Antecedents of Ethnic Diversity: The Role of Nomination Committees

Abstract

The role of the nomination committee (NC) in the selection of members of various ethnic groups for board membership has increased significantly as a result of the global financial crisis of 2008. A company board that comprises directors who come from all the three major ethnic groups (Malay, Chinese and Indian Malaysians) increases the efficiency of the board in its monitoring and advising roles. According to the Malaysian Code of Corporate Governance (MCCG 2012), the NC shall be responsible for the appointment and recognition of candidates of diverse backgrounds into the board and committee. With that in mind, this paper examines the presence of Malay, Chinese and Indian directors in a nomination committee and its impact on the ethnic diversity of its board. This paper also examines the influence of the executive directors who are members in the nomination committee on the nomination process. For this purpose, 393 (50%) Malaysian listed companies were selected from the three year period of 2011 to 2013. Only non-financial companies were included because other companies such as finance have a different set of regulations in Malaysia. In this study, descriptive statistics, correlation and multiple regression were used for the purpose of revealing important significance of the variables used. In order to control possible endogeneity issues, the GMM estimator was also administered. The regression results of the ethnic diversity model are statistically significant, showing that, a higher proportion of Malay and Chinese directors in a nomination committee has negative relationships while a higher proportion of Indian directors in a nomination committee increases their representation on the board. However, the proportion of executive directors in the nomination committee was found to have a significant impact on the director nomination process of Malay, Chinese and Indian directors. In order to test the robustness of the model, several sets of measures were used. In conclusion, it is deduced that the results of this study support the social identity theory and power struggle; it shows the importance of diversity within the nominating committee of Malaysian companies. The result also reveals that unbiased and effective board mix enhances the strategic decision-making process of the board.