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Journal of Business Ethics

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11-04-2015

The Impact of the Dual Board Structure and Board Diversity: Evidence from Chinese Initial Public Offerings (IPOs)

Authors: Hisham Farag, Chris Mallin

Published in: Journal of Business Ethics | Issue 2/2016

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Abstract

Chinese listed companies have a two-tier (dual) governance structure that comprises a supervisory board/committee (SB) and the board of directors (BoD). However, as there is no hierarchical relationship between them, the two boards are independent. This is different from the governance mechanism in Continental Europe in which the SB appoints the directors of the management board; in this sense, the Chinese two-tier governance structure is unique. We investigate the impact of governance characteristics and ownership structure on gender diversity of both the BoD and the SB for a sample of 892 Chinese Initial Public Offerings floated in both the Shanghai and Shenzhen Stock Exchanges. We find that the average proportion of female directors and female SB members on the BoD and the SB are 10 and 22 %, respectively. Using both static and dynamic panel data methods, we find that there is no significant impact of board structure on gender diversity in China. However, we find a positive and significant relationship between SB size and gender diversity. We also find that the higher the state ownership, the lower the female representation on both boards. Finally, our findings show that there is a bi-directional relationship between financial performance and the proportion of female directors sitting on the BoD.

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According to this proposal, all EU listed companies except small- and medium-size enterprises (SMEs) should increase substantially the number of women on EU corporate boards by setting a minimum objective that 40 % of NEDs of listed company boards should be of the ‘under-represented gender,’ generally women. In addition, listed companies should make individual commitments on gender-balanced representation by the end of 2020 and must disclose information about board diversity in their annual reports and websites. Member states will set their own sanctions for non-compliance which may include fines or invalidity of a NED appointment.

To illustrate, the positive relationship between board diversity and financial performance is supported in the following studies; Erhardt et al. (2003), Miller and del Carmen Triana (2009) and Pathan and Faff (2012) in the US; Luckerath-Rovers (2011) in the Netherlands and Mahadeo et al. (2012) in Mauritius However, a negative diversity–performance link is found in the following studies: Ryan and Haslam (2005) and Haslam et al. (2010) in the UK.; Bohren and Strom (2010) in Norway. Finally, a neutral link is supported in Farrell and Hersch (2005) in the US.

Blau index is calculated as \(D\; = \;1 - \sum\limits_{i = 1}^{n} {P_{i}^{2} }\), where D is the Blau index, P is the percentage of board members in each category and n is the board size. The Blau index values range from 0 to 0.5, the latter occurs when the board is equally balanced (i.e. each gender represents 50 %). Therefore, the maximum value of the Blau index occurs in the case of an equally balanced board when both genders are represented in equal proportions.

We also use the Herfindahl index to measure education diversity on three categories namely undergraduate degree (e.g. BSc), postgraduate degree (e.g. Master and/or PhD) and non- university degree (e.g. technical secondary school and associate degree).

We agree with Wintoki et al (2012) and Boone et al (2007) that Tobin’s Q is a measure of growth opportunity rather than a measure of financial performance.

Although higher order of lag length result in more exogenous instruments, the use of internal instruments may cause the problem of weak instruments as the number of lags increases (Wintoki et al. 2012). However, we used different lag length as an empirical trade–off.

Adams and Mehran (2012) and Mateos de Cabo et al (2012) argue that ROA is the most widely used measure of profitability as it examines the returns generated from a company’s assets. Moreover, there are some limitations to the ROE as it is mainly used as a measure of return on shareholders’ funds. Moreover, it might provide inaccurate measure of profitability when companies have high leverage ratio.

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Title: The Impact of the Dual Board Structure and Board Diversity: Evidence from Chinese Initial Public Offerings (IPOs)
Authors: Hisham Farag
Chris Mallin
Publication date: 11-04-2015
Publisher: Springer Netherlands
Published in: Journal of Business Ethics / Issue 2/2016
Print ISSN: 0167-4544
Electronic ISSN: 1573-0697
DOI: https://doi.org/10.1007/s10551-015-2649-6

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