Emerging Markets Finance and Trade

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Boardroom Diversity and Operating Performance:

The Moderating Effect of Strategic Change

Chih-shun Hsu, Wei-hung Lai & Sin-hui Yen

To cite this article: Chih-shun Hsu, Wei-hung Lai & Sin-hui Yen (2018): Boardroom Diversity and
Operating Performance: The Moderating Effect of Strategic Change, Emerging Markets Finance
and Trade, DOI: 10.1080/1540496X.2018.1519414

To link to this article: https://doi.org/10.1080/1540496X.2018.1519414

Published online: 29 Nov 2018.

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Emerging Markets Finance & Trade, 1–25, 2018
Copyright © Taylor & Francis Group, LLC
ISSN: 1540-496X print/1558-0938 online
DOI: https://doi.org/10.1080/1540496X.2018.1519414

Boardroom Diversity and Operating Performance: The

Moderating Effect of Strategic Change
Chih-shun Hsu1, Wei-hung Lai2, and Sin-hui Yen1
1
Department of Accounting, Tamkang University, New Taipei City, Taiwan (R.O.C.); 2Graduate
Institute of Management Sciences in Accounting Section, Tamkang University, New Taipei City,
Taiwan (R.O.C.)

ABSTRACT: This study aims to investigate the effect of boardroom diversity on Chinese listed firms’
operating performance. Incorporating gender, age, tenure, and professional background of board mem-
ber’s attributes into a composite diversity index, the results show that boardroom diversity positively
affects operating performance. However, when taking strategic change into consideration, the results
indicate that the firms with larger strategic change tend to have a negative correlation between board-
room diversity and operating performance, whereas the correlation is positive if firms with smaller
strategic. This study expects to fill the literature gap by extending the understanding of boardroom-
diversity-performance relationship in the emerging context.
KEYWORDS: boardroom diversity, strategic change, operating performance

Research on board diversity has been observed and discussed over many years as the workplace has
become increasing diverse. Board diversity is a double-edged sword. On the one hand, Mannix and
Neale (2005) found that diversity benefits creativity and quality performance to a company by
increasing in the variety of perspectives and opportunities for knowledge sharing, critical resources
(Arfken, Bellar, and Helms 2004; Carter, Simkins, and Simpson 2003), on the other hand, it can lead
to social division so as to create negative impact on the board’s performance. For instance, as per
social identity theory, board diversity can bring about differences of opinion and provoke additional
conflict. This makes decision-making more time-consuming and less effective, thereby affecting
operational performance (Earley and Mosakowski 2000).
The board of directors represents the interests of shareholders and is at the core of internal
governance mechanisms. A good board of directors can increase the accuracy of a company’s
decisions and protect it from risk, so as to influence the company’s financial performance. The
composition or characteristics of a board of directors determine whether it can function properly.
When examining board diversity and financial performance, researchers have come to the vague
conclusions. For example, increasing female directors can create corporate value (Solakoglu and
Demir 2016), hiring directors of Asian or African descent can produce unique outlooks and perspec-
tives, enhancing corporate performance (Appelbaum et al. 2015), and seeking educational and
professional diversity in board members can result in diverse, professional, and high-quality decisions
that positively benefit operational performance (Morales and Marquina 2009; Tanikawa et al. 2016).
For the previous studies concerning the composition of the board in relation to organizational
outcomes, most of them focused on a single attribute of the demographic diversity among board of
directors, such as diversity of gender, race or ethnicity, or tenure (Campbell and Minguez-Vera
2008; Tanikawa and Jung, 2016; Tarus and Aime 2014). The results of those studies on the
diversity–performance relationship are divergent. They failed to provide the consistent and crystal
conclusions on how gender diversity or tenure diversity impacts on financial performance. In line

Address correspondence to Sin-hui Yen, Department of Accounting, Tamkang University, No.151, Yingzhuan
Rd., Tamsui Dist., New Taipei City, Taiwan (R.O.C.) 25137. E-mail: sinhui@mail.tku.edu.tw
2 C.-S. HSU ET AL.

with the apparent widespread support for board diversity, we assume all the attributes of board
directors are equally important and suggest that organizing the individual attributes into an effective
and composite index would help researchers to capture the meanings of the board diversity. Using
the composite index helps us develop a broad view of board diversity impacts on financial
performance.
Thus, we refer the studies by Hafsi and Turgut (2013) and Hoang, Abeysekera, and Ma
(2017, 2016)) establish a board diversity composite index and investigate the association
between board diversity and operation performance in Chinese companies.
In addition, we believe that board diversity–performance association is influenced by corpo-
rate’s strategies because by law, the board of directors is given power over control functions. It
can also help management develop and plan company strategies, and establishes the overall
development direction, mission, and vision that achieve operating objectives (Zahra and Pearce
1989). When a corporation faces changes in the market, the board of directors makes decisions
regarding the reallocation of the company’s primary strategic resources in an effort to enhance its
competitive advantages and achieve its set objectives. The process of formulating series strategies
for the allocation of internal and external resources is called strategic change (SC). Triana, Miller,
and Trzebiatowski (2013) suggested that SCs are influenced by the demography of the board of
directors. The magnitude of environment changes outside the company is the determinant to its
strategy choices; the greater changes of external environment, the larger the SC the company
might decide to execute. The structure of the board perhaps needs to be altered to achieve the
strategic objectives. After the company adapt SC for a period of time, its effect on the company’s
performance is manifested. The boardroom diversity (DIB) and the way it interacts with SC
eventually influence the financial performance. Thus, we suggest that the association between
DIB and financial performance is related to the magnitude of the SCs. That is another focus of
this study.
Using data from 2012 to 2014 provided by Chinese listed companies within the high-discre-
tionary industry, this study examined the effect of DIB on operational performance, and further to
investigate whether a SC of the company has a moderating effect on the board diversity–
performance association. The results indicate that if we only consider the connection between
DIB and operational performance, a positive relationship exists between the two. However, if we
take SC into account, the relationship between DIB and operational performance is affected
significantly; in companies that made smaller SCs, DIB and operational performance create a
positive adaptive influence.
Differing from the previous studies which have examined the relationship between the single
attribute of board of directors and financial performance, this is the first concerted attempt to examine
the relationship of DIB on financial performance by considering the impact of SC for a fast growing
and important emerging market, China. We believe that this study supplements to the literature a little
known story of board diversity and operational performance of the listed companies in China, a fast-
growing economy characterized by high government intervention but weak-developed governance
system. This fills the gap in the literature by extending the understanding of boardroom diversity–
performance relationship in the emerging context.
The findings of this study would also help Chinese policymakers in reviewing the implications of
the current corporate governance practice about DIB in the context of China to increase firms’ value
to stakeholders. It can also assist other emerging countries which are striving to improve corporate
governance.
The remainder of this paper is organized as follows. Next section presents a literature review and
hypothesis development. We first reviewed literature regarding board members and the relationships
between boardroom diversity and operational performance, between strategic change and boardroom
diversity, and between strategic change and operational performance. Hypotheses accordingly are
formulated. Research data and samples are described, including the method of sample selection,
 BOARDROOM DIVERSITY AND OPERATING PERFORMANCE 3

variable definition, and a detailed explanation of how boardroom diversity and strategic change were
measured. The section following presents analysis of the results, and it finishes with concluding
remarks.

Theoretical Framework and Hypothesis Development

Top management teams (TMTs) act as a nexus between an organization and its environment. They
base their important decision-making on the organization’s internal technology and demands of the
external regulatory environment to help the organization gain a competitive advantage and survive.
Hence, as per upper echelons theory, TMTs play a pivotal role in the performance of an organization
(Finkelstein and Hambrick 1990; Hambrick and Mason 1984; Roberson and Park 2007). The purpose
of studying TMT background diversity is to expand the information resources for a team, in the hope
of strengthening the team’s abilities to develop effective strategies and solve problems, identifying
strategic opportunities, and ultimately, improving the organization’s performance.
Recent years have seen a growing number of studies investigating the effects of DIB. (Boulouta
2013; Campbell and Minguez-Vera 2008; Roberson and Park 2007; Smith, Smith, and Verner 2006).
Besides controlling function given by the law, the board of directors serves other functions that help a
company achieve its business goals, such as developing strategy and offering service (Zahra and
Pearce 1989). Control function refers to the board’s authority to dismiss the CEO, the general
manager, or other senior executives; to inspect and audit how managers utilize resources to determine
their salary and compensation; and to monitor the self-interested behavior of the CEO, the general
manager, or other senior executives so as to ensure company growth and protect shareholder interests.
The strategy function refers to the board helping the management develop and plan company
strategies and establish overall development direction, mission, and vision. The resource dependence
function refers to improving company reputation and gaining crucial resources and a legal status that
can ensure business success. Finally, the service function refers to the board’s ability to offer
consultation and opinions to the CEO and other senior executives and ensure that the board is
working properly and that the company is operating legally so as to safeguard the interests of
stakeholders.

Board Members’ Attributes

According to the upper echelons theory, the strategies and operational performance of a company are
influenced by the attributes of members at the TMT. This is because the demographic variables of
said members reflect personal faith, values, cognitive biases, and attitudes toward risk, all of which
are critical factors in corporate decisions and operational performance (Hambrick and Mason 1984).
Gender is a common variable examined in research on board member attributes. However, past
studies offer inconsistent results with regard to the connection between operational performance and
gender diversity on the board. Some researchers observed a positive relationship between the two.
For example, Adams and Flynn (2005) asserted that female directors strengthen the supervisory
function of the board and reduce agency costs, which is conducive to the achievement of performance
goals. Solakoglu and Demir (2016) argued that increasing the proportion of female directors on the
board alters the board’s supervisory behavior. For example, they might more vigorously expose
governance issues, which can enhance control over senior management and the protection of share-
holders (Selby 2000). Konrad, Kramer, and Erkut (2008) suggest that women tend to specialize in
accounting or finance, which gives them unique perspectives that then have a positive influence on
problem-solving and ideation. Addition of female directors leads to greater creativity and innovation
and is a good strategy to improve corporate image as well; these are all ways of helping the company
more clearly understand the market, which has a positive impact on their ability to meet market needs
so as to create positive effect on financial performance (Solakoglu and Demir 2016). However, some
4 C.-S. HSU ET AL.

researchers found a negative relationship between the board’s gender diversity and financial perfor-
mance. Social identity theory holds that people like to socialize with people like themselves. This can
lead to conflict and influences teamwork (Williams and O’ Reilly, 1998). Also differences in risk
preferences suggest that female board members are more capable of hedging risk than male board
members, so they may adopt conservative strategies that affect operational performance (Jianakoplos
and Bernasek 1998).
Age is another common variable in research on board members. Wiersema and Bantel (1992)
asserted that age influences how managers view and choose strategies. Age can serve as a proxy for
experience and a signal of risk-taking and openness to change (Escriba-Esteve, Sánchez-Peinado, and
Sánchez-Peinado, 2009). People in different age groups experience different periods of history, so
they have different perceptions of social problems as well as varying values and beliefs. Li (2010)
pointed out that older and younger board members are significantly different in the ways they were
educated, their social experiences, and the markets in which they grew up. As a result, they display
different preferences and behaviors in their work.
Board members’ age affects strategy formulation and operational performance. Zhang, Cai, and Li
(2011) stated that board age diversity has an influence on the company’s financial performance. Older
managers are less accepting of new things, less willing to innovate and reform, and more likely to
avoid high-risk decisions and appear to care more about their own job security. Furthermore, greater
age means less energy and poorer stamina, which affects the ability to receive and process informa-
tion (Herrmann and Datta 2005). However, greater age can also mean that they are more experienced
in management, are well-connected, or have substantial social resources.
The tenure of board members is also a common research variable. Finkelstein and Hambrick (1990)
stated that in an organization, the tenure of a member of the TMT indicates a level of social interaction
and is a crucial determinant of whether members can reach a consensus. From a resource-based
perspective, senior executives that have served longer tenures possess a greater understanding of the
company’s internal and external resources. They can produce appropriate strategies and operating
methods at the right moment and more experience overall, which benefits the company’s competitive-
ness and operational performance (Bergh 2001). Furthermore, senior executives with poor management
performance are bound to be eliminated, so those who are able to stay have likely already aligned their
interests with those of the company. Thus, a positive relationship exists between the tenure of senior
executives and corporate performance (Boeker 1992). However, some literature also indicates longer
tenures have a greater adverse effect on corporate performance. Hambrick and Fukutomi (1991) argued
that early in their tenures, top managers demonstrate more open management thinking and attempt to
acquire as much knowledge as possible regarding the company and its operational market. As their
tenure continues, senior executives tend to become complacent and believe that the current management
model is successful and can withstand difficulties and do without any substantial changes. Their
management thinking becomes increasingly conservative, and they begin to ignore the changes in
demand in the operational market and to decrease the company’s ability to respond to the market.
Eventually, this causes the company’s performance to deteriorate.
The level of professional education that TMT members have achieved also influences corpo-
rate decisions and performance. Bantel (1993) held that board members have more diverse
educational backgrounds and professional experiences, which may benefit company decisions.
Gottesman and Morey (2006) also supported that the educational backgrounds of top managers
are important intellectual capital for companies. Hambrick and Mason (1984) pointed out that the
information processing capabilities and ability to cope with complex markets vary with a board
member’s educational background. The way they consider corporate decisions will also differ.
For instance, senior executives who have received higher education in finance or accounting can
proficiently use the net present value in the capital budget or utilize assessment techniques such
as the capital asset pricing model, which benefits the quality of corporate decisions (Graham and
Harvey 2002). Thus, board members who are highly educated or have a high degree of
 BOARDROOM DIVERSITY AND OPERATING PERFORMANCE 5

professional knowledge can apply their expertise to business decisions and thereby improve
operational performance.

Resource Dependence Theory

The idea that board diversity affects firm performance has rooted from resource dependence
theory (Pfeffer and Salancik 1978). Resource dependence theorists have specifically argued that
combining diverse member perspectives in board decision-making improves firm’s ability to
obtain critical resources to their functioning. Research by Hillman and Dalziel (2003) showed
that board directors provide important resources in the form of counsel, external legitimacy, and a
channel of communication that is convenient for networking. According to this theory, members
of the board of directors are selected based on their professional knowledge and experience, and
use their professional acumen to increase the company’s decision-making quality and operational
performance.
Echoing this supposition, Hamel and Prahalad (1994) suggest that increasing the number of
board members with diversified backgrounds expands the breadth and depth of acquirable
resources and helps the company establish its competitive edge through effective integration
and management of resources, which further improves its operational performance. Hillman,
Cannella, and Paetzold (2000) argued that the greater DIB brings the benefits for firms because
greater diversity in board member background, age, gender, and tenure can create interactions
that will help the company understand complex markets. When board members share their ideas
with one another, they can produce more solutions to problems, provide the management with
timely information, obtain crucial resources, enhance the legitimacy of the company in society,
reduce uncertain transaction costs, enhance problem-solving abilities and decision quality, and
thereby give the company greater competitive advantages and better performance (Nielsen and
Huse 2010).

The Concept of SC
Mintzberg (1978) conceptualized strategy into a model of corporate resource allocation and
defined SC as the redistribution a company’s primary resources after a period of time. Hofer
and Schendel (1980) describes SC as “special kind of problem-solving process for defining an
organization’s strategy, which includes an analysis of the environment and its resources as well as
a discussion of strategic alternatives, an evaluation of these alternatives, and a final choice.” Thus,
SC can be regarded as a series of reallocations of primary resources, done in a way that enhances
competitive advantages and achieves set objectives after changes are detected in the company’s
market.
Based on this concept, Finkelstein and Hambrick (1990) developed the strategic resource
allocation profile (SRAP). SRAP is based on observations of a company’s resource application
for a period of time. It captures the SCs in companies over time. SRAP is a measurement index
comprising six factors that encompass the management cores of various functional develop-
ments within company organizations: (1) marketing activities (advertising intensity), (2)
research and development activities (research and development intensity), (3) production
activities (plant and equipment newness), (4) management activities (nonproduction overhead),
(5) operational activities (inventory levels), and (6) financial activities (financial leverage). The
first three are basic resource allocation ratios. Nonproduction overhead captures the structure of
a company’s expenses (sales and management costs). Inventory levels represent the production
cycle time and working capital management, and financial leverage measures financial strength
(Haynes and Hillman 2010).
6 C.-S. HSU ET AL.

Zhang and Rajagopalan (2010) posited that SCs exert impact on a company’s operational
performance. Organizational ecology theory (Hannan and Freeman 1977) reveals complexity exists
inside and outside the company. Internal and external environmental factors, strategy adjustments,
and organizational transformations that companies adopt determine whether their operations succeed
or fail. The SCs that companies produce via resource allocation may bring about two distinct results.
Appropriate SCs reflect a company’s bold ideas and novel strategy adjustments and increase good
interactions between the company and the market so that the company is more capable of responding
to market changes and displaying better performance. However, a greater magnitude of SC requires
new abilities and new resources. Such SCs are difficult to implement and incur greater costs. Poor or
ineffective execution of SC can also trigger undesirable outcomes, which result in disruptive
influences (Zhang 2006).

Hypothesis Development
DIB and Operational Performance
Resource dependence theory holds that the main function of a board of directors is to provide their
company with resources, professional knowledge, management decisions and consultation, while
connecting the company with an external network and spreading innovation (Baysinger and
Hoskisson 1990). Thus, as per resource dependence theory, Campell and Minguez-Vera (2008)
advocated increasing the number of women among board members. Mahadeo, Soobaroyen, and
Hanuman (2012) indicated that a board of directors with age diversity can divide labor more
efficiently: older directors provide experience, networks, and financial resources; middle-aged direc-
tors are in charge of execution; and younger directors learn and develop professional knowledge,
which increases overall operational performance. Eisenhardt and Schoonhoven (1990) advocated that
combining members of different tenures means that they can utilize the experiences of senior
members, who can share their experiences with other members. Zahra and Pearce (1989) maintained
that an ideal board of directors should include diverse backgrounds, skills, and expertise so that each
director can contribute their talent from different angles. This promotes brainstorming that increases
decision quality and operational performance.
Companies with DIB can benefits from its creativity and innovation as well as leadership
effectiveness. For this reason, diversity exerts a positive impact on the operational performance of
companies. A good board of directors must help solve the agency problems in management, strike a
balance between the interests of shareholders and managers, and maximize the interests of everyone
involved, thereby promoting operational performance. Tarus and Aime (2014) have found that
youthful decision-makers engage more in strategic decision-making; hence, it is expected that
board of directors composed of younger board members is more likely to venture into novel and
advice on risky decisions because of their risk-seeking behavior. Tuggle, Schnatterly, and Johnson
(2010) found that DIB in terms of industry knowledge and background devoted more consideration to
entrepreneurial issues on firm’s performance.
In increasingly complex business environment, we argue that diverse board members are impor-
tant as boards need to grapple with the multiple dimensions of a business decision, e.g., financial,
human resource, legal, taxation, ethical, environmental, media, and operational implications. While
the board may benefit from the input of functional specialists from within the company, DIB provides
the potential for faster and in-depth assessments of the implications of particular decisions and
addresses any information asymmetry issues between the board and senior management, which
leads to the quality of decisions and promote the company’s operational performance. Based on the
argument above, we state the first hypothesis as follows:
H1: Boardroom diversity is positively related to a company’s operational performance.
 BOARDROOM DIVERSITY AND OPERATING PERFORMANCE 7

Moderating Effect of SC on the Relationship Between DIB and Operational Performance

The board of directors is the gatekeeper mechanism for corporate strategy making. In facing rapid
changes in the market, DIB brings diverse expertise and experience, and can help companies make
SCs, which then influence operational performance (Westphal and Frederickson 2001; Geletkanycz
and Hambrick 1997). Furthermore, the relationship between DIB and operational performance may
not be unidimensioned; this may depend on the magnitude of SCs.
When companies execute SCs in response to changes in the market, they may abandon their original
strategies and reallocate their resources. One feasible approach is to radically alter the organization’s
operations, restructure the interior of the organization, and possibly dissolve current operating teams and
have new teams take over. The magnitude of these changes will have a substantial impact on the
company’s operations. With such major SCs, DIB may lead to differences of opinion, poor efficiency,
and conflicts in communication among board members as they make the decisions for major organiza-
tional adjustments or resource reallocation. This could adversely affect operational performance.
According to social identity theory, differences in gender, age, tenure, or educational background can
lead to different perceptions of interpersonal relationships, which prevents them from agreeing on major
decisions and increases cognitive conflict (Earley and Mosakowski 2000). Compared to a homogeneous
board, a diverse board often has poorer cohesion and a lower degree of information integration, which
has a negative impact on operational performance.
Another feasible approach is to make minor SCs. Companies that adopt this strategy do not need
to reallocate major resources. Rather, they can gather existing resources to strengthen the company’s
internal operations, such as communication and coordination capabilities. In this case, resource
dependence theory holds that DIB could help companies identify complex markets; diverse board
members share their ideas with one another, produce more solutions to problems, provide diverse
information, obtain crucial resources, enhance decision quality, enable the company to efficiently
allocate and manage existing resources, reduce operating risks, decrease transaction costs, and further
increase the company’s competitive advantages and corporate performance. Based on the discussion
above, we state the second hypothesis as follows:
H2: The relationship between boardroom diversity and operational performance is positively moderated
by strategic change.

Methodology
Empirical Models and Variable Definitions
We utilized multiple regression analysis to identify the relationship between DIB, SC, and operational
performance. After a board of directors decides to carry out a SC, it may take a while for the change
to take effect. For example, the outcome of SCs related to the design and advertising of a new product
may take some time to reflect in sales. Thus, a company’s decision-makers must make appropriate
adjustments from a long-term perspective in order to see the results of the SC. Triana, Miller, and
Trzebiatowski (2013) found evidence that the effects of SC generally impose a 2-year lag time.
Therefore, in this study, independent variables (i.e., board structural diversity and SC) are represented
by data from 2012. Control variables include company size, sales growth rate, degree of financial
leverage, state-owned enterprises, all of which are represented by data from 2013.
In addition, using time-lag dependent and independent variables could tackled the reverse caus-
ality problem, as suggested by Garay and Gonzalez (2008) and Cater et al (2010) that using time-lag
dependent variable provides a solution to endogenous problems existing between board diversity and
a firm’s operational performance.
This study used two multiple regression models to examine the relationship between DIB and
operational performance:
8 C.-S. HSU ET AL.

ROAi;t ¼ α0 þ β1 DIBi; ðt2Þ þ β2 Firm SizePi; ðt1Þ þ β3 Growthi; ðt1Þ þ β4 Debi; ðt1Þ þ
β5 Board sizei; ðt1Þ þ β6 Stateowni; t þ β7 Ssei; t þ εi; t
(Model1)
ROAi;t ¼ α0 þ β1 DIBi;ðt2Þ þ β2 SCi;ðt1Þ þ β3 ðDIBi;ðt2Þ  SCi;ðt1Þ Þ þ β4 Firm Sizei;ðt1Þ
X
þ β5 Growthi;ðt1Þ þ β6 Debti;ðt1Þ þ β7 Board sizei;ðt1Þ þ β8 Stateowni; t þ β9 Ssei; t þ εi;t
(Model2)

Return on Assets
Tarus and Aime (2014) observed that most of the empirical studies on board characteristics focus on
accounting and financial performance. For this reason, we employed the common financial performance
index return on assets (ROA) as the variable to measure operational performance. ROA represents the
ability of a company to use its own assets to create profit and the profitability of enterprises in the application
of their total assets. It is a crucial index used to assess the operational performance of companies. We defined
ROA as the sum of total profit and financial expenses divided by average total assets.

Boardroom Diversity
Hafsi and Turgut (2013) and Hoang, Abeysekera, and Ma (2017, 2016) used comprehensive indexes
to study DIB. In this study, board member gender, age, tenure, and background served as the proxy
variables for DIB. However, the figures of these individual variables may come in the form of
percentages, coefficients, or variation, or they may take the form of the Blau index. To solve the
problem of their different calculation standards, we referred to the method used by Hafsi and Turgut
(2013) to create a composite index from the four variables. This involved dividing the figures for
each variable into four quartiles (lowest 25%: 0; median 25%: 1; median 75%: 2; highest 25%: 3) to
change the individual variables into category variables and then adding them together to form the
comprehensive index. To verify the validity of the calculations, we cross-checked the results using
tertiles, and the results were consistent. The definitions of the individual variables are as follows:
1. Gender of board members (Sexr): the number of female board members divided by the total
number of board members.
2. Age of board members (Agestdr): variation in age; that is, the standard deviation of the ages of
the board members in each sample company divided by the mean. This measures age diversity.
3. Tenure of board members (Teturestdr): variation in tenure; that is, the standard deviation of the
tenures of the board members in each sample company divided by the mean. This measures
tenure diversity.
4. Background of board members (Background): The professional backgrounds of board members
were divided into seven categories according to the occupational classification system released
by the People’s Republic of China in 2017: engineers, economists, accountants, auditors,
lawyers, teachers, and others. As professional background is categorized rather than measured,
we employed the diversity index proposed by Blau (1977), the formula of which is:
P
H ¼ 1  P2i
where Pi = the number of board members in the category in question divided by the total number
of board members in the sample company.
According to Blau (1977), seven categories means that the values should fall between 0 and 0.857,
with lower values indicating less background diversity in the sample company and higher values
symbolizing greater background diversity.
 BOARDROOM DIVERSITY AND OPERATING PERFORMANCE 9

Strategic Change
Based on the organizational ecology theory, Zhang and Rajagopalan (2010) pointed out that the SCs
resulting from resource allocation may create two different outcomes in the company’s operational
performance. One is a good adaptive influence, whereas the other is a destructive influence. In this
study, we calculated SC using six factors of SRAP by Finkelstein and Hambrick (1990) for each
sample company. The six factors are (1) advertising intensity: advertising expenditures divided by net
operating revenue, (2) research and development intensity: research and development expenditures
divided by net operating revenue, (3) plant and equipment newness: total fixed assets divided by net
fixed assets (minus depreciation and impairment), (4) nonproduction overhead: sales and manage-
ment expenditures divided by net operating revenue, (5) inventory level: net inventory (minus
inventory impairment) divided by net operating revenue, and (6) financial leverage: total debt divided
by total assets.
We defined the score of SC as the sum of the differences between the values of these six factors
in 2014 and their respective values in 2012. If the resource levels of a company did not change
during this 2-year period, then the SC score would indicate no differences. As the direction of
change was not relevant, we used the absolute values of the six factors in our calculations.
Moreover, the six factors are measured in different ways, so we referred to existing research
(Finkelstein and Hambrick 1990; Zhang 2006) and integrated them into a single index for SC by
standardizing the six factors so that each measurement index has the same weight, calculating their
total, and then dividing the total by six to produce the SC score. The smaller the score of SC is, the
unchanged strategy the sample company is more willing to stick to during 2012 and 2014. On the
other hand, the larger the SC score is, the major SC the sample company is more likely to adopt by
increasing advertising intensity and R&D expenditures, or deducting inventory level and lowering
financial leverage.

Control Variables
Firm size (Firm_Size) reflects the ability of a company to obtain resources and seize investment
opportunities. It is positively correlated with the operational performance of the current period
(Mandzila and Zeghal 2016). In this study, the logarithm of the total revenues of each sample
company at the end of the year served as the proxy variable for firm size. Greater revenues
indicate a larger scale, so we predicted that it has a positive relationship with operational
performance.
Business growth (Growth) is the sales growth rate of each sample company at the end of the year.
A mutual association exists between corporate governance and sales growth, and a significant
positive correlation exists between sales growth and operational performance (Klapper and Love
2004). A greater sales growth rate means greater business growth. We predicted that sales growth has
a positive relationship with operational performance.
Financial leverage (Debt) signifies a company’s ability to operate leverage for financial capital.
The interest expense created by leverage activities reduces corporate earnings, and the resulting tax
shield effects prompt managers to take risks that affect operational performance (Bhojraj and
Sengupta 2003). We use the debt ratio of each sample company at the end of the year as the proxy
variable for the financial leverage. We predicted that debt has a negative relationship with operational
performance.
Board Size (Board_size) is used as the number of directors on the board of each sample company
at the end of the year. More people on the board are supposed to increase the depth and breadth of
resources that the company has access to. Effective integration and management can then help
companies gain unique competitive advantages (Hung, Chen, and Ke 2005). We predicted that
board diversity has a positive relationship with operational performance.
10 C.-S. HSU ET AL.

Ownership by the state (Stateown) represents the political resources that the company has access
to. In state-owned companies, managers are assigned by the government, and they generally do not
have experience relevant to the industry. More often than not, they only pursue their own personal
political goals and neglect the company’s profit objectives, so the corporate values of state-owned
companies with political relations are relatively low (Fan, Wong, and Zhang 2007). The dummy
variable (equaling 1 for state-owned companies and 0 otherwise) is used for the state ownership. We
predicted that it has a negative relationship with operational performance.
Industry sectors (Sse) indicates that the characteristics and conditions of different industries have
affected the composition of the board, so as to have an impact on the company’s operational
performance (Fan, Li, and Pan, 2010). To prevent industry variation from interfering with operational
performance, we dummy the industry sector variable by categorizing high-discretionary industries
into five groups based on SSECODE: industry (01), commerce (02), real estate (03), public utilities
(04), and miscellaneous (05).

Sample Selection and Data Sources

Hambrick and Finkelstein (1987) stated that in high-discretionary industries, senior executives have
greater managerial discretion because the products or services of the company differ significantly
from those of its competitors or due to a growing or unsteady demand for the products or services. In
contrast, industries that have high degrees of concentration and control are subject to the influence of
external powers such as competitors, suppliers, or customers. In these companies, senior executives
have less managerial discretion. Thus, the market of the industry influences corporate management as
well as the managerial discretion of senior executives, who can only make decisions that are limited
by the conditions of their industrial market. If they have greater managerial discretion, they have
more sway in management and have a wider set of options (Campbell et al. 2012; Hambrick and
Abrahamson 1995). As SC has more significance in companies with more managerial discretion, we
chose to use high-discretionary industries in China for the purposes of this study and categorized
them according to the method used by Jing, Huang, and Wang (2014). The subjects of this study were
Chinese A-share companies in high-discretionary industries listed on the Shanghai and Shenzhen
stock exchanges.
The sample period was from 2012 to 2014. Relevant data were obtained from the Taiwan
Economic Journal (TEJ) and China Stock Market and Accounting Research (CSMAR). Board data
from 2012 originated from the TEK database, while SC data from 2012 and 2014 came from the
CSMAR database. Primary data on the backgrounds of board members were obtained from the TEJ
Corporate Governance Database: Director and Executive Educational Background and Experience.
Using keywords, we searched the databases and sorted the results.

Table 1. Sample screening result.

The number of samples initially obtained 3013

Less: B shares number of companies (110)

H shares number of companies (98)
Number of financial securities industry (29)
Board variables missing data (1048)
Strategic changes variables data missing (792)
ROA data missing (11)
Industry data missing (4)
Medium- and low- discretionary industries data (255) (2347)
Total number of high-discretionary industries data 666
 BOARDROOM DIVERSITY AND OPERATING PERFORMANCE 11

Results
Sample Screening
This study examined Chinese A-share companies in high-discretionary industries listed on the
Shanghai and Shenzhen stock exchanges. Our initial sample contained 3013 companies. After
eliminating companies with H shares or B shares, companies in the finance and insurance industries;
companies with incomplete data or extreme values in the board variables, SC variables, operational
performance, or industry type; and companies in low or moderate discretionary industries, we derived
a total of 666 companies. Table 1 displays the sample screening process.

Descriptive Statistics and Relevant Analyses

Table 2 presents the descriptive statistics of the Chinese A-share companies in high-discretionary
industries listed on the Shanghai and Shenzhen stock exchanges. It includes data regarding DIB and
operational performance, including mean, standard deviation, minimum, first quartile, median, third
quartile, and maximum. For the dependent variable, ROA served as the measurement index for
operational performance. The mean ROA of the sample companies was 4.7%, but there was a wide
difference between the minimum and maximum values. For the independent variable, DIB served as

Table 2. Descriptive statistics (666 observations).

Variable1 Mean SD Min P25 Median P75 Max

ROA .047 .046 −.100 .022 .0419 .071 .193

DIB 5.340 2.344 .000 4.000 5.000 7.000 11.000
Sexr .165 .098 .000 .088 .153 .230 .424
Agestdr .159 .079 .025 .122 .156 .192 .658
Teturestdr .072 .098 .001 .003 .014 .128 .588
Background .679 .955 .001 .640 .693 .740 .840
SC .300 .309 097 .165 .214 .301 2.402
Firm_Size 20.999 1.313 18.487 20.074 20.837 21.724 24.963
Growth .171 .342 −.707 −.005 .125 273 2.018
Debt .384 .205 .046 .212 .378 .535 .945
Board_size 9.190 2.020 5.000 8.000 9.000 10.000 19.000
Stateown .150 .352 .000 0.000 .000 .000 1.000

Notes: 1To mitigate any undue influence from outliers all variables are winsorized at the 1% level.
ROA: Net profit before financial expenses divided by average total assets.
DIB: The composite index of boardroom diversity, considering board member gender, age, tenure, and background.
Sexr: Female director ratio, the number of female board members divided by the total number of board members.
Agestdr: Director’s age, the standard deviation of the ages of the board members in each sample company divided by
the mean.
Teturestdr: Director’s tenure, the standard deviation of the tenures of the board members in each sample company
divided by the mean.
Background: Director’s professional backgrounds, considering seven categories of Chinese professional classification
system and computed as the diversity index proposed by Blau (1977).
SC: The index of strategic change, considering six factors of SRAP (Finkelstein and Hambrick 1990) and being
calculated as their total of absolute values divided by six.
Firm_Size: The logarithm of the total revenues of each sample company at the end of the year.
Growth: Sales growth rate of each sample company at the end of the year.
Debt: The debt ratio of each sample company at the end of the year.
Board size: The number of directors on the board of each sample company at the end of the year.
Stateown: State-owned enterprise, dummy variable. 1 as a state-owned enterprise and 0 otherwise.
12 C.-S. HSU ET AL.

the measurement index for diversity among board members. With the quartile method, the values
ranged from 0 to 12, and the mean and standard deviation were 5.340 and 2.344, respectively.
The mean proportion of female directors on the board was 16.5%, which was an improvement from
11.7% in Chinese A-share companies in 2010. This is comparable to 15.7% of female directors in the
Fortune 500 companies in 2010 (Wu and Sun 2014). Moreover, the mean age of board members in the
sample companies was 53.77, the coefficient of variation being 0.159. According to a survey conducted
by Shi (2007), 69% of board members in Chinese listed companies ranged from 40 to 60 in age. As per
Chinese Company Act, the tenure of board members in Chinese companies may not exceed 3 years, but
they may serve a second term if they are reelected. The mean director tenure was 3.49 years, which
means that most directors were reelected to serve at the second term. The coefficient of variation for
director tenure was 0.072. The mean Blau index for director background was 0.679.
The mean for SC was 0.300. Wiersema and Bantel (1992) obtained a mean of 0.19 for SC, while
Triana, Miller, and Trzebiatowski (2013) derived a mean of −0.01. Thus, compared to those in past
studies on companies in other countries, this study found that Chinese companies introduced a greater
magnitude of SC in response to market changes. The mean sales growth rate was 17.1%, which
means that on the whole, the revenue of Chinese companies was in the developing stage. The mean of
financial leverage was 38.4%, thereby showing that the overall amount of debt that Chinese
companies had was not overly high. The mean board size was 9.19 people, and 15% of the sample
companies were state-owned.
Table 3 lists the Pearson correlation coefficient of the various variables. As can be seen, the
primary observed variables (DIB and operational performance) were positively correlated as pre-
dicted, but the correlation is not significant. As predicted, a significant and positive correlation
existed between sales growth (Growth) and operational performance, while financial leverage (Debt)
and state ownership (Stateown) had a significant and negative correlation with operational perfor-
mance. The relationship between firm size (Firm_Size) and operational performance was positive as
predicted, but not significant, and SC and board size (Board_size) had a negative but not significant
correlation with operational performance. Observations of the individual variables in DIB revealed a
significant and positive relationship between the proportion of female directors (Sexr) and operational
performance, a significant and negative relationship between tenure (Tenurestdr) and operational
performance, a positive but not significant relationship between board director age (Agestdr) and
operational performance, and a negative but not significant relationship between board director
background (Background) and operational performance. The correlation analyses for the above
pairs of variables do not provide sufficient proof as to whether the hypothesis regarding the
correlation between DIB and operational performance is supported. In other words, variables such
as firm size, sales growth, and financial leverage still exert marginal influence on the impact of DIB
on operational performance. We will discuss the details further when presenting the multiple regres-
sion analysis in the next section. Furthermore, the correlation coefficients of all of the variables did
not exceed 0.7, which means that multicollinearity issues are not a problem in the variables. We later
provide variance inflation factors to examine the multicollinearity issue in the regression analysis.

Regression Analyses for DIB, SC, and Operational Performance

To test Hypothesis 1, we first examined the relationship between DIB and operational performance in
the entire sample population using direct effect in Table 4 without the SC variable. To determine
whether interactions between DIB and SC affect the influence of DIB on operational performance
(Hypothesis 2), we examined moderated effects among DIB, operational performance, and SC using
moderating effect, which includes SC and interaction effects.
The results for direct effect in Table 4 indicate a statistically significant and positive relationship
between DIB and operational performance (coefficient = 0.001, t = 1.752). Thus, Hypothesis 1 is
Table 3. Pearson correlation analysis (666 observations).
1 2 3 4 5 6 7 8 9 10 11 12

1 ROA 1
2 DIB .068 1
3 Sexr .117** .473** 1
4 Agestdr .028 .315** .079 1
5 Teturestdr −.111* .354** −.157** .012 1
6 Background −.065 .382** −.031 −.053 .016 1
7 SC −.004 −.007 .012 −.031 .004 .005 1
8 Firm_Size .047 −.110** −.241** −.077 .167** .049 −.012 1
9 Growth .116** −.018 .011 −.008 .099 −.048 .039 .115** 1
10 Debt −.274** −.095* −.223** −.110** .210** .090* .056 .563** .013 1
11Board_size −.018 −.071 −.071 −.044 −.002 .026 −.016 .145** −.017 .156** 1
12 Stateown −.112** −.078* −.086* −.086* .074 .014 −.012 .195** −.006 .171** .149** 1

Notes: See Table 2 for an explanation for each variable; * and ** represent significance at the 0.1 and 0.05 levels, respectively.
BOARDROOM DIVERSITY AND OPERATING PERFORMANCE
13
 14

Table 4. Regression results: boardroom diversity, strategic change, and operational performance.
Direct effect Moderating effect
C.-S. HSU ET AL.

Coefficient t-Value Coefficient t-Value

Constant −.184 −5.446*** −.190 −5.595***
DIB .001 1.752** .003 2.494**
SC .028 1.823*
DIB  SC −.005 −1.771**
Firm_Size .010 6.696*** .010 6.680***
Growth .013 2.700*** .013 2.737***
Debt −.094 −9.561*** −.095 −9.617***
Board_size .001 .663 .001 .691
Stateown −.012 −2.371** −.012 −2.370**
P
Sse Y Y Y Y
Highest VIFa 1.507 2.081
No of observation 666 666
F-statistic 14.104*** 12.057***
Adjusted R2 .165 .166
P
Direct effect：ROAit ¼ α0 þ β1 DiBiðt2Þþ β2 Firm Sizeiðt1Þ þ β3 Growthiðt1Þ þ β4 Debtiðt1Þ it þ β5 Board sizeiðt1Þ it þ β6 Stateownit þ β7 Sseit þ εit Moderating effect:
ROAit ¼ α0 þ β1 DiBiðt2Þ þ β2 Scit þ β3 DiBiðt2Þ  Scit þ β4 Firm Sizeiðt1Þ
X
þ β5 Growthitiðt1Þ þ β6 Debtiðt1Þ it þ β7 Board sizeiðt1Þ it þ β8 Stateownit þ β9 Sseit þ εit
Notes：***Significance at 0.01 level, **significance at 0.05 level, *significance at 0.10 level.
Refer to Table 2 for the variable explanations.
a
An analysis of the variance inflationary factor (VIF) for each model reveals that VIFs are all smaller than 2.1, suggesting that multicollinearity is not an issue. A rule of thumb is
that if VIF is greater than 10, multicollinearity is a problem (Hair, et al., 2006).
See Table 2 for an explanation for each variable; *, **, and *** represent significance at the 0.1, 0.05, and 0.01 levels, respectively.
 BOARDROOM DIVERSITY AND OPERATING PERFORMANCE 15

supported. If we only look at DIB and operational performance, their relationship confirms the
resource dependence theory. Greater DIB means better operational performance.
The results for moderating effect in Table 4 show that with the interaction effects of DIB and SC, a
statistically significant and positive relationship exists between DIB and operational performance
(coefficient = 0.003, t = 2.494) and between SC and operational performance (coefficient = 0.028,
t = 1.823). The coefficient for the product term of DIB and SC reached significance (coeffi-
cient = −0.005, t = −1.771), which means the moderating effect in Hypothesis 2 is supported as well.
With regard to the relationships between operational performance and the various control vari-
ables, our study results also revealed a significant and positive correlation between firm size and
operational performance (P < 0.01). This means that larger companies are more capable of obtaining
resources and seizing investment opportunities. A significant and positive association also existed
between revenue growth and operational performance (P < 0.01), thereby indicating the company has
better operational performance in the year before its sale has grown. A significant and negative
association exists between the financial leverage and operational performance (P < 0.01). This means
that the interest expenses created by leverage activities reduce corporate earnings, and the resulting
tax shield effects prompt managers to take risks that in turn influence operational performance. Thus,
operating financial leverage appears to have a negative impact on operational performance.
To further understand how SC interferes the relationship between DIB and operational perfor-
mance, we used the median of SC to divide the sample companies into two groups: companies with
relatively minor SC (332 companies) and companies with relatively major SC (334 companies).
Table 5 shows the relationships between DIB and operational performance in the two groups. As can
be seen, DIB is significantly and positively related to operational performance in the group with
relatively minor SC (coefficient = 0.002, t = 1.803), whereas an insignificant and negative relation-
ship in the group with relatively major SC (coefficient = −0.000, t = −0.332). This suggests that
introducing a smaller magnitude of SC creates an adaptive effect that promotes operational perfor-
mance, as previously suggested by resource dependence theory.
In contrast, introducing a greater magnitude of SC generally means abandoning previous strate-
gies, which necessitates significant resource reallocation and major alterations in the internal orga-
nization or management procedures of the company. These in turn exert a substantial impact on
company operations. However, the findings of this study indicate that DIB indeed benefits the
operational performance of Chinese companies adopting small magnitudes of SC. We believe that
when Chinese companies gather their existing resources to promote efficient operation, DIB facil-
itates information integration and discussion during decision-making, improves information quality,
and even helps companies allocate and manage their existing resources more efficiently. These
changes have the effect of lowering operating risk, reducing transaction costs, and increasing
operational performance.

Further Analysis
Analysis of Board Variables, SC, and Operational Performance
Research in the past focused on the diversity of individual board member attributes such as gender,
age, or professional background. Each of these studies have had their own definitions of DIB, but due
to the lack of specificity and consistency among these definitions, their investigations on the
relationship between DIB and operational performance produced varying conclusions: some positive,
some negative, and others finding no relationship between the two. This study therefore examined the
respective influences of four board member attributes (proportion of female directors, director age,
director tenure, and director background) on operational performance and the moderating effects of
SC on these influences.
The direct effect in Table 6 shows that a significant and positive relationship can be observed
between the proportion of female directors and operational performance (coefficient = 0.071,
 16
C.-S. HSU ET AL.

Table 5. Regression results: board diversity and operational performance—the subsample by strategic changea.
Minor strategic change Major strategic change

Coefficient t-Value Coefficient t-Value

Constant −.248 −4.553*** −.152 −3.466***
DIB .002 1.803* −.000 −.332
Firm_Size .014 5.508*** .008 4.323***
Growth .007 .941 .019 2.854***
Debt −.103 −6.796*** −.092 −7.002***
Board_size .000 −.094 .001 .689
Stateown −.012 −1.630 −.010 −1.506
P
Sse Y Y Y Y
Highest VIFb 1.583 1.514
No of observation 332 334
F-statistic 7.604*** 7.500***
Adjusted R2 .166 .163
P
ROAit ¼ α0 þ β1 DiBiðt2Þ þ β2 Firm Sizeiðt1Þ þ β3 Growthiðt1Þ þ β4 Debtiðt1Þ it þ β5 Board sizeiðt1Þ it þ β6 Stateownit þ β7 Sseit þ εit .
a
Notes: Based on the median level of strategic change, the sample is divided into two subsamples, which are respectively relatively minor strategic change (332 sample size) and
relatively major strategic change (334 sample size).
b
An analysis of the variance inflationary factor (VIF) for each model reveals that VIFs are all smaller than 1.583, suggesting that multicollinearity is not an issue.
See Table 2 for an explanation for each variable; * and *** represent significance at the 0.1 and 0.01 levels, respectively.
 BOARDROOM DIVERSITY AND OPERATING PERFORMANCE 17

Table 6. Regression results: the effect of board member’s attributes on operational

performance.
Direct effect Moderating effect

Coefficient t-Value Coefficient t-Value

Constant −.182 −3.402*** −.179 −3.310***

Sexr .071 2.699*** .074 2.781***
Agestdr .061 1.221 −.020 −.291
Tenurestdr −.035 −1.433 −.007 −.176
Background .009 .346 .013 .473
SC −.033 −1.488
Sexr  SC .071 1.271
Agestdr  SC .290 1.786*
Tenurestdr  SC −.109 −1.055
Background  SC −.013 −.741
Firm_Size .009 3.710*** .009 3.811***
Growth .027 3.576*** .025 3.297***
Debt −.079 −5.296*** −.079 −5.168***
Board_size .002 1.716* .002 1.668*
Stateown −.014 −1.884* −.014 −1.930*
P
Sse Y Y Y Y
Highest VIFa 1.596 2.819

No of observation 666 666

F-statistic 5.799*** 4.498***
Adjusted R2 .180 .181

Direct effect:
ROAit ¼ α0 þ β1 Sexriðt2Þ þ β2 Agestdriðt2Þ þ β3 Tenurestdriðt2Þ þ β4 Backgroundiðt2Þ þ β5 FirmSizeiðt1Þ
þ β6 Growthiðt1Þ þ β7 Debtiðt1Þ þ β8 Boardsize Pβ10
it iðt1Þit þβ9 Stateownit þ Sseit þεit
Moderating effect：
ROAit ¼ α0 þ β1 Sexriðt2Þ þ β2 Agestdriðt2Þ þ β3 Tenurestdriðt2Þ þ β4 Backgroundiðt2Þ þ β5 ðSexriðt2Þ  Scit Þþ
β6 ðAgestdriðt2Þ  Scit Þ þ β7 ðTenurestdriðt2Þ  Scit Þ þ β8 ðBackgroundiðt2Þ  Scit Þ þ β9 FirmSizeiðt1Þ þ
β10 Growthiðt1Þ þ β11 Debtiðt1Þ it þ β12 Boardsize iðt1Þ P
it þβ13 Stateownit þ β14 Sseit þεit
Notes: See Table 2 for an explanation for each variable; * and *** represent significance at the 0.1 and 0.01 levels,
respectively.
a
An analysis of the variance inflationary factor (VIF) for each model reveals that VIFs are all smaller than 2.819,
suggesting that multicollinearity is not an issue. A rule of thumb is that if VIF is greater than 10, multicollinearity is a
problem (Hair et al. 2006).

t = 2.699). This supports the conclusion drawn by Solakoglu and Demir (2016), in which adding
female board members can help companies understand the market more clearly, increase the
number of outstanding directors, and open opportunities for female employees. In board opera-
tions, adding female board members increases the depth and breadth of discussions, which
enhances decision quality, improves corporate image, and creates better operational performance
(Konrad, Kramer, and Erkut 2008). In contrast, director age (coefficient = 0.061, t = 1.221) and
background (coefficient = 0.009, t = 0.346) were found to be positive but not significant related to
operational performance. Although the old and the young board members are different in the ways
they educate, socially experience, and behave in the work, their different preferences affect
company’s strategy formulation and performance. However, we have no statistical evidence to
18 C.-S. HSU ET AL.

suggest that age and background diversity are related to the company’s operational performance.
Finally, a negative but not significant relationship exists between director tenure and operational
performance (coefficient = −0.035, t = −1.433). The findings, with no statistical support, appear to
indicate Chinese directors with longer tenure tend to become complacent and stay unchanged for
the changing environment the company face. They become increasingly conservative and less able
to respond to the changes in market demand so that the operational performance is negatively
affected.
The moderating effect in Table 6 indicates that SC exerts a significant and positive moderating
effect on the relationship between age and operational performance (coefficient = 0.290, t = 1.786)
and a positive but not significant moderating effect on the relationship between the proportion of
female directors and operational performance (coefficient = 0.071, t = 1.271). The empirical results
with regard to age diversity correspond to the results derived by Mahadeo, Soobaroyen, and
Hanuman (2012). Chinese companies that introduce SCs and a board of directors with age diversity
can divide labor more efficiently. Older directors provide experience, networks, and financial
resources, middle-aged directors are in charge of execution, and younger directors learn and develop,
which increases overall operational performance. In contrast, gender diversity possibly results in
conservative strategies that affect operational performance because female board members dislike
risk more than male board members. Finally, although the coefficients are negative, we have no
statistical evidence to suggest the SC has moderating effect on the relationship between tenure and
operational performance (coefficient = −0.109, t = −1.055) and on the relationship between educa-
tional background and operational performance (coefficient = −0.013, t = −0.741).
The analysis above shows that in terms of direct effects, diversity in gender, age, and background
has a positive impact on operational performance, while tenure has a negative impact. SC only has
moderating effects on the relationship between age and operational performance. Thus, the results of
this study indicate that some single board member attributes also have positive influence operational
performance, and others do not. However, when multiple attributes are considered together, DIB
indeed has a positive and significant impact on operational performance (direct effect in Table 4), and
SC has moderating effects. We thus believe that combining multiple board member attributes into a
single diversity index can clearly depict DIB and provide a glimpse of the true effects of DIB in
enhancing operational performance. Furthermore, this approach clarifies how DIB influences opera-
tional performance when companies make SCs.

DIB, SC, and Operational Performance in the Overall Industries

Research conducted by Finkelstein and Hambrick (1990) and Haleblian and Finkelstein (1993)
indicates that upper-level management in companies in medium- and low-discretion industries enjoys
less managerial discretion. Board structural diversity in these companies may be or not be related
with operational performance. Thus we used data from all industries to examine whether the DIB has
effect on the firm’s performance. Table 7 shows the regression results of the effects of DIB and SC on
operational performance. There is insignificantly positive relationship of DIB and operational
performance (coefficient = −0.001, t = 1.059). Nor the SC has moderating effect on the relationship
(coefficient = −0.000, t = −0.393).
In order to investigate why, within the all industries, DIB is not related to operational performance, and
SC has no moderating effect, we further use data from low- and medium-discretion companies in the
simple effect columns in the respective panels A and B of Table 8. The results indicate a nonsignificant
positive relationship (coefficient = 0.001, t = 0.431) within medium-discretion industries, and negative
relationship (coefficient = −0.007, t = −1.932) within low-discretion industries. The results for SC
moderation indicate a nonsignificant negative effect (coefficient = −0.003, t = −0.567) within medium-
discretion industries. Within low-discretion industries, this effect presents as a nonsignificant positive
moderating effect (coefficient = −0.001, t = 0.294). These results are consistent with those of Finkelstein
Table 7. Regression results: the effect of board member’s attributes on operational performance—all industries.
Direct effect Moderating effect

Coefficient t-Value Coefficient t-Value

Constant −.190 −6.289*** −.188 −6.206***

DIB .001 1.059 .001 1.056
SC −.001 −.091
DIB  SC −.000 −.393
Firm_Size .012 8.085*** .011 8.012***
Growth .019 4.299*** .019 4.317***
Debt −.102 −11.124*** −.102 −11.061***
Board_Size .028 2.967*** .028 2.966***
Stateown −.012 −2.568*** −.012 −2.575***
P
Sse Y Y Y Y
Highest VIFa 1.702 2.328

No of observation 921 921

F-statistic 21.082*** 17.253***
Adjusted R2 .183 .182
P
Direct effect : ROAit ¼ α0 þ β1 DiBiðt2Þ þ β2 Firm Sizeiðt1Þ þ β3 Growthiðt1Þ þ β4 Debtiðt1Þ it þ β5 Board sizeiðt1Þ it þ β6 Stateownit þ β7 Sseit þ εit
ROAit ¼ α0 þ β1 DiBiðt2Þ þ β2 Scit þ β3 DiBiðt2Þ  Scit þ β4 Firm Sizeiðt1Þ þ
Moderating effect： X
β5 Growthitiðt1Þ þ β6 Debtiðt1Þ it þ β7 Board sizeiðt1Þ it þ β8 Stateownit þ β9 Sseit þ εit
Notes： See Table 2 for an explanation for each variable; *** represent significance at 0.01 levels, respectively.
a
An analysis of the variance inflationary factor (VIF) for each model reveals that VIFs are all smaller than 2.328, suggesting that multicollinearity is not an issue. A rule of
thumb is that if VIF is greater than 10, multicollinearity is a problem (Hair et al. 2006).
BOARDROOM DIVERSITY AND OPERATING PERFORMANCE
19
Table 8. Regression results: the effect of board member’s attributes on operational performance—low- and medium-discretion companies.
20

Panel A: Medium-discretion companies

Direct effect Moderating effect

Coefficient t-Value Coefficient t-Value

Constant .063 .641 .070 .706

DIB .001 .431 .002 .759
C.-S. HSU ET AL.

SC .013 .328
DIB  SC −.003 −.567
Firm_Size .011 1.755* .011 1.672*
Growth −.014 −2.456** −.013 −2.304**
Debt −.007 −.856 −.008 −.886
Board_size .007 .543 .007 .542
Stateown −.001 −.082 −.001 −.055
P
Sse Y Y Y Y

Highest VIFa 1.868 2.355

No of observation 145 145
F-statistic 1.664 1.414
Adjusted R2 .039 .030

Panel B: Low-discretion companies

Direct effect Moderating effect

Coefficient t-Value Coefficient t-Value

Constant −.005 −.043 .003 .021

DIB −.007 −1.932 −.007 −1.913
SC −.003 −.340
DIB  SC .001 .294
Firm_Size −.012 −1.120 −.012 −1.116
Growth .020 1.905* .020 1.868*
Debt −.010 −1.404 −.010 −1.362
Board_size .000 −.139 .000 −.119
Stateown −.002 −.122 −.001 −.055
P
Sse Y Y Y Y
Highest VIFa 1.783 2.398
No of observation 110 110
F-statistic 1.004 .830
Adjusted R2 .000 −.019
P
Direct effect : ROAit ¼ α0 þ β1 DiBiðt2Þ þ β2 Firm Sizeiðt1Þ þ β3 Growthiðt1Þ þ β4 Debtiðt1Þ it þ β5 Board sizeiðt1Þ it þ β6 Stateownit þ β7 Sseit þ εit
ROAit ¼¼ α0 þ β1 DiBiðt2Þ þ β2 Scit þ β3 DiBiðt2Þ  Scit þ β4 Firm Sizeiðt1Þ þ β5 Growthitiðt1Þ
Moderating effect： X
þ β6 Debtiðt1Þ it þ β7 Board sizeiðt1Þ it þ β8 Stateownit þ β9 Sseit þ εit
Notes： See Table 2 for an explanation for each variable; *, and ** represent significance at the 0.1 and 0.05, respectively.
a
An analysis of the variance inflationary factor (VIF) for each model reveals that VIFs are all smaller than 2.398, suggesting that multicollinearity is not an issue. A rule of
thumb is that if VIF is greater than 10, multicollinearity is a problem (Hair et al. 2006).
BOARDROOM DIVERSITY AND OPERATING PERFORMANCE
21
22 C.-S. HSU ET AL.

and Hambrick (1990) and Haleblian and Finkelstein (1993). Since upper-level management in these types
of industries practice low levels of managerial discretion, companies within these industries failed to
exhibit a significant correlation between board structural diversity and operational performance.

Conclusion and Suggestions

This study started from the perspective of corporate governance and established DIB information
to determine the influence of DIB on operational performance and further consider the moderat-
ing effects of SC on said influence. The results indicate that when only the simple effects of DIB
are considered, DIB exerts a positive influence on operational performance. Once SC is taken
into account, the results support the resource dependence theory; companies that introduced
smaller magnitudes of SCs presented a positive relationship between DIB and operational
performance.
The academic contributions of this study are as follows. Researchers have begun to recognize the
importance that the board of directors holds in corporate governance. However, empirical studies on board
director attributes and corporate performance in the past merely considered single attributes rather than
multiple attributes at the same time. Taking multiple attributes into account may affect the results, so further
investigation is necessary. The empirical findings of this study demonstrate that DIB indeed influences
operational performance; this theoretical contribution strengthens existing research on boards of directors.
The second contribution of this study is its approach of combining different attributes into a single
composite index. The attributes examined in this study included gender, age, tenure, and background,
which involve ratios and coefficients of variation. Using the quartile method, we changed these
individual variables into category variables and then added them together to form the composite
index. The rigor of the data presents the differences among the sample companies.
In addition to having a supervisory function, the board of directors also has a strategic function.
The impact of DIB on operational performance may not be unidirectional; it may depend on the
magnitude of SCs and thus requires further investigation. The empirical findings of this study show
that SC indeed moderates the relationship between DIB and operational performance and that the
magnitude of the SC also plays a part in the moderation. This theoretical contribution strengthens
existing research on board of directors and their effects on operational performance.
The results of this study finally contribute to the Chinese practice of corporate governance. It is suggested
that a positive relationship exists between DIB and operational performance in Chinese listed companies in
high-discretionary industries. Boards containing directors with diverse backgrounds such as more female
directors and directors of different ages, tenures, and educational backgrounds have enhanced a wider range
of perspectives and visions. The diverse board members have greater capacity to face challenges brought by
uncertainties and dynamic changes in the commercial market; they reduce uncertainties and transaction
costs, and improve operational performance. In companies that introduce smaller magnitudes of SC, DIB
helps companies identify complex markets, provide diverse information and visions, obtain crucial
resources, and allocate resources more efficiently. This creates more beneficial adaptive influences and
enhances corporate performance.
This study has the following limitations. First, the samples chosen for this study only included
Chinese A-share companies in high-discretionary industries listed on the Shanghai and Shenzhen stock
exchanges. Considering the issues brought by missing values, we eliminated samples with incomplete
data, which may have caused some bias in the results of the empirical analysis. Next, many factors
influence DIB. Only four variables served as the proxy variable for DIB in this study: the proportion of
female directors, director age, director tenure, and director background. Including other variables such
as the experience, ethnicity, and culture of the directors would reveal a more complete picture of the
effects of board diversity. Our suggestions for future research are as follows. There are a number of
studies on diversity indexes, such as that of Haynes and Hillman (2010), which examined board capital,
and Forbes and Milliken (1999), which investigated cognitive diversity. Studying DIB from different
 BOARDROOM DIVERSITY AND OPERATING PERFORMANCE 23

perspectives would lead to further understanding on the connections between board director attributes
and operational performance. This would further fill existing academic research gaps.

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