Board diversity matters: assessing ESG performance through the lens of firm size

Abstract

Purpose: This study investigates whether board diversity (BD) affects environmental, social and governance (ESG) performance, focusing on ESG dimensions. Design/methodology/approach: This study uses data from FTSE All-Share firms spanning 2011-2021. It uses ordinary least squares regressions on how BD impacts ESG performance, focusing on the environmental, social and governance dimensions. In addition, to counter potential endogeneity bias, generalized method of moments estimator is used. Findings: The research reveals a positive and significant effect of BD on ESG performance, with cultural and independence diversity having a particularly strong impact. The findings also show that the effects of BD on ESG performance vary across dimensions, with cultural and independence diversity positively influencing environmental and social dimensions, while expertise diversity has an insignificant impact. All three types of diversity (cultural, independence and expertise) positively affect governance dimensions, regardless of firm size. Practical implications: The results highlight the importance of BD in improving ESG performance, adding valuable insights to the corporate governance literature. Therefore, it is essential for regulators and policymakers to consider the practical implications of these results, emphasizing the need to prioritize BD for enhanced corporate board effectiveness. Originality/value: This study contributes to the existing body of knowledge in corporate governance by examining the impact of BD on ESG performance. The research underscores the importance of BD, highlighting its essential role in driving ESG performance.