size, proportion of board Board education
(2012) independence diversity research
BIJ Appendix 4
25,3

Author(s) Country Sample Dependent variables Independent variables Result

Golden USA US hospital Strategic change Board tenure diversity, board Inverted
1058 and Zajac industry – size, ownership, board member U-shaped
(2001) 3,198 hospitals age, business orientation relationship
Ben-Amar Canada 289 M&A M&A performance Tenure diversity, ownership, Non-linear
et al. (2013) decisions of M&A transection value, method
Canada – of payment
2000-2007
Brown USA S&P 1,500 Abnormal stock ROE, market to book ratio, R&D Curvilinear
et al. (2017) price reactions expenditure, dividend yield, relationship
board independence
Table AIV. Hafsi and USA 100 companies Corporate social Type of industry, financial No impact
Board tenure Turgut from S&P 500 performance performance
diversity research (2013) firms

Appendix 5. Calculation of board diversity index

We have used Blau (1977) values for gender, age, tenure, and education of board members as primary
indicators of board demographic diversity:
(1) gender index (GI) ¼ Blau index value for gender diversity (gender is 1 if the board member is
female; 0, otherwise);
(2) tenure index (TI) ¼ Blau index value for tenure diversity (tenure is classified into the following
four categories: 1 ¼ 0-10 years, 2 ¼ 11-20 years, 3 ¼ 21-30 years, and 4 ¼ greater than
31 years);
Note: total number of years that a board member was employed by that firm.
(3) age index (AI) ¼ Blau index value for age diversity (age is classified into the following five
categories: 1 ¼ 25-35 years, 2 ¼ 36-45 years, 3 ¼ 46-55 years, 4 ¼ 56-65 years, and 5 ¼ greater
than 65 years);
(4) education index (EI) ¼ Blau index value for education level diversity (education level is
classified into the following five categories: elementary (passed board examination after Class
10), secondary (passed board examination after Class 12), graduation from a recognized
university, Masters (post-graduation) from a recognized university, and PhD from a
recognized university, based on the total number of years of formal education, i.e. 5 years,
11 years, 16 years, 20 years, and more than 20 years, respectively; and
(5) total board diversity index (TBDI) ¼ gender index (GI) + tenure index (TI) + age index (AI)
+ education index (EI).

Corresponding author
Muneza Kagzi can be contacted at: muneza.kagzi@gmail.com

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