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Board diversity and firm performance: impact of

ESG activities in China

Yao Dong, Chen Liang & Zhong Wanyin

To cite this article: Yao Dong, Chen Liang & Zhong Wanyin (2023) Board diversity and firm
performance: impact of ESG activities in China, Economic Research-Ekonomska Istraživanja,
36:1, 1592-1609, DOI: 10.1080/1331677X.2022.2090406

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ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA
2023, VOL. 36, NO. 1, 1592–1609
[Link]

Board diversity and firm performance: impact of ESG

activities in China
Yao Donga,b, Chen Liangb and Zhong Wanyinb
a
School of economics, Sichuan University, Chengdu, Sichuan, China; bSchool of finance and
accounting, Chengdu Jincheng College, Chengdu, Sichuan, China

ABSTRACT ARTICLE HISTORY

The investigation of association between board diversity and the Received 7 February 2022
firm performance is the subject of many studies. However, the Accepted 13 June 2022
empirical results presented in the extant literature are inconclu-
KEYWORDS
sive at best. The inconclusive empirical results could be due to
Board diversity; ESG
several factors and one of them could be that the relationship is activities; firm performance
contingent on some key factors. Given the rising trend of
Environmental, Social and Governance (ESG) activities, in this JEL CLASSIFICATION
paper the relationship between board diversity and the firm per- G20; G30
formance is tested in the context of ESG activities. The subject of
examination in this study is the listed Chinese firms. The sample
period spans for 6 years and is collected from 2014 to 2019. This
work uses a dynamic approach to modelling relationships. The
generalised method of moments (GMM) is used in a two-step sys-
tem. An endogeneity-free estimate may be achieved by using this
strategy. We can learn a great deal from these hypotheses. There
is a positive and substantial correlation between board diversity
and the firm’s success, which suggests that diverse boards are
beneficial to businesses. Both ESG activities and a positive coeffi-
cient on company performance are significant. This shows invest-
ors appreciate companies that are involved in ESG activities
because they see this as an investment that pays off. Last but not
least, the report shows that board diversity has a negative and
considerable impact on ESG efforts. According to the results,
board diversity and ESG efforts are not necessary for a company’s
success. According to the data, board diversity is not particularly
beneficial in the context of significant ESG initiatives. Board diver-
sity really hurts a company’s success when it engages in high ESG
activities. The study also discusses the work’s policy ramifications.
Finally, the work lays out a clear path for further study.

1. Introduction
The board room of a firm is considered to be the highest body responsible for super-
vision, monitoring and the decision making. There are at least two major strands on

CONTACT Yao Dong [Link]@[Link]

ß 2022 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group.
This is an Open Access article distributed under the terms of the Creative Commons Attribution-NonCommercial License (http://
[Link]/licenses/by-nc/4.0/), which permits unrestricted non-commercial use, distribution, and reproduction in any
medium, provided the original work is properly cited.
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 1593

the functionality of the boards. First view, the agency view, argues that the board is
responsible for the strict monitoring and is supposed to closely watch the activities of
the managers who are more often than not driven by self-interest Fama and Jensen
(1983), Hart (1995) and Jensen and Meckling (1976). As the agency theory argues
that the managers engage in activities that benefit them even if they are detrimental
to the long term benefits of the firm. In this sense, a diverse board is necessary to
closely monitor managers’ activities and give them enough space as well to pursue
growth opportunities that are beneficial to firms. In other words, diverse boards are
expected to optimally monitor the activities of managers. The second view, resource
dependence view, argues that the main function of the board is to provide effective
feedback and efficient advisory Hillman and Dalziel (2003). The demographically
diverse board is expected to be more prudent in their decision making due to the
availability of superior peers and colleagues. In other words, as per resource depend-
ence view, a diverse board is likely to make better decisions due to better boards in
terms of their qualification and the experience Anderson et al. (2011), Ben-Amar
et al. (2013), Bernile et al. (2018), Yang et al. (2019, 2018). In a sense, it could be a
good argument that a board which is diverse not just structurally but also demo-
graphically is expected to be superior in terms of decision-making, supervision, advis-
ory and monitoring (Winkler et al., 2020).
Although the theoretical expectation of resource dependence and the agency view
is that the diverse boards are expected to contribute to firm performance through
their superior decision-making skills and the advisory capabilities, yet the relationship
between board diversity and the firm performance is not very straightforward. For
instance, some of the studies indicate positive association whereas others find no
association or even negative association between the two Beji et al. (2021), Dobija
et al. (2022), Jiang et al. (2021), Kinateder et al. (2021), Miller and del Carmen
Triana (2009) and Tasheva and Hillman (2019). The departure of the empirical
results presented in the extant literature suggests that the results may be contingent
on other factors Raj Aggarwal et al. (2019), Atif et al. (2021), and Endrikat et al.
(2021). In other words, the conflict between the theoretical expectations and the
empirical results suggest that the examination should be carried out by exploring the
intricacies that are likely to interact with the board diversity and the firm perform-
ance association Saunila (2020).
According to this research, omitting ESG activities in a board diversity and firm
performance connection may lead to inaccurate findings. In light of the growing
popularity of environmental, social, and governance (ESG) initiatives throughout the
world, it is critical that the relationship between diversity and company performance
be investigated. Thus, the primary goal of this article is to investigate the impact of
board diversity and ESG actions on company performance in conjunction. ESG
efforts and board diversity may also provide insights into the firm’s [Link] the
purpose or to achieve the objective, this paper makes use of Chinese data Peternel
and Gre
s
s (2021). The data period is from 2014 to 2019 and hence spans for 6 years.
The methodological approach used in this paper is the Two-step System Generalized
method of Moments (GMM). The approach of GMM ensures that the paper is free
from endogeneity issues inherent in the governance literature Al-Qeed et al. (2018)
1594 Y. DON ET AL.

and Kuk et al. (2021). Moreover, the method also overcomes the issue of finding a
suitable instruments associate with instrumental variable approach or two Stage Least
Squares (2SLS) Saeidi et al. (2021).
There are several insights from the econometric analysis. First, board diversity is sig-
nificantly associated with the firm performance indicating greater board diversity leads
to better performance. Second, ESG activities are significantly related to firm perform-
ance suggesting that engaging in ESG activities could be strategic initiative and provide
the firms a competitive edge Alsayegh et al. (2020) and Sa˛czewska-Piotrowska and
Piotrowski (2021). Third and more importantly, the association between board diversity
and the firm performance is contingent on the ESG activities. In other words, inter-
action effect of ESG and the board diversity is negative suggesting the higher ESG
activity lowers the positive effect of board diversity on the firm performance (Sammut,
2021). More precisely, the findings indicate that the board diversity and the ESG activ-
ities are substitutes in driving the firm performance. In other words, the involvement
in ESG activities can compensate for less diverse boards Khan et al. (2021).
The rest of the paper is organized as follows. The following section provides a
review of the extant literature on the association between board diversity and the
firm performance. In Section 3, the paper elaborates on the data and the method-
ology used in the paper. Section 4 presents the empirical results and the discussions.
Finally, the paper concludes with conclusion and the limitations in Section 5 (Alqasa
& Afaneh, 2022; Fadilah et al., 2022; Keshavarzian & Silvius, 2022).

2. Literature review
The extant literature on the effect of board diversity has been the topic of many
researches, especially in the past decade. The existing literature on the board diversity
makes a distinction between the structural and the demographic diversity (Aggarwal
et al., 2019; Ali et al., 2019). The structural diversity is usually referred to the board
independence and the demographic diversity refers to gender, experience, age, cul-
ture, nationality etc. Ararat et al. (2015), Russen et al. (2021) and Terjesen et al.
(2016). As the board independence is put into effect either through regulatory
requirements or made part of the best practices, the structural diversity is also often
labelled as something which is highly desirable Ben-Amar et al. (2017), Bennouri
et al. (2018), Chen et al. (2019) and Leasa et al. (2021).
Board diversity’s impact isn’t always clear-cut, and it comes with its own set of
advantages and disadvantages. In other words, there are benefits and drawbacks to
having a diverse board. Having a more diverse board has several advantages. When it
comes to information analysis and processing, a more diverse board is anticipated to
have more depth and breadth of knowledge and expertise. In the end, this results in
a board that is anticipated to make better judgments than a board that is less diverse
Cao et al. (2020). An additional benefit of a more diverse board is that it is likely to
spur innovation by fostering a more open environment for new ideas to flourish
Carter et al. (2003), Leung et al. (2020) and Liu et al. (2014). The capacity of the
board of directors to allow multiple points of view inside the company and to be
more receptive of fresh ideas and debate is directly tied to [Link], as the
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 1595

diverse board is expected to be more tolerant towards the new or different though
process and hence it can lead to better monitoring than a less diverse board which
does not give way to new ideas or thought processes Brahma et al. (2021), Gul et al.
(2011) and Sierra et al. (2021). Fourth and equally important, diverse boards are
expected to be better in terms of their understanding of the market in which the firm
operates (Kowsar & Mukherjee, 2021). This invariably implies that the diverse board
understands the stakeholders of the firms such as suppliers, clients, customers etc.,
and hence can guide the firm better in expanding their reach and acquiring more
market share. In other words, a more diverse board can help realize a firm its real
potential through better market reach and enhanced penetration. Last but not the
least, a more diverse board is expected to be better equipped in promoting the firm
through its global network, especially through diversity and inclusion (Dalziel et al.,
2011; Goodstein et al., 1994; Robinson & Dechant, 1997).
As mentioned above, the board diversity has some disadvantages and certain costs
attached with it. For instance, during financial turmoil, the diverse boards could not
come to consensus on leading strategic initiatives. As a result, the ultimate goal of a
company might be jeopardised by a diverse board’s inability to rapidly come to con-
sensus (Dalton et al., 1998, 1999). Disparities and variances in board composition
may be an impediment and cause severe frictions if they aren’t addressed, which
might turn out to be bad news for a company instead of good news (Bruna et al.,
2021; Daiser et al., 2017; Veltrop et al., 2015). The variety of the board’s membership
might jeopardise the company’s operations, which could be harmful to the company
over the long term if not immediately R Aggarwal and Dow (2012), Kim et al.
(2009), Machold et al. (2011) and Yu and Van Luu (2021).
Although the literature on board diversity is vast but no clear outcome from the
literature has emerged. For instance, some points to negative association whereas
others point to positive or no association between the board diversity and the firm
performance (see among others, (Ahmed & Ali, 2017; Alazzani et al., 2017; Arun
et al., 2015; Beji et al., 2021; Campbell & Mınguez-Vera, 2008; Harjoto et al., 2015;
Haslam et al., 2010; Jebran et al., 2020; Joecks et al., 2013; Lai et al., 2017; Liao et al.,
2019; Nekhili et al., 2020; Nguyen et al., 2020; Sila et al., 2016; Srinidhi et al., 2011;
Torchia et al., 2011; Yasser et al., 2017; Zaid et al., 2020 ).
These findings indicate a need to find if the effectiveness of board independence is
contingent on other factors Parmar et al. (2010). More precisely, it is crucial to inves-
tigate whether the relationship between board independence and firm performance is
interlinked with the macro or micro economic factors. Hence, once these factors are
taken into the account in the empirical pursuit then the findings would be more con-
sistent and meaningful Achim et al. (2021).
More importantly, bulk of the extant literature has relied on the data from devel-
oped nation and that to mostly from Europe and North America. Nevertheless, more
recently the focus has shifted to developing region, especially the significant ones like
India, China, and Turkey etc. Saeed and Sameer (2017). Nonetheless, the evidences
presented in the literature so far, be it from developed or developing nation, has
ignored the importance of engagement of firms in the ESG activities (Claveria
Gonzalez et al., 2021).
1596 Y. DON ET AL.

There is also a lack of research on how successful diverse boards are when it
comes to monitoring. It has been shown that diverse boards have advisory competen-
ces that are much better to those of less diverse boards, according to empirical evi-
dence Ali et al. (2019). Only a few studies have linked empirical results to the
monitoring and advising skills of diverse boards, which is an essential point to
[Link] this paper, we hypothesize that the effect of board diversity on firm per-
formance may be contingent on the level of ESG activities. The increasing trend of
ESG activities to signal superior corporate governance is gaining attention across the
globe Azmi et al. (2021). This is because the general awareness amongst the public
about the issues such as global warming, board independence, employee satisfaction,
and work place safety is increasing and various stakeholders are making these criteria
as a benchmark to reward or punish the firms Gadeikiene and Svarcaite (2021). As
board diversity is also presumed to be an aspect of governance, it is important to
investigate as to how it interacts with the ESG activities and leave its impact on the
firm performance. In other words, it is interesting to examine whether the level of
diversity in the boardroom and involvement in ESG activities are substitute or com-
pliment in influencing the firm performance (Gaspar_enien_e et al., 2021).
Therefore, in this paper, the interaction of board diversity and the ESG activities is
examined. In other words, the paper delves into exploring the effect of board diver-
sity and the ESG activities on affecting the firm performance. The objective of this
paper adds to the literature in following ways. First, it extends the board diversity lit-
erature by exploring its nexus with ESG activities. Second, the paper extends the ESG
literature by examining whether it is complimentary or substitute in influencing the
firm performance. Third, the paper adds to the diversity and the ESG literature in
the developing economies, which is so far confined to the developed nations (Al-
masaeed et al., 2021; Alsoud et al., 2021; Hernawati et al., 2021; Mattayaphutron &
Mahamat, 2021).

3. Data and methodological approach

The governance literature has often been criticized for not addressing the endogeneity
issues in the corporate governance literature Abdallah et al. (2015). More importantly,
most of the extant literature has ignored the persistence issue and has generally relied
on static modelling. This paper uses a dynamic modeling approach to assess the rela-
tionship between board diversity, ESG activities and the firm performance. The detail
of econometric modelling specification and the methodological approach is provided
in more detail later (Alshahrani, 2021; Diep & Hieu, 2021; Hasker, 2021).
Several data suppliers do not have information on the environmental, social, and
governance (ESG) actions of listed companies in China. It’s only accessible with the
likes of China Corporate Responsibility Institute (CCRI), SynTao Finance, and MSCI,
according to the authors’ knowledge SynTao is the leading service provider for ESG-
related data points among all data suppliers. To put it another way, SynTao’s SG
coverage of Chinese listed corporations is far and by the most extensive of any other
data or service provider. The study decided to use SynTao instead of CCRI or MSCI
datasets because of this.
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 1597

The data used in this paper is sourced from Wind database. The study period of
this paper is 2014 to 2019 and hence covers the period of 6 years. The other firm level
variables are collected from China Stock Market and Accounting Research Database
(CSMAR) database. The total sample size is of 248 listed firms. These firm level varia-
bles are based on the extant literature. These variables are financial leverage, revenue
growth and total sales. As the firm performance is driven by the macroeconomic con-
ditions as well, the paper also controlled for the macroeconomic conditions. In order
to control the degree of freedom issues, the paper only controls for important macro-
economic variables such as economic growth and the level of financial development.
These macroeconomic variables are also based on the firm performance literature.
The macroeconomic variables are collected from World Development Indicators
(WDI). More importantly, following the extant literature, the paper excludes the non-
financial firms and the utility firms. These firms have different capital structure as
compared to other firms. Moreover, these firms are regulated differently as compared
to other firms (Gaba et al., 2021; Hamsal et al., 2021; Lima et al., 2021; Lipi nska,
2021; Zhao, 2021).
As mentioned above, the methodological approach used in this paper is that of
Generalized Method of Moments (GMM). For the estimation, following dynamic
econometric estimation is performed.

Performanei, t ¼ a0 þ b1 Performancei, t1 þ b2 BDi, t1 þ b3 ESGi, t1 þ ei, t (1)

Equation 1 is the base model. In the above Equation 1, Tobin’s Q denotes the
profitability of a firm. As it is a dynamic modelling, the lagged values of Tobin’s Q
are also used. BD is the board diversity. It is measured as the number of female
directors to total number of directors. ESG is the composite score on the firms’ envir-
onmental, social and the governance activities
Among the methods used in this study are Arellano and Bond (1991) First
Difference technique, as well as Arellano and Bover (1995) and Blundell and Bond
(1998) System GMM approaches. As the study employs a two-step GMM, it employs
Windmeijer (2005)’s technique to rectify any downward bias it may have.
When it comes to dynamic panel models, GMM is better to conventional panel
approaches. It also solves the problem of finding appropriate instruments to measure
endogenous variables. GMM, for example, employs the lagged values of endogenous
variables as instruments in its method.
The underlying assumption of GMM is that the data generating process of Yt fol-
lows the stationarity and stochastic process. The application of GMM requires to
have known moment conditions. More importantly, vector valued function g(Y,h)
must be identified in advance:

m ðh0 Þ ¼ E½g ðYt , h0 Þ ¼ 0, (2)

In the above equation (Equation 2), E indicates the expectation. The Y is the gen-
eric term in the equation. Along the similar lines, the m(h) function is required to be
different from the numerical value of zero.
1598 Y. DON ET AL.

The basic idea behind GMM is to replace the theoretical expected value E[] with
its empirical analog—sample average:
The underlying logic behind the methodological approach of GMM is to substitute
the expectation (theoretical) of E[] with the empirics of mean of sample:

1 XT
^ ðh0 Þ ¼
m gðYt , hÞ (3)
T t¼1

Furthermore, the expression needs to minimize with regards to h. The minimizing

value of h is our estimate for h0. The minimized value of h is h0.

4. Findings and discussion

The descriptive statistics are provided in the Table 1.
The estimation results are provided in the Table 2. There are three columns in the
Table. In the first column, the baseline results are provided. The lagged term of
Tobin’s Q is significant and positive indicating the persistence of financial perform-
ance. In other words, it indicates the past financial performance is a strong determin-
ant of a present financial performance. It also justifies the choice of dynamic
modelling (Akpan et al., 2021).
Column 1 of Table 2 shows a correlation between business success and the
diversity of the board of directors. The positive and substantial coefficient of board
diversity shows that a company’s financial success is strongly influenced by the
degree of diversity on the board. The Adams et al. (2015) findings are consistent
with these findings (2018). More diverse boards, it is said, are better for promoting
innovation and hence better for long-term financial success, therefore the findings
are not unexpected. Additionally, a more diverse board contributes to improved
decision-making in the boardroom by increasing the quality of the discussions.
Financial success is also strongly and positively linked to the coefficient of ESG.
Both the agency- and resource-dependence viewpoints are supported by these find-
ings. These individuals are certain that ESG has a favourable impact on finan-
cial success.
In the column 2 of the Table 2, the baseline equation is extended to include inter-
action term of board diversity and the ESG activities. The following model is esti-
mated:

Table 1. Descriptive statistics.

Variable Mean Min Max
TOBINS Q 1.62 0.56 107.8
ROA 1.76 11.89 56.88
ESG 18.17 1.67 94.28
Firm Size 5.91 9.65 88.92
Firm Size 11.06 8.66 56.76
Financial Leverage (%) 31.76 2.60 94.11
GDP Growth (%) 5.65 1.53 9.55
Financial Development 92.66 24.77 121.57
Source: own research.
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 1599

Table 2. Board Diversity and Performance (System GMM).

(1) (2) (3)
Tobin’s Qt-1 0.001 0.084 0.005
(0.011) (0.000) (0.000)
Board diversity 0.043 0.051 0.012
(0.062) (0.000) (0.010)
ESG 0.055 0.029 0.043
(0.001) (0.000) (0.068)
Board DiversityESG 0.033 0.059
(0.000) (0.051)
Firm Size 0.092
(0.088)
Sales growth 0.032
(0.093)
Financial Leverage 0.001
(0.001)
Economic activity 0.083
(0.019)
Financial development 0.001
(0.000)
Constant 0.055 0.006 0.000
(0.000) (0.000) (0.000)
AR (1/2) 0.67/0.32 0.21/0.32 0.44/0.31
Sargan/Hansen Test (p-Val) 0.39/0.42 0.73/0.58 0.05/0.99
Source: own research.

Performancei, t ¼ a0 þ b1 Performancei, t1 þ b2 BDi, t1 þ b3 ESGi, t1

þ b4 ðBDESGÞi, t1 ei, t (4)

The above equation (Equation 4) is the extension of baseline equation (Equation

1). In the equation, the interaction term of board diversity and the ESG is included.
The sign (positive or negative) and the significance of b4 determine whether the
board diversity and the ESG activities are substitutes or compliments in affecting the
firm performance.
In the second column of the Table 2, the results include the interaction term of
ESG and the board diversity. The negative and the significant interaction term sug-
gest that the board diversity and the ESG activities are substitutes in its effect on the
financial performance. These findings are very interesting as it suggest that the firm
with a diverse board may not gain from the ESG activities. In fact, as the board
diversity increases, the increased ESG activities leads to poor performance.
According to the existing literature, the results of control variables are likewise con-
sistent with the findings. For example, all of the variables at the company level are
important. To put it another way, the research shows that increasing the size of the
business and increasing sales have a beneficial impact on the firm’s success. Financial
leverage seems to be linked to worse performance, according to the research. Extant
research has shown that increasing financial leverage may lead to a decrease in per-
formance owing to higher debt repayments. Bankruptcy is a possibility in the worst-
case scenario. Positive and substantial macroeconomic coefficients may be found. The
findings imply that a more prosperous business climate, aided by high-quality financial
institutions, is a key factor in the success of enterprises. There is a lot of evidence that
excellent macroeconomic circumstances are necessary for businesses to be profitable.
1600 Y. DON ET AL.

The model is further extended to include macro and the micro variables. The fol-
lowing model is estimated:

Performancei, t ¼ a0 þ b1 Performancei, t1 þ b2 BDi, t1 þ b3 ESGi, t1

þ b4 ðBDESGÞi, t1 þ b5 Ai, t1 þ b6 Bi, t þ ei, t (5)

The above equation (Equation 5) is the extension of Equation 4. In the modelling,

micro and the macroeconomic variables are included. In the above equation
(Equation 5), A are the series of micro or firm level variables used in the paper
whereas B is the set of macroeconomic variables. The set of firm level variables are
size, leverage and the growth of sales. The size variable is measured by the log of total
assets whereas sales growth is measured by the percentage change in profit. Finally,
the leverage is measured by the total debt to equity. The macroeconomic variables
used in the paper are economic activity and the level of financial development. The
economic development is measured by the level of GDP per capita whereas the finan-
cial development is measured by the private credit to domestic sector as a percentage
of GDP. The data of both the macroeconomic controls are collected from World
Development indicators.
The results are presented in the third column of Table 2.
In order to ensure that the results are not driven by the approach of System
GMM, the equations 1, 4 and 5 is reestimated using First differenced GMM. The
results are presented in Table 3. The findings are almost identical to the results
reported in Table 2. These findings suggest that the results are not driven by the
adopted methodological approach.
In order to provide additional robustness to the paper. The alternative proxy of
performance is used. More specifically, the paper uses Return on Assets (ROA) as an

Table 3. Board Diversity and Performance (First Differenced GMM).

(1) (2) (3)
Tobin’s Qt-1 0.099 0.084 0.000
(0.018) (0.000) (0.000)
Board diversity 0.012 0.051 0.072
(0.000) (0.000) (0.000)
ESG 0.043 0.029 0.000
(0.000) (0.000) (0.545)
Board DiversityESG 0.033 0.077
(0.000) (0.059)
Firm Size 0.000
(0.774)
Sales growth 0.077
(0.000)
Financial Leverage 0.055
(0.000)
Economic activity 0.083
(0.000)
Financial development 0.008
(0.000)
Constant 0.082 0.055 0.045
(0.000) (0.000) (0.000)
AR (1/2) 0.54/0.36 0.23/0.44 0.15/0.55
Sargan/Hansen Test (p-Val) 0.00/0.43 0.43/0.66 0.00/0.38
Source: own research.
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 1601

Table 4. Robustness – Board Diversity and Performance.

(1) (2) (3)
ROAt-1 0.088 0.085 0.089
(0.000) (0.000) (0.000)
Board diversity 0.023 0.051 0.009
(0.092) (0.000) (0.000)
ESG 0.077 0.029 0.078
(0.009) (0.000) (0.000)
Board DiversityESG 0.022 0.023
(0.000) (0.000)
Control variables (firm level) Yes
Control variables (country level) Yes
Constant 0.000 0.000 0.000
(0.000) (0.000) (0.000)
AR (1/2) 0.44/0.36 0.11/0.33 0.90/0.00
Sargan/Hansen Test (p-Val) 0.66/0.63 0.74/0.55 0.07/0.00
Source: own research.

alternative measure of performance. The equations 6,7 and 8 are similar to equations
1,4 and 5 except that it uses ROA as a measure of performance as opposed to
Tobin’s Q.

ROAi, t ¼ a0 þ b1 ROAi, t1 þ b2 BDi, t1 þ b3 ESGi, t1 þ ei, t (6)

ROAi, t ¼ a0 þ b1 ROAi, t1 þ b2 BDi, t1 þ b3 ESGi, t1 þ b4 ðBDESGÞi, t1 þ ei, t
(7)

ROAi, t ¼ a0 þ b1 ROAi, t1 þ b2 BDi, t1 þ b3 ESGi, t1

þ b4 ðBDESGÞi, t1 þ b5 Ai, t1 þ b6 Bi, t þ ei, t (8)

The results are presented in Table 4. The reported results (colum1,2 and 3) are
almost identical to the findings reported in Tables 2 and 3. The findings, in a way,
indicate that irrespective of whether the performance measure is book based or mar-
ket based, the overall findings remain the same(Al Thuwaini et al., 2022; Castro-
Bedri~nana et al., 2022; Chuong et al., 2022; Dinh et al., 2022).
Because the macroenvironment is a significant driver of business success, the art-
icle also examines the impact of inflation and interest rates in making its conclusions
more reliable. Table 5 shows the results of System GMM estimates. Columns 1, 2,
and 3 all have findings that are almost identical to those of the other columns. ESG
efforts have less of an impact on financial performance when the board is more
diverse, and our studies support that conclusion even further.

5. Conclusion and limitations

The effect of board diversity on financial performance is a subject of debate for a
long time. There are three important strands on financial performance and board
diversity literature suggesting positive effect, negative effect and no effect. More
recent literature has stressed on the importance of evaluating the relationship in a
contextual way. In a way, it is now suggested that the performance-diversity
1602 Y. DON ET AL.

Table 5. Robustness – Board Diversity and Performance.

(1) (2) (3)
Tobin’s Qt-1 0.032 0.009 0.005
(0.000) (0.000) (0.000)
Board diversity 0.043 0.091 0.785
(0.041) (0.000) (0.000)
ESG 0.059 0.087 0.066
(0.000) (0.000) (0.091)
Board DiversityESG 0.067 0.058
(0.000) (0.933)
Control variables (firm level) Yes
Control variables (country level) Yes
Additional control Yes
Constant 0.047 0.000 0.000
(0.000) (0.000) (0.000)
AR (1/2) 0.51/0.00 0.89/0.77 0.72/0.11
Sargan/Hansen Test (p-Val) 0.65/0.00 0.16/0.53 0.02/0.82
Source: own research.

relationship may be contingent on other factors. In this paper, we evaluate the role of
ESG activities in influencing the relationship. To test the objective, the data of
Chinese listed firms from is employed. The collected data cover the period of 6 years
from 2014 to 2019. The findings using the methodological approach of System and
the First differenced GMM indicate following. First, board diversity and the financial
performance is positively related indicating the importance of having a diverse board
which encourages innovation and also leads to improved decision-making. This even-
tually leads to better performance. Second, the coefficient of ESG activities is positive
and significant indicating ESG activities can be used by the firm to improve its per-
formance. This is not surprising as ESG activities are argued to be a source of com-
petitive edge for the firms and hence adds to the long-term performance. Finally, and
perhaps most crucially, the word ‘interaction’ refers to the unfavourable and substan-
tial nature of the relationship between board diversity and ESG initiatives. In other
words, the negative and significant coefficient of interaction term suggests that board
diversity and ESG are substitutes in predicting financial success. Research shows little
benefit to a company with a diverse board of directors, according to the results.
Because of this, companies who lack the means to participate in ESG initiatives might
acquire a competitive advantage in their markets just by diversifying their board of
directors. Alternative measures of financial success had no effect on our findings. In
other words, the conclusions reported are equal to both Tobin’s Q (a market meas-
ure) and ROA (a financial measure) (book measure).Moreover, the findings remain
robust to the inclusion of additional control variables such as institutional quality,
inflation and the interest rates (Almalki et al., 2022; Griffioen, 2022; Hidayat et al.,
2022; Lekhawichit, 2022).
There are several limitations of this paper but two are noteworthy. First, the meas-
ure of board diversity in this paper is only viewed from the gender angle and hence
other type of diversity such as age, qualification, nationality, religion and culture has
been completely ignored. This is one of the drawbacks of this paper and future
research can tackle this by including several other dimensions of diversity. Second
and somehow related to the first drawback is the use of simple percentage of female
directors as a measure of gender diversity. The future research can make use of the
 ECONOMIC RESEARCH-EKONOMSKA ISTRAŽIVANJA 1603

proposed diversity measure such as Shannon Index or even the Blau Index to better
capture the diversity essence of the board (Harrison & Klein, 2007).

Disclosure statement
No potential conflict of interest was reported by the authors.

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