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Examining Board Diversity and Its Effect on Firm Profitability of Malaysian Public Listed Companies.


In recent years, female representative on the board of director becomes favorable in boardrooms and has gained considerable interest in academic debate, corporate strategy and even in government agenda. Empirical research found that board diversity on a boardroom enables the organisation to think strategically in corporate planning. While board diversity helps organisation strategize corporate threats and opportunities through the eyes of variety stakeholders and improve organisational processes and firm performance. Having said that, monitoring function was enhanced and enable to eradicate irregularities in financial reporting as diverse on board more comfortable and confidence to query the management (Rhode and Packel, 2014). With a diverse on boards also resulting to creativity, innovation and a better knowledge in enhancing firm performance. In addition, the board diversity also can improve board discussion, problem solving and ability to make a better decision making (Ferreira, 2010). Greater board diversity also can make board structure more knowledgeable and sensitive to a wider variety of groups, improve reputation and performance more adaptable to its ever changing environment.

Focusing on the new practices were enhanced including to strengthen board composition, independence, accountability and transparency motivated this study to gauge the board structural effectiveness through board diversity on boardroom, with aims to provide a new insight on corporate strategy to company's stakeholders. In fact, (CHEE-WOOI and GUAT-KHIM, 2017; Rahman, Ibrahim, and Ahmad, 2015) were posited that genuinely practices of the code within corporation was widely recognised as a back bone in strengthening economic performance for the country in the long-term.

Theoretically, agency theory emphasises on the relationship between agent and the principal; highlighted the potential risk and issues arise upon the delegation of an agent. The principal engages the agent to conduct some services and delegate decision making authority on their behalf (Jensen and Meckling, 1976). Due to this contractual relationships exist, the manager expected to efficiently manage the firm by maximising shareholder wealth and act to the best interest of shareholders. Thus, the presence of board of directors was expected to reduce agency problems between agent (managers) and the principle (shareholders). Examining board diversity is vital mechanism in corporate governance which act as a control that can be used to reduces agency cost. Align with governance oversight roles may enhance the firm profitability (Kilic and Kuzey, 2016). Particularly, board structure is more activist with a diverse board members due to their independent director's characteristics. It was a corporate strategy by recruiting more outside directors with non-traditional attributes to serve the boardrooms.

Board structure is considered as a key in governance oversight function in a corporation and as they involved in corporate decision making. Many research focused and conducted on the board of directors effectiveness, board characteristics and attributes such as independence, education, tenure, education, ethnicity and diversity (Adams and Ferreira, 2009; Ferreira, 2010). Despite a significant number of research conducted on these issues, debate on the effect of board diversity is still inconclusive. Increasing prevalence of diversity on corporate board, however there is still not much clarity on a firm's strategy to appoint directors from diverse background. Taken together, the purpose of this study to investigate the impact of board diversity; woman is CEO on firm profitability, in Malaysia context.

This paper is arranges as follows; discussion on board diversity in section 2; gender diversity, nationality diversity, ethnicity diversity and woman's CEO and firm's profitability. Section 3 explain the research methodology and research model. Section 4 discuss the results from analysis and discuss the findings. Section 5 considers conclusions drawn on research findings and provide recommendations for future research agenda.

Literature Review and Hypotheses Development Gender Diversity and Firm Profitability

The competitive market nowadays tends to push the companies to think of the new strategy on how they can generate more profit or revenues. It was crucial to ensure the sustainability of organisation to adapt with ever challenging business environment. Female representative on a boardroom leading to greater corporate reputation and images. On the other hand, firm without female director may give impression that the company unable to recruit and retain women employees (Solakoglu and Demir, 2016). Kilic and Kuzey (2016) found a significant and positive impact of female director and firm performance of Turkey Listed Companies. Next, Adams and Ferreira (2009) claimed a significantly and positively association of diverse board in terms of gender diversity and firm's performance of US firms. Contradict with previous studies found that gender diversity negatively affect the firm value (Joecks, Pull, and Vetter, 2013). Campbell and Minguez-Vera (2008) found diverse gender on board insignificantly impact the firm value. Therefore, by referring to prior studies, I proposed the following hypothesis:

H1: There is significant and positive impact between gender diversity and firm profitability.

Nationality Diversity and Firm Profitability

Diverse national on boards commonly refer to someone have a tradition, common origin languages and capable to form a nation-state. Diverse in nationality differences among board members may give uniqueness and something new to the group of organisations. Every individual come from different family background education, religion, belief and different environment. Thus, these may give benefits to organisation for a better views and perspectives which finally lead to better decision. Estelyi and Nisar (2016) proved that diverse nationality on board positively affect the value of the firm. Despite non-Malaysian director bring different perspectives, knowledge to share with and its valuable skills, they also shared different norms, values and understanding. This situation will give a good impact on corporate governance practices and firm's strategic decision making. The result is consistent with (Balsmeier, Buchwald, and Stiebale, 2014) found that non-Malaysian director is positively affect the firm performance. Bremholm (2015) also found positive impact between board nationality diversity and firm value. In contrast, Zainal, Zulkifli, and Saleh (2013) have argued that positive cognitive and signaling consequences was impacted by traditional forms of task-related diversity which indicated that a diverse boards with relations-oriented leading to sentimental issues and poor communication which consequently create misunderstandings and conflict on boards. Masulis, Wang, and Xie (2012) found that non-Malaysian director was significantly and negatively affect the firm performance. Thus, it is recommended for firms to have a portion of non-Malaysian served on board. Taken together, I develop the following hypothesis:

H2: Nationality diversity has a significantly positive impact on firm profitability.

Ethnic Diversity and Firm Profitability

Malaysia cultural typically consist of three major ethnics; Malay, Chinese, and India (Mun, 2013). Board diversity in ethnicity might give advantages to the organisation during decision making especially towards particular market settings (Richard, Murthi, and Ismail, 2007). Besides, every diverse ethnic group is different in their cultures from other ethnic groups as every individual from every ethnic group may have a different understanding, belief and different view of opinion. Malaysia has diverse ethnic groups with various religious practices such as Islam, Buddha, and Catholic. Robinson and Dechant (1997) pointed out that those religionists have their own religious beliefs and point of overview. Thus, these differences may give new perspectives and also an exposure to the eye of the stakeholders. Abdullah, Ismail, and Izah (2017) found a positive and significant impact of diverse ethnic boards and firm value, and claimed the company with board director from the three major ethnic groups performs better than the company that only comprises only one or two ethnic groups. Marimuthu and Kolandaisamy (2009) conducted a study have concluded that diverse ethnics on board significantly influence the firm performance of Top 100 Malaysian listed companies. Diverse ethnic group resulting better problem solving and offering creating solutions within organisation. Thus, this situation allows competitive advantages among their employees. A negative relationship between ethnic diversity and firm performance was highlighted by (Frijns, Dodd, and Cimerova, 2016). This indicated that not necessarily all items of cultural differences are important and it is stressed that individualism diversity is mainly affects the effectiveness of the board structure in firms. In addition, Gul and Zhang (2016) stated that the role of board ethnicity in Malaysia corporate sector is less related to the performance. Thus, the following hypothesis is developed:

H3: Ethnicity diversity has a significantly positive impact on firm profitability.

Woman's CEO and Firm Profitability

Women in leadership are phenomena that have obtained many attentions over the past couple of years. Leadership is the ability to make others do something important that they might not otherwise be done. Without followers, leaders are not a leader, although followers may only come after a long wait. Therefore, women can become leaders probably because they are educated in a different way, or they recognize the leadership potential that exists and has learned to lead. The relationship of CEO woman diversity and firm profitability was also the most studied type of diversity. The various firms who hire women at the top level of their firms are also doing well on a number of other unmeasured characteristics such as a more focused recruitment policy, better working environment and conditions. Smith, Smith, and Verner (2006) performed a study on Danish firms claimed that the number of women executives who serve the board likely to have a good effect on firm performance. Khan and Vieito (2013) stated that firm performance was improved with CEOs are women as compared to their counterparts. They also indicated that the firms headed by woman's CEO are less risky than firms with male CEOs. The research also studies the relationship between woman's CEO and the new economy firms but the result appears no significant relationship. Taken together, hypothesis four (4) is developed:

H4: There is significant and positive impact between CEO is woman and firm profitability.

Data and Methodology Source of Data

Corporate Governance data was obtained from the annual reports of Publicly Listed Companies (PLCs) at Bursa Malaysia for the year 2016. Using dataset for the period of 2016 would avoid any adoption period of MCCG, which was revised again in 2012. Of the 805 companies, this study exclude finance companies, insurance and unit trust industries because they are governed under the Banking and Financial Institution Act 1989 (BAFIA), which is a different regulatory body. Finally, this study also eliminates companies with missing values and unavailable data during the sample period. Finally, there are 747 firms' year observations under the period of study. Information and data on CEO, gender, nationality and ethnicity are collected by hand.

Variables Measurement

Dependent Variables The return on sale (ROS) is measured by calculating total operating income to net sales of the company (Muravyev, Talavera, Bilyk, and Grechaniuk, 2010). The return on sale (ROS) also known as firm's operating profit margin to evaluate the efficiency of the company's operation. The ROS able to explain firm's efficiency in generating profits from its business activities. By using the ROS, it will provide insight into how much profit of the company is being produced. This will be benefits to investors, creditors and other entity that rely on this ratio to gain information regarding the profitability of the companies. Return on sale (ROS) also able to provide different insight compared to other measures. As much past research used ROA and ROE to measure the firm performance of the company, this study use ROS to give different results using other measurement.

Independent Variables This study uses gender, nationality background, ethnicity diversity and woman's CEO to examine its effect on firm profitability. For the gender diversity it was measured by the total number of women directors on board (Erhardt, Werbel, and Shrader, 2003). Board gender diversity creates different viewpoints, ideas and also they approach problems differently. Next, nationality diversity coded as "1" if at least one Non-Malaysian director on the boards and "0" otherwise (Yatim, Iskandar, and Nga, 2016). Next, ethnic diversity are consists of four different ethnics such as Malay, Chinese, Indian and others. Ratio scale was used to measure ethnic diversity, which is the percentage of Non- Malay directors over the total directors on the board (Marimuthu, 2008). This study examines the ethnicity of directors to test whether the director from different ethnic backgrounds give impact towards firm profitability. Lastly, woman's CEO coded as "1" if the CEO is a female director and "0" if the CEO is male director (Smith et al., 2006). The summary of variables measurement is shown in Table 1.

Empirical Research Models

The purpose of this study to investigate the impact of board diversity and woman's CEO on firm profitability of Public Listed Companies. I expect that board diversity which includes gender, nationality and ethnicity, and woman's CEO significantly and positively impacts on firm profitability. This study applies OLS to test the association of diverse on boards and woman's CEO and profitability scores. The regression models for the testings' hypotheses are as follows:

RO[] = [[alpha].sub.0]+ [[alpha].sub.1]GE[] + [[alpha].sub.2]NA[] + [[alpha].sub.3]ET[] + [[alpha].sub.4]WCE[] + [summation over (term)] [[alpha].sub.i]YEA[R.sub.i] + [summation over (term)] [[alpha].sub.i]INDU[S.sub.i] +[[epsilon]] (1)

Empirical Results and Analysis

Descriptive Statistics

The result of statistical description of the sample is presented in Table 2. The average score of operating income to net sales is 51 percent. Averagely, public listed companies in Malaysia were able to generate profit to manage company operation. As for board of director diversification, gender diversity presents an average score 86 percent, with maximum value of 6 female directors on boardroom. Following the commentary of the code recommended firms to establish a policy on boardroom diversity confirms that the Malaysian listed companies have practices the governance system for their business sustainability with woman involvement on boardroom. In terms of nationality diversity, Malaysian public listed companies are fairly appointed non-Malaysian director to serve the boards. About 26.2 percent of diverse nationality background in Malaysian public listed companies. The mean value for ethnic diversity reveals 66.4 percent, confirmed directorship structure of Malaysian listed companies are people from multicultural. The result also support (Marimuthu and Kolandaisamy, 2009) claimed that directors with multicultural are more creative. The statistics also reveals that about only 4.0 percent of CEOs are women, out of Malaysian public listed companies. It is valuable to highlight that the board should at least 30 percent women directors.

Correlation Analysis

Correlation analysis was employed to test the multicollineary problems among variables. Table 3 presents the result of the correlation analysis of the degree of multicollinearity among the regressors. Table 3 reveals a significant correlation between firm profitability and explanatory variables (gender diversity and national diversity), except for ethnicity diversity and woman is CEO of company. Moreover, as the values of correlation coefficients are all below 0.6 in absolute terms, thus there is no evidence of multicollinearity among the variables. Besides, I also run the variance inflation factors (VIF) test with the cut-off value setting for VIF at 5. From the analysis the VIF for ROS = 1.003, VIF for GEN = 1.040, VIF for NAT = 1.012, VIF for ETH = 1.013, VIF for WCEO = 1.033. Therefore, I concluded that there is no dependency among the explanatory variables. Hence, all variables are included in the regression analysis to test the impact of board diversity, woman CEO and firm profitability.

Regression analysis

The F-statistic indicates overall significance of the model at 1 percent significance level. The empirical evidence for the Model depict positively and significantly relationship between nationality diversity and firm profitability, while insignificant result between gender and ethnicity diversities and woman is CEO of the company. The result consistent with (Balsmeier et al., 2014; Bremholm, 2015; Estelyi and Nisar, 2016) indicating that companies with diverse nationality background directors associated with higher firm profitability. It could be explained that non-Malaysian nationals may possess an ability to understand better the need and aspirations of a diverse body of stakeholders and the markets, provide creative ideas and competencies that resulting to greater profitable.

Discussion and Conclusion

This study differs in determining firm profitability. I do conduct a different study by examining the impact between diverse on boards (gender, national and ethnic); and woman is CEO of company and firm profitability of Public Listed Companies for the year 2016 in Malaysia. Empirical findings can be summarised as follows: first national diversity has positive and significant impact on the firm profitability and it is consistent with (Balsmeier et al., 2014; Bremholm, 2015; Estelyi and Nisar, 2016) indicates that diverse national background on boards resulting better firm value. This finding concludes that national variation on boards influence a director's monitoring and thus this situation create incentives for the directors to achieve higher level of performance in discharging their governance function. Second, ethnicity and woman is CEO of the company both reveals insignificant results and concluded that ethnicity differences and female as CEO are not equally important and not affects the effectiveness of board of directors. Next, gender diversity reveals insignificant negative result to firm profitability. It is concluded that due to lack structural support such as mentoring and sponsoring of women with potential resulting lower firm profitability.

In summary, several potential benefits might be derived from nationality diversity on boards. First, in addition to greater access to resources, enhance creativity, different perspectives and networking, a diverse board with nationality cultural enhance the firm reputation by leveraging balances opportunities to every layered of employees and meet an expectation of stakeholders (Ferreira 2010). Second, nationality diversity on boards might actively contribute their inputs and ideas which resulting positive movement on board activity. Next, diverse national background on boards also facilitates firm operation and improves corporate strategy such as dealing with external events. Overall, this study provide insightful findings about the board structural and its effect on firm value and contribute to the asymmetric impact on the management governance oversight role.

Although the findings of this study may give new insight to the policy makers and companies about board diversities and woman's CEO, this study also address several shortcomings to the readers and investors. This study not includes other moderating effects and incentives that should examined in the future. More extensive measurement may be considered in the future. Future study may consider using CEO attributes ad empirical extension to this study. It is particularly time consuming to manually collected board diversification information and data from extracted reports of the selected sample.


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Masdiah Abdul Hamid (*)

Accounting Department, Universiti Tenaga Nasional, Pahang, Malaysia Email:

(*) Corresponding Author
Table 1: Summary of Variables Measurement

Variables                    Description

Dependent Variable
Return On Sales (ROS)        An accounting measurement, measured by
                             total operating income
                             divided by net sales.
Independent Variables
Gender Diversity (GEN)       Total number of women directors on the
                             board of directors.
Nationality Diversity (NAT)  Coded as "1" if at least one Non-Malaysian
                             director on the board of
                             directors and "0" otherwise.
Ethnic Diversity (ETH)       Ethnic diversity is measured based on a
                             ratio scale, number of Non-Malay
                             directors over total directors on the
Woman's CEO (CEO)            Coded as "1" if CEO is a female and "0"
                             if the CEO is male

Table 2: Summary Statistics for Explanatory Variables

          Mean    Median  Minimum  Maximum  SD     Skewness  Kurtosis

ROS       0.510   0.115   -3.510   165.510  6.346  24.067    617.043
GEN       0.859   1.000    0.000     6.000  0.961   1.272      2.147
FOREIGN   0.592   0.000    0.000    10.000  1.282   2.931     10.655
NAT       0.262   0.000    0.000     1.000  0.440   1.082     -0.831
ETH       0.664   0.714    0.000     1.670  0.286  -0.812      0.056
BSIZE     7.450   7.000    3.000    17.000  1.976   0.899      1.781
NDIR      4.890   5.000    0.000    16.000  2.397  -0.026      0.351
WCEO      0.040   0.000    0.000     1.000  0.196   4.694     20.084

Table 3: The result of Correlation Analysis

         ROS           FOREIGN       NAT          BSIZE

ROS       1.000
FOREIGN   0.131 (***)   1.000
NAT       0.132 (***)   0.975 (***)   1.000
BSIZE     0.066 (*)      .078 (**)    0.071 (*)    1.000
NMDIR    -0.002 (*)     0.108 (***)   0.102 (***)  0.437 (***)
ETH      -0.044         0.080 (**)    0.078 (**)  -0.105 (***)
GEN       0.123 (***)   0.080 (**)    0.072 (**)   0.275 (***)
WCEO      0.057         0.032         0.033        0.020
IND       0.091 (**)   -0.026        -0.036       -0.063 (*)

         NMDIR        ETH           GEN           WCEO   IND

NMDIR    1.000
ETH      0.782 (***)   1.000
GEN      0.099 (***)  -0.031         1.000
WCEO     0.029         0.052         0.192 (***)  1.000
IND      0.088 (**)    0.120 (***)  -0.037        0.044  1.000

Notes: (***), (**), (*)Coefficients are significant at the 1,5 and 10
percent level, respectively

Table 4: Regression Result

                                           OLS Model
                    Coefficient    Std. Error  t-Statistics  Prob.

Intercept             0.092 (***)  0.029        3.218        0.001
GEN                  -0.003        0.011       -0.238        0.812
NAT                   0.261 (***)  0.008       31.792        0.000
ETH                   0.022        0.037        0.612        0.541
WCEO                  0.046        0.054        0.859        0.390
Industry dummy         Yes                       Yes
[R.sup.2]             0.585
Adjusted [R.sup.2]    0.582
F-statistic         208.585 (***)
Prob(F-statistic)     0.000

Notes: Dependent variable = ROS for OLS Model.
(***), (**), (*)Statistically significant at the 1, 5 and 10 percent
level, respectively
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Author:Hamid, Masdiah Abdul
Publication:Global Business and Management Research: An International Journal
Geographic Code:9MALA
Date:Apr 1, 2018
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