Board family diversity and firm performance

Purpose Many researchers argue that board diversity leads to prudent managerial decisions and results in better firm performance. The authors contend that a firm may not realize the full benefits of board diversity when all board members belong to the same family. The purpose of this study is to examine the relationship between family diversity on corporate boards and firm performance. Design/methodology/approach The study employed a two-step system GMM (generalized method of moments) approach to analyze the longitudinal panel data of 2,655 firm-year observations collected from Bangladeshi firms listed on the Dhaka Stock Exchange (DSE) between 2000 and 2019. In addition, the study used difference-in-differences (DiD) regression to address the endogeneity. Findings The findings suggest that board family diversity contributes to better firm performance. This effect is partially mediated by effective expense control. The results are robust to alternative measures of board family diversity, including the Blau index, and to different econometric approaches. Practical implications While board diversity is promoted for improving decision-making and performance, this study emphasizes that family composition is a crucial aspect of diversity. Firms where all nonindependent or nonrepresentative directors belong to the same family may suffer from limited diversity, missing out on the benefits of diverse family resources. By examining how the representation of different families on the board influences governance and performance, this research offers insights for policymakers, practitioners and investors. The findings suggest that promoting greater family diversity can improve board effectiveness and firm performance. Originality/value To the best of the authors’ knowledge, this is the first study to examine the impact of board family diversity on firm performance in an emerging economy. The findings contribute to the existing body of knowledge in corporate governance literature.