Effect of board diversity on financial performance: testing the conditional effect of corporate social responsibility and tax aggressiveness of listed firms in kenya

Abstract

Performance of listed firms in developing countries of painstakingly measured because of the firm-related factors that influence the operational efficiencies of these firms. In particular, the firm’s board of directors influences the firm performance through its oversight role as well as its stewardship role. In the Kenyan context, several firms including Athi River Mining, Uchumi Supermarkets and Mumias Sugar have collapsed because of underperformance while National Bank of Kenya have undergone restructuring. Due to these challenges relating to the performance and board of directors of the firms listed in Nairobi Security Exchange, the study sought to evaluate the effects of the board’s characteristics on firm performance of companies listed in Nairobi Security Exchange. The study main objectives was establish effect of gender, age, nationality and ethnic diversity of board of directors on firm performance among listed firms in Kenya, to examined the meditating effect of tax aggressiveness on firm performance in listed firms in Kenya and to assess the moderating effect of CSR disclosure on firm performance of listed firms in Kenya.. This study was informed by Agency stakeholder theory, resource dependency theory, legitimacy theory and signaling theory. This study adopted a positivist philosophy which was supported by an explanatory design. The target population was 61 listed firms in Kenya, however, there were 43 listed firms in the NSE being firms which have shown consistency in the market during the period 2011-2017 giving a total of 301 firm - year observations. The data was collected from published financial reports and analysed descriptively and inferential through the use of panel regression models. The findings indicate that board’s gender diversity (ββ 1 = 0.1868, p < 0.05), board’s ethnic diversity (ββ 3 = 0.4170, p< 0.05) and board’s nationality diversity (ββ 4 = 0.2250, p < 0.05) had a significant and significant effect and explained 12.32 per cent variance in firm performance while boards’ age diversity (ββ 2 = -0.0019, p> 0.05) was not significant. When the control variable are added, the direct effect of the board’s characteristics (βgender, ethnic and nationality diversity) increased to 21.24 per cent. The mediating effect of tax aggressiveness had a positive effect on the board’s ethnic diversity (ββ 3 = 0.4428, p < 0.05) and nationality diversity (ββ 4 = 0.2187, p< 0.05) and explain about 28.81% variance in performance. Further, the moderating effect of CSR disclosure has positive influence on ethnic diversity (ββ 3 = 0.4080 , p> 0.05) nationality diversity (ββ 4 = 0.1924 , p> 0.05) and explains about 30.14 % variance in performance. Based on these findings, the study rejected all the null hypotheses (βH 01, H 03, H 04, H 05a, H 05c, H 05d, H 06c and H 06d ) and concluded that board’s diversity characteristics (βethnic and nationality) have a positive effect on performance. Thus, the study concludes that firms with more female members, ethnically and culturally diverse tend to outperform their counterparts with fewer female board members and least diverse in terms of nationality and ethnically. Further, firms that engage in CSR tend to have higher performance and include and equal proportion of both foreign and domestic directors (βnationality diversity). The implication is that valuable and diverse expertise brings change in facilitating corporate performance.