Corporate governance, board diversity and firm financial performance: new evidence from Sri Lanka

Abstract

This paper investigates demographic diversity of board members in the Sri Lankan boardroom and their effect on the firm financial performance. Board diversity is measured by gender, ethnicity, age, education and occupational diversity. After controlling for potential endogeneity, this study finds that though board ethnicity and age diversity increase firm financial performance, board gender, education and occupational diversity reduce firm financial performance. Further, this study's results indicate Sri Lankan corporate boards are not fully diversified in their gender, race and educational qualifications and achievements. The results indicate that in Sri Lanka's uncertain environment, rather than having a diversified board, the preference is for recruitment to be focused on board members with the right skills. However, as a multicultural country, it is essential to introduce new board diversity orientation programmes, because such programmes create a two-way socialisation process, i.e., bias is reduced and minority perspectives can influence organisational norms and values.