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What Makes Better Boards? A Closer

Look at Diversity and Ownership

Walid Ben-Amar, Claude Francoeur,1 Taeb Hafsi1 and Ral Labelle1

Telfer School of Management, University of Ottawa, 55 Laurier East, Ottawa, Ontario K1N 6N5, and1HEC Montreal, 3000 Cte-Sainte-Catherine Road, Montreal, Quebec H3T 2A7, Canada

Email: [email protected], [email protected], [email protected], [email protected]

This study investigates the joint effect of corporate ownership and board of directorsdiversity configurations on the success of strategic merger and acquisition (M&A)decisions. Board diversity is defined as the extent to which its demographic diversity asmeasured by the culture, nationality, gender and experience of its directors complementsits statutory diversity. A theoretical framework linking ownership, board diversity and

M&A strategic decision making is proposed and tested. Based on a sample of 289 M&Adecisions undertaken by Canadian firms over the period 20002007, demographic diver-sity is found to have a clear and non-linear effect on M&A performance while statutorydiversity is of limited influence. Ownership is found to influence the effect of diversity,making the relation finer and more precise. This has practical implications. First,statutory diversity is not sufficient for well-performing boards. Also, ownership is animportant factor. The most advocated board diversity aimed at insuring the boardsindependence is not valid across all ownership configurations. From a public policyperspective, results provide support for the principles-based approach in governance.Governance regimes should encourage the search for a balance between board diversityand the need for cohesion that best serves the firms purpose and obligations.

Introduction

Boards diversity and its effect on firm perform-ance have been extensively studied and yet it

seems that we know little about the issue. Con-flicting findings, unclear or unclean methodolo-

gies, leave scholars and managers in a quandary.The first important reason for such a situation is

the dominant use of agency theory premises thatstatutory diversity (SD) is all that counts to

control management and provide it with incen-tives to protect shareholder value (Fama and

Jensen, 1983). SD is mandated by law or bestpractices and is often reduced to board members

independence from management. The secondimportant issue is the belief that there is a linear

relationship between diversity and performance.This is questioned by both logic and extant

research (Manzoni, Strebel and Barsoux, 2010;Milliken and Martins, 1996). The third important

issue is ownership. It is increasingly believed thatdifferent owners pursue different goals, even when

they share the same kinds of assets. This may havesignificant effects on firm governance and ulti-

mately performance (Sur, 2009).In this study, we propose what we believe is a

more convincing theory and finer empirical find-ings by considering these issues. To do so, we

recognize that SD has an effect, but we considersuch effect to be contingent on individual charac-

teristics of actual board members, or demo-graphic diversity (DD), and on the nature of

owners. SD, and in particular DD, are measures

Claude Francoeur and Ral Labelle gratefully acknowl-edge financial support from the Social Sciences andHumanities Research Council of Canada (Grant 410-

2011-2639), the Stephen A. Jarislowsky Chair in govern-ance and the CGA Professorship in Strategic FinancialInformation. Taeb Hafsi acknowledges support fromthe Montreal Interuniversity Institute of Governance(IGOPP), from the Rebrab, and from the Somersfamilies.

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British Journal of Management, Vol. 24, 85101 (2013)

DOI: 10.1111/j.1467-8551.2011.00789.x

2011 The Author(s)British Journal of Management 2011 British Academy of Management. Published by Blackwell Publishing Ltd,9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.

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of pluralism or heterogeneity in the composition

of boards of directors. This is seen as breeding ahigher level of openness and decision making ana-

lytical quality, and despite expected difficulties in

reconciling the resulting variety of perspectives,

leading to better decisions (Erhardt, Werbel andShrader, 2003; Watson, Kumar and Michaelsen,1993).

In the second section of the paper, our exami-nation of the literature supports these assertions

and is used to build a theoretical model anddevelop hypotheses. Then, we subject the model

and hypotheses to various statistical tests using asample of 289 merger and acquisition (M&A)

decisions undertaken by Canadian firms over the20002007 period. As in McDonald, Westphal

and Graebner (2008), we focus on M&A decisionsas it might reasonably be expected that boards

exercise greater influence on acquisition perform-ance than on overall firm performance, the latter

being related to a wider array of organizationaland environmental factors (Hermalin and

Weisbach, 2001).The following section describes the findings,

and in particular the joint effects of SD, DD andownership on firm performance. In the final

section, these findings and the methods used arediscussed, and a few concluding comments and

suggestions for future research are offered.

Theoretical framework and hypothesesdevelopment

The question of what impact board characteristics

have on firm performance is among the mostextensively researched topics in the large body

of corporate governance research (McDonald,Westphal and Graebner, 2008). The first attempt

to explain performance, taking into account theinteractions among the factors that make up

diversity and independence, was Molzs (1988,1995). He developed a pluralism index to that

effect, and classified boards into managementdominated and pluralistic. In contrast to what we

are proposing in this paper, Molz (1988, 1995) didnot distinguish between DD and SD, lumping

them together, and did not take the firms owner-ship structure into account. Furthermore, his

model only integrated gender diversity while wealso include diversity of culture and experience as

measured by the presence of foreign directors and

the tenure of directors. These differences may

explain why Molzs (1988, 1995) proposition thatperformance is related to pluralism was not sup-

ported by his empirical investigations. Neithersocial (Molz, 1995) nor financial (Molz, 1988)

performance was found to be significantly relatedto pluralism.

The framework presented in Figure 1 structures

and motivates what we do. It underlines the dualbut complementary fiduciary and advisory gov-

ernance roles the board plays in strategic decisionmaking, given the firms ownership structure.

From a fiduciary or statutory perspective, theboard is deemed to indirectly influence firm per-

formance by focusing on decision control to mini-mize agency costs. This monitoring role, where

independence and related statutory board charac-teristics are assumed to ensure better representa-

tion and protection of minority shareholdersinterests, has been the main proposition of agency

theory (Fama and Jensen, 1983) and the focus ofmost governance research and reforms, such as

Sarbanes-Oxley. From such a perspective, boardeffectiveness is measured in terms of its independ-

ence from management or SD. This means thatthe diversity of incentives between outsiders and

insiders represented on the board should helpthem meet their fiduciary obligations (Fama,

1980; Hillman, Nicholson and Shropshire, 2008;Jensen and Meckling, 1976) and keep managerial

discretion within proper bounds. However, theresults of empirical research on the relation

between performance and statutory independenceare mixed (Bhagat and Black, 2002). This may not

come as a surprise given that in theory, asdescribed in our framework, the main goal of

fiduciary governance is to minimize agency costs,thus only indirectly affecting the strategic decision

making process. This is the basis of our firsthypothesis where we test the relationship between

SD and M&A performance.

In contrast, the left-hand side of the proposedframework asserts that board members are a key

resource and directly contribute to better strategicdecision making (Raatikainen, 2002). By ques-

tioning, criticizing, advising and counselling, theyenhance the strategic decision making process.

They also provide access to channels of informa-tion between the firm and environmental contin-

gences, preferential access to resources, andlegitimacy (Hillman, Withers and Collins, 2009,

p. 1408). So, given that SD may be necessary but

86 W. Ben-Amar et al.

2011 The Author(s)British Journal of Management 2011 British Academy of Management.

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not sufficient to materially influence corporatevalue, other theories based on the provision of

resources, competences and cultural values(Barney, 1991; Hillman, Nicholson and Shrop-

shire, 2008; Selznick, 1990) must be harnessed tocomplement the insights of agency-based theories

and to better understand the governance

performance relation. From this advisory per-spective, board effectiveness also requires a

diversity of cultures, experiences and genders,referred to as demographic diversity (DD), in

order to guide and contribute to organizationallearning and improved management strategic

decision making. The emphasis is on the directorsability to counsel and mentor rather than

monitor management. DD goes beyond SD,which mainly promotes financial literacy and the

need for a diversity of incentives between mana-gement and shareholders. Although minority

investors protection still matters, under this per-spective a greater consideration is given to all

stakeholders and DD is intended to foster greaterpluralism on the board.

We define board diversity or pluralism as theextent to which its demographic characteristics

complement its statutory characteristics. DD is a

broad construct (Hambrick and Mason, 1984)that may include measurable demographics

including innate characteristics which are social,racial, cultural diversity, and acquired character-

istics related to life experience. In this research,DD refers to the participation of women and

foreign directors with diverse cultures on theboard as well as to the experience of directors as

measured by their tenure.1 Knowledge and com-

petences per se are seen as exogenous. In otherwords, all firms are assumed to select their direc-

tors with the objective of optimizing the level ofknowledge and competence obtained. It is their

decision relative to the mix of SD and DD whichmay make a difference.

Board diversity is expected to be positivelyrelated to firm performance, especially in situa-

tions of complex decisions, because both DD andSD should enhance the boards overall qualifica-

tions and lead to better debates, thus triggering

1Racial diversity on boards was not included in our indexas this information was not available in the proxy state-ments from which we manually collected the data. To thebest of our knowledge, this information is not availablein any other public database in Canada.

Figure 1. Ownership, diversity in corporate governance and board strategic decisions: theoretical framework

What Makes Better Boards? 87


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better M&A decisions (Erhardt, Werbel and

Shrader, 2003; Watson, Kumar and Michaelsen,1993). Our research design distinguishes the effects

of statutory diversity or highly recommended

best practices from voluntary DD on firm per-

formance.This leads to oursecond hypothesis thatthere is a relationship between a firms level of DDand the success of its M&A decisions. However, as

in Luis-Carnicer, Martnez-Sanchez and Prez-Prez (2008) and because heterogeneous groups

have to work through their communicationproblems and conflicts to end up making better

decisions, we expect a curvilinear relationshipbetween DD and M&A performance.

Agency theory and recent governance reforms,which are mainly concerned with SD, have been

respectively formulated and initiated in thecontext of the US capital market where corporate

ownership is relatively more widely held than else-where in the world (La Porta, Lopez-De-Silanes

and Shleifer, 1999). Furthermore, Sur (2009) andKlein, Shapiro and Young (2005) have shown

that governance arrangements and firm perform-ance are related to ownership characteristics.

Thus, our last hypothesis concerns the presumedjoint effect of ownership and governance configu-

rations on performance.Referring to the theoretical framework pre-

sented in Figure 1, we shall now first justify whywe distinguish board of directors SS and DD

given the firms ownership structure, then organ-ize the relevant governance and M&A literatures

and finally develop hypotheses on their relativeeffects on M&A performance.

Statutory board diversity

Statutory board diversity (SD) refers to theregulation-mandated or highly recommended

governance best practices or guidelines putforward in several countries.2 SD recommenda-

tions are based on the assumption that a board of

directors independence from managementenhances its monitoring function and indirectly

improves performance (Fama and Jensen, 1983;John and Senbet, 1998). SD includes regulated or

recommended governance practices, including inparticular a higher proportion of outside directorson the board and the separation of the functions

of CEO and chairperson of the board, generallyreferred to as the leadership structure. These are

designed to foster a greater diversity of interestsor incentives than if executive directors or domi-

nant shareholders were controlling the board. Italso includes such other best practices as encour-

aging share ownership by directors to furtheralign their interests with those of all shareholders.

Theoretical and empirical governance research(Dalton et al., 1998; John and Senbet, 1998) has

examined most of agency theorys propositions,in particular that the board of directors monitor-

ing function is an important pillar of a firms cor-porate governance system. As described on the

right-hand side of Figure 1, from that fiduciaryperspective, SD is assumed to indirectly improve

the boards effectiveness in creating value throughminimizing agency costs. In other words, loss to

the principal resulting from interests divergencemay be curbed by imposing governance or deci-

sion control structures to the agent. In so doing,agency costs are minimized, which indirectly

affects value creation.To examine SD, we build a SD index based on

four proxies, all widely used in the governanceperformance empirical literature, to measure the

boards independence. These are the leadershipstructure, the proportion of outside directors in

total board membership and the levels of owner-

ship by inside and outside directors.Empirical tests of the relation between tradi-

tional proxies for SD and firm performance aregenerally inconclusive (Dalton et al., 1998).

According to Bhagat and Black (2002, p. 265), apriori, it is not obvious that independence (without

knowledge or incentives) leads to better directorperformance than knowledge and strong incen-

tives (without independence). This may not comeas a surprise for two reasons. First, according to

stewardship theory, there are situations whereexecutives as stewards [including those that are

sitting as directors] are motivated to act in the bestinterests of their principals (Davis, Schoorman

and Donaldson, 1997, p. 24). Second, as shown in

2For instance, in the USA, listed companies must have amajority of independent directors on their board(section 303A.01 of the New York Stock ExchangeListed Company Manual). Canada employs a principles-based approach to corporate governance through theimplementation in National Instrument 58-101 andNational Policy 58-201 of best practices guidelines. Thisapproach is in combination with a mandatory Statementof corporate governance practices in the firms annualreport or proxy statement as to the extent of compliancewith such guidelines.



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our framework, according to agency theory the

main goal of fiduciary governance is to minimizeagency costs, and thus improve performance,

though indirectly. Agency costs, and the effect of

SD, may be particularly important in major stra-

tegic decisions such as M&As, which justifies ourdesire to test the following hypothesis:

H1: There is a positive relationship between a

firms board SD and the quality of its boardstrategic decisions.

Demographic diversity

In theprevioussection,we referred to thestream offiduciary governance research which mainly

resorts to agency theory to examine the board ofdirectors effectiveness. We now turn to advisory

governance (left-hand side of Figure 1), whichfocuses on theboardas a provider of keyresources.

There is substantialevidence(see Hillman, Withersand Collins (2009) for an overview) that boards of

directors play an important advisory role in cor-porate strategic decisions. From this advisory per-

spective, DD as more precisely specified later inthis section is assumed to enhance the skills and

general competence of boards of directors anddirectly impact strategic decision making and per-

formance. According to Hillman and Dalziel(2003) and Westphal (1999), directors are in a

position to affect strategy by providing advice andsocial support to the CEO. They can also affect the

organizational context within which strategic deci-sions are made (McNulty and Pettigrew, 1999).

Hambrick and Mason (1984), focusing on thetop management team, argue that demographic

heterogeneity enhances the ability to deal with

strategic change. More recently, building on theirwork on upper echelons of management, Ham-

brick (2001), Canella, Park and Lee (2008) andHambrick, Werder and Zajac (2008) extend the

theory to address the issue of diversity on theboard. Raatikainen (2002) asserts that diverse

groups make better decisions, which may leadto better performance. Diversity improves the

knowledge base, the creativity and the quality ofthe decision making and monitoring processes of

a group (Erhardt, Werbel and Shrader, 2003;Watson, Kumar and Michaelsen, 1993). Further-

more, Milliken and Martins (1996) suggest thatdiversity of qualifications engenders favourable

board dynamics and fosters innovative solutions

to the strategic issues that the organization is con-

fronted with. There may also, however, be anintriguing mediating effect of beliefs in diversity

on group performance, as developed by van Knip-penberg, Haslam and Platow (2007). According

to this psychological perspective, when groupsvalue diversity they may be better able to use it

fruitfully. In contrast, when either diversity isunexpected or its impact is downplayed, its effects

may be depressed.3 Nevertheless, board DD could

also produce integration difficulties, result inpoorer strategic decisions in contexts that require

fast decisions (Milliken and Martins, 1996), andeven backfire on company boards (Manzoni,

Strebel and Barsoux, 2010). In the context oftop managers, Hambrick, Cho and Chen (1996)

indicate that heterogeneity is negatively relatedto the possibility of reaching a consensus in a

decision making process.4

According to them, het-erogeneity slows down the process by which strat-

egy is formulated and could considerably impairthe decision making performance of managers

and, ultimately, of the firms board members.Diversity increases creativity (Pelled, Eisenhardt

and Xin, 1999), but also conflict (Jehn, 1995), anddecreases commitment and communication (Tsui,

Egan and OReilly, 1992).Prior research on diversity has mostly exam-

ined the relation between one factor of DD at atime and organizational performance. In this

research, we test the joint effect of gender, cultureor nationality and tenure of board members on

M&A performance.

Gender diversity. The complexity of board hete-

rogeneity effects may explain that results of extantresearch on the relationship between board and

top management gender diversity and financialperformance are mixed and inconclusive (Adams,

Gupta and Leeth, 2009; Carter, Simkins andSimpson, 2003; Daily, Trevis and Dalton, 1999;

Erhardt, Werbel and Shrader, 2003; Haslamet al., 2010; Shrader, Blackburn and Iles, 1997).

For instance, Adams, Gupta and Leeth (2009)

3We gratefully acknowledge that this argument has beensuggested and developed by one of this papers reviewers.4One of the reviewers wondered whether consensus wasnecessary. We believe that in major M&A decisions, it isimportant for the board to show a united front. A simplemajority decision is an ominous signal that may cast ashadow on the value to the firm of the M&A operation.



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find no difference in firms financial performance

around the appointment of a woman or a man asa CEO in the USA. Haslam et al. (2010) also

report that there is no association between

womens board representation and accounting-

based performance measures but they find a nega-tive correlation with stock-based performancemeasures.

In exploring the relationship further, Fran-coeur, Labelle and Sinclair-Desgagn (2008)

document a positive relation between genderdiversity and financial performance in the case of

firms operating in riskier environments. The pres-ence of women on boards appears to help deal

with more complex strategic issues. Recently,Adams and Ferreira (2009) show that female

directors have a significant impact on boardinputs and governance. More specifically, gender-

diverse boards allocate more effort to monitoringmanagement, but the true relation between

gender diversity and firm performance is complex.For instance, these authors find that the relation

between gender diversity and firm performance iscontingent upon the quality of governance. We

find that diversity has a positive impact on per-formance in firms that otherwise have weak gov-

ernance, as measured by their abilities to resisttakeovers. In firms with strong governance,

however, enforcing gender quotas in the board-room could ultimately decrease shareholder

value (Adams and Ferreira, 2009, p. 308).Overall, empirically, gender diversity is found to

be either positive or neutral vis--vis performance.

Culture or nationality diversity. Oxelheim andRandy (2003), Choi, Park and Yoo (2007) and

Ruigrok, Peck and Tacheva (2007) have explored

the effect of foreign directors representationon the boards processes and dynamics and

ultimately on firm performance. Their findingsconfirm the dialectic mentioned earlier. On the one

hand, in agreement with the resource dependenceperspective, foreign directors cultural knowledge

and expertise in foreign markets is beneficial(Ruigrok, Peck and Tacheva, 2007). In particular,

foreign directors extend board international expo-sure and its network of contacts, an important

source of competitive advantage in internationalacquisition strategies. On the other hand, diversity

of nationalities on the board may create commu-nication and integration problems. In particular,

misunderstandings and conflicts among board

members canaffect thetime value andthe accuracy

of decisions (Ruigrok, Peck and Tacheva, 2007).Empirical tests generally confirm the positive

effect of foreign directors on firm performance.Oxelheim and Randy (2003) document that

Swedish and Norwegian firms with Anglo-American outside directors have higher valua-

tions than comparable firms without foreignoutside directors. Choi, Park and Yoo (2007) also

report a positive effect of foreign directors onfirm performance in the Korean context. So,

in general, international diversity among board

members can be expected to have a positive effecton performance.

Directors tenure. According to organizational

demography research, tenure in a group has aneffect on firms performance (Kosnik, 1990), stra-

tegic actions, and strategic change (Golden andZajac, 2001). As their association with a board

lasts, directors experience and familiarity withthe corporations specific governance issues and

problems increase (Kesner, 1988). Directors withlonger board experience also better understand

the ongoing management team practices and cancarry their oversight responsibilities with greater

skills. Experienced directors can also contributeto company strategy (Bilimoria and Piderit, 1994)

and have a better understanding of the firmsresources and operations (Alderfer, 1986). In con-

trast, newly appointed directors may be capturedby the incumbent CEO (Finkelstein and Ham-

brick, 1988). However, tenure diversity may havenegative consequences as well. Katz (1982) sug-

gests that longer tenure is associated with greaterrigidity, increased commitment to established

practices and procedures, and increased insula-tion from new ideas. According to the manage-

ment friendliness hypothesis (Vafeas, 2003),directors with long board tenure are less effective

at monitoring management, which increases thechances of CEO entrenchment. Vafeas (2003)

argues that extended tenure may reduce intra-group communications and lower the quality of

firms decisions. This study shows that the partici-

pation of senior directors in the compensationcommittee is associated with higher compensation

payments to the firms CEO.In summary, long tenure is useful and leads to

better performance, but pushed to the extreme itleads to groupthink and the tendency to suppress

conflicts, even at the expense of good decisions.



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Overall, DD is seen as having a positive effect.

But there are situations where negatives are alsoobserved. This mixed evidence suggests a non-

linear relationship with performance. Diversity

has to be significant before it can be domesticated

and made acceptable to all board members (vanKnippenberg, Haslam and Platow, 2007). Whenit is, it improves performance. This leads to our

second hypothesis.

H2: There is a non-linear relationship between

a firms board DD and the quality of its boardstrategic decisions. Low levels of DD diminish

the quality of board strategic decisions whilehigher levels of DD enhance it.

The ownership factor in governance

Finally, Figure 1 shows that the diversity of theboard or its composition is affected by the firm

ownership configuration. This reflects the findingsof studies conducted in the USA by Sur (2009)

and in Canada by Klein, Shapiro and Young(2005). Sur (2009) shows that board composition,

strategic decisions and performance are all relatedto ownership. He proposes three ownership types

other than the widely held firms: institutional,family and corporate blockholder. For dispersed

outside investors, the main concern is the qualityof SD to ensure that managers opportunism is

kept in check. Institutional behaviour is geared atmaximizing shareholders value within well diver-

sified portfolios; corporate blockholder behaviouris guided by the strategy of the dominant owner;

and owners of family firms are less diversified anddominated by ideological or value considerations

(Sur, 2009). In Canada, Klein, Shapiro and

Young (2005) also conclude that the effect ofboard independence or SD on performance differs

by ownership category.So, a higher level of diversity, be it SD or DD,

is not a panacea for all types of firms in boardstrategic decision making. Using a similar typol-

ogy as in Sur (2009), we argue that firms charac-terized by high ownership concentration such as

family firms will benefit more from low levels thanfrom high levels of SD and DD.

Introducing DD in the board at low levels maybring new ideas and perspectives to the directors

representing institutions or the controlling familywithout threatening their coherence. In general,

there are indeed clear advantages to close-knit

family governance, first in terms of coherence,

trust (Eddleston et al., 2010; Steier, 2001) andlong-term orientation of board members (Le

Breton-Miller and Miller, 2006).Introducing SD in family firms boards reduces

reluctance towards R&D investment (Chen andHsu, 2009) and voluntary disclosure (Chau and

Gray, 2010). Anderson and Reeb (2004) have alsoshown that public firms where independent direc-

tors balance family board representation performbetter. However, higher levels of diversity are

likely to lead to conflicts and loss of firm-specific

knowledge detained by family members (Dyer,2006; Jones, Makri and Gomez-Mejia, 2008). We

therefore suggest that board strategic decisionmaking may be adversely affected when the levels

of SD and DD in place are too high. This leads toour last hypothesis.

H3: In the presence of high ownership concen-tration, low levels of diversity (SD and DD)

enhance the quality of board strategic decisionswhile higher levels of diversity diminish it.

Control variables

Prior research identifies several variables that aredeemed to affect M&A success. A high relative

size of the target company to the acquirer(Asquith, Bruner and Mullins, 1983; Kohers and

Kohers, 2000) and paying in cash (Huang andWalking, 1987; Travlos, 1987) are factors that are

generally viewed as favourable by the market. Incontrast, acquiring public targets, compared with

private ones, is generally associated with lowerperformance (Faccio, McConnel and Stolin,

2006; Fuller, Netter and Stegemoller, 2002).Cross-border transactions create value for the

acquiring firm by exploiting market imperfectionsin outside markets (Eun, Kolodny and Scheraga,

1996). However, integration costs and culturalproblems could undermine these gains. Empirical

results have been somewhat mixed (Cakici, Hessel

and Tandon, 1991; Eun, Kolodny and Scheraga,1996; Faccio, McConnel and Stolin, 2006).

Technology-based industries are characterized byhigh growth potential and high risk due to the

uncertainty associated with the complexity oftheir activities and the unproven nature of tech-

nology used within these companies (Kohers andKohers, 2000, 2001). Finally Datta, Pinches and

Narayanan (1992) note that the relatedness,



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among the acquiring and target firms activities, is

a key determinant of the level of value creation intheir merger. Synergies are indeed easier to

achieve when the merged firms operate in the

same type of business (Rumelt, 1982).

Data and methodology

In this section, we first explain why we selected a

sample of M&As conducted by Canadian firms toexamine the joint effect of ownership and diver-

sity on the success of M&A strategic decisions.We then present the dependent and independent

variables of our empirical model.

Institutional setting and sampling procedure

The Canadian institutional setting offers a particu-

larly good laboratory to study ownership anddiversity configurations and their joint relation

with performance. With regards to ownership, itsmix of closely and widely held firms is representa-

tive of corporate ownership around the world(Denis and McConnell, 2003; Faccio and Lang,

2002; La Porta, Lopez-De-Silanes and Shleifer,1999). Yet, its mostly voluntary principles-based

approach to corporate governance is significantlydifferentfrom the US mostly rules-basedapproach

(Broshko and Li, 2006) and the resulting manage-rial latitude may thus be more conducive to a

broader diversity. Our final sample consists of 289

observations covering 206 acquiring firms. Table 1summarizes the sample selection process.

Empirical model

The resulting model is described in more detaillater but can be summarized as follows:

CAR constant

STATUTORY DIVERSITY

DEMOGRAPHIC DIV

it

it

it

=++

1

2

_

_ EERSITY

INST FAM RELSIZECASH TARGETPU

it it it

it it

+ + ++ +

3 4 5

6 7 BB

CROSSBORDER

HIGH TECH RELATEDit

it it

++ +

8

9 10_

where CARit is the cumulative abnormal return

around the announcement date. Dependent andcontrol variables are described in Table 2. We

now turn to discussing both the dependent and

the independent variables.

M&A performance (dependent variable). M&As

offer the right context within which to testthe contribution of diversity in governance to

enhanced decision making. M&A decisions are

strategic, complex and fraught with uncertainty.Also, complex strategies and decisions of M&As

are typically under the responsibility of top man-agement and the board of directors. Given the

uncertainties related to both the transactionitself and the future integration of the firms

involved, M&As are likely to reveal disagree-ments among and a greater involvement of board

members.In line with research on the impact of M&As on

shareholders wealth, we use the Brown andWarner (1985) event study methodology to assess

the success of M&A strategic decisions.5

Diversity configuration. If individual director

characteristics interact to produce the boards

behaviour, their diversity may constitute either astimulus or a challenge (or both) to the boardseffectiveness and innovativeness. Therefore,

rather than only examining the relationshipbetween directors individual characteristics and

performance, we combine all dimensions of diver-sity or pluralism discussed earlier into two indices,

SD and DD, to examine their interaction andeffect on the success of M&A strategic decisions.

The construction of our diversity indices isstraightforward. As in prior research that calcu-

lated governance indices (e.g. Black, Jang and

Kim, 2006; Gompers, Ishii and Metrick, 2003) we

5This short-window event study methodology is widelyused in previous M&A studies (Bruner, 2002; McWil-liams and Siegel, 1997; Tuch and OSullivan, 2007). Itproduces the most statistically reliable evidence onwhether M&As create value for shareholders (Andrade,Mitchell and Stafford, 2001).

Table 1. Sample selection

Raw data from Thomson-SDC 941

Less: income trusts (294)

Less: overlapped transactions in estimation period (110)

Less: missing returns in CFMRC database (168)

Less: missin g predictor variables in SEDAR (80 )Final sample 289



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compute our index scores by adding points for

every characteristic that enhances the level ofdiversity of the board. Dichotomous variables

are given values of 0 and 1. As in Dittmar andMahrt-Smith (2007) and Francoeur, Labelle

and Sinclair-Desgagn (2008) we split the sampleinto terciles for continuous variables to rank

firms board diversity levels. These groups thentake values of 0, 1 and 2.6 The procedure is sum-

marized in Table 3.

Ownership configuration. To take ownership

into consideration, we rely on the same method-ology as La Porta, Lopez-De-Silanes and Shleifer(1999) and Faccio and Lang (2002) to measure the

ultimate voting and ownership rights held by thefirms largest blockholder. Sample firms are clas-

sified in three groups of owners: widely held, whenthere is no dominant owner at the 10% threshold

level; institutional investor, when the largestshareholder at the 10% threshold level is a

financial institution (e.g. mutual fund, pensionfund etc.); and family firms, again when the

largest shareholder at the 10% threshold level is afamily.

Control variables. The model controls forfactors that are identified in the literature as

potentially affecting stock market returns at theannouncement date of M&A transactions. These

factors have been mentioned earlier, and theirexpected relationships with performance are

summarized in Table 2.

6For a robustness check, we divided our sample by themedian or in quartiles and obtained similar results.

Table 2. Description of the ownership and control variables and hypothesized relationships

Hypothesized

relationship

Ownership variables

Widely held firms: dummy variable that equals 1 when there is no dominant shareholder at the 10% threshold or

when the largest shareholder is a widely held corporation

?

Institutional blockholder: dummy variable that equals 1 when the largest shareholder at the 10% threshold is an

institutional shareholder (for instance, pension funds and mutual fund managers) (INST)

+

Family firms: dummy variable that equals 1 when the largest shareholder at the 10% threshold is an individual or a

family (FAM)

+

Control variables

Relative size of the transaction to the acquiring firm market value prior to the deal announcement RELSIZE +

Method of payment, binary variable CASH +

Public status of the target (public or private), binary variable TARGETPUB

Cross-border transactions, binary variable CROSSBORDER ?

Target operating in the high technology sector, binary variable HIGH-TECH ?

Relatedness of the activities acquirer/target, binary variable RELATED +

The dependent variable is the cumulative abnormal returns for a three-day window around the M&A announcement date (-1, 0, +1),

CAR.

Table 3. Description of the independent variables and construc-

tion of the indexes

Independent variables of

interest

Construction of the index

Statutory diversity index (SD)

CEO is not chairperson

binary variable

0 if CEO is also chairperson;

1 if not

Percentage of independent

directors

First tercile: 0 mark

Second tercile: 1 mark

Third tercile: 2 marks

Percentage of outside

directors ownership

(voting rights)




Percentage of insidedirectors ownership

(voting rights)

First tercile: 0 markSecond tercile: 1 mark


Demographic diversity index (DD)

Percentage of women on the

board




CEO is a woman binary

variable

0 if the firms CEO is not

a woman; 1 otherwise

Percentage of foreign

directors (residence is

outside Canada)




Directors tenure (number of

years) within the firm

First tercile: 2 marks


Third tercile: 0 mark



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Results and analyses

Descriptive statistics and univariate analyses

Table 4 provides descriptive statistics. First, themean cumulative market model abnormal returns

(CAR_mm) obtained in the three-day windowaround the announcement date (-1, 0, +1) is posi-

tive and significant (1.4%, p = 0.01). The averageSD score is 3.75 and the median is 4.00. Board

DD measures its gender diversity, its cultural and

international exposure and its directors experi-ence within the firm. The average DD score is 1.93

while the median is 2.00. Results also show that42.2% of the firms in our sample are widely held,

25.3% are controlled by an institutional investorand 25.3% are controlled by a family. The propor-

tion of family firms in our sample is comparablewith what it is in previous Canadian studies.

The average relative deal size to the biddermarket value is 28.1%, and 58.8% of the transac-

tions are paid exclusively in cash. Moreover, 28%of the transactions involve publicly held targets

while 54% involve foreign targets. Table 4 alsoshows that 17.0% of the acquired companies

belong to the high-tech industry and 57.4% of thetransactions involve an acquirer and a target from

related industries (same three-digit SIC code).Table 5 presents the distribution of the SD and

DD indices.

Table 6 presents the distribution of SD and DD

by type of ownership. Part (a) shows that firmscontrolled by institutional investors exhibit the

highest level of SD (average 4.14) among the firmsof our sample, followed by widely held firms

(average 3.68) and family controlledfirms (averagelevel 3.52). Table 6, part (a), also shows that the

difference between SD scores of firms controlledby institutional investors and the two other groups

is statistically significant. In contrast, family firmsdo not seem to differ from widely held firms in the

level of SD. These results suggest that institutionalinvestors promote more intensely the adoption of

best practices governance guidelines.Table 6, part (b), compares the level of DD

between the three groups of owners. Widely held

firms exhibit the highest average DD score (2.14),followed by family firms (1.74) and institutionalinvestors firms (1.71). The results also show that

the DD level observed in widely held firms is sta-tistically higher than the level achieved by family

and institutional investors firms (at the 10% level).Taken together, the results presented in Table 6

show that owner identity has a significant effecton the diversity configuration of firms.

Table 7 presents a matrix of correlations

between independent and explanatory variables.The highest correlation coefficient is 0.338

(correlation between family and institutionaldummies). These results indicate that multicolline-

arity is not a serious problem in our multivariateanalyses.

Multivariate analyses

Table 8 presents the results of three ordinary least

squares regressions testing the three hypotheses of

Table 4. Descriptive statistics

Mean Median Standard

deviation

Independent variable

CAR_mm 0.014*** 0.012 0.078

Diversity

Statutory 3.758 4 1.423

Demographic 1.931 2 1.276

Ownership

Widely held 0.494 0 0.495

Institutional 0.253 0 0.435

Family 0.253 0 0.435

Control variables

Relsize 0.281 0.113 0.469

Cash 0.588 1 0.493

Targetpub 0.28 0 0.45

Crossborder 0.54 1 0.499

High-tech 0.17 0 0.376

Related 0.574 1 0.495

N 289

CAR_mm, cumulative market model abnormal return.

***p < 0.01.

Table 5. Distribution of observations by diversity score

Statutory

diversity

N Demograph ic

diversity

N

0 2 0 42

1 11 1 67

2 39 2 87

3 85 3 67

4 58 4 16

5 61 5 8

6 26 6 2

7 7

Total 289 289

Mean 3.8 1.9

Median 4.0 2.0

Standard deviation 1.4 1.3



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our theoretical framework of Figure 1 and includ-ing the control variables. In regression 1 we test for

a linear relationship between SD and DD(Hypothesis 1) and M&A financial performance.

In regression 2 we consider that the tested relation-ships between performance and board SD and

especially DD (Hypothesis 2) may not be linear.Thus, we include the squared values for board

diversity variables to test for the existence ofan inflexion point.Finally,in regression 3 we intro-

duce ownership dummies to test our third hy-pothesis of a joint interactive effect of board

diversity variables and owners identity on M&A

performance.As suggested by Aiken and West (1991), the

independent variables (SD and DD) are mean-centred to attenuate the problem of multicolline-

arity in our regression models when introducingquadratic terms. We also tested for multicollinear-

ityamong ourexplanatory variablesby computingthe variance inflation factors (VIF) for each of the

regressioncoefficients. As presented in Table 8, thehighest VIF value in our models is 2.13, which is

well below the cut-off value of 10 suggested byNeter, Wasserman and Kutner (1985).

Results of the first regression indicate that thelevelsof SDor DDof the board of directors are not

statistically related to the financial success ofM&As. We then use two quadratic regressions to

test the more plausible hypothesis of a non-linear

relationship between board diversity and M&Aperformance. The result of regression 2 shows a

non-linear relationship between the DD of theboard members and CAR at the time of M&A

announcement which is in line with our secondhypothesis. The coefficient of the DD variable is

negative and statistically significant whereas thecoefficient of its squared value (DD2) is positive

and significant, which is consistent with an asym-metric U-shaped curve. Figure 2 graphically rep-

resents the relationship between DD and M&A

performance. It suggests that introducing DD onthe board of directors has at first a negative effect

on the success of acquisition decisions, probablybecause the benefits of DD are counterbalanced by

problems related to integration difficulties. Butbeyond a certain level,7 DD starts enhancing the

boards knowledge base and ability to deal withcomplex strategic decisions and results in better

M&A decisions. In total, these results confirm oursecond hypothesis.

Regression 3 where ownership is introducedshows the same relation between DD and board

strategic decisions. Institutional and family own-ership also have a significant positive impact on

the dependent variable over and above the widelyheld firms. Figure 3 summarizes Table 8s results

7Technically, this level corresponds to the inflexion pointof the U-shaped curve, a value of 1.1.

Table 6. Descriptive statistics and comparisons of group means by type of ownership

One-way ANOVA Scheffe multiple group comparisons:

row mean column mean (p value)

Ownership Mean Standard deviation Frequency Widely held Institutional

(a) Statutory diversityWidely held 3.6853 1.4013 143

Institutional 4.1370 1.2618 73 0.4517

(0.085)*

Family 3.5205 1.5555 73 0.1648 0.6164

(0.719) (0.032)**

Total 3.7578 1.4228 289

p value 3.87**

(b) Demographic diversity

Widely held 2.1399 1.1903 143

Institutional 1.7123 1.1605 73 0.4275

(0.064)*

Family 1.7397 1.4816 73 0.4001 0.0274

(0.090)* (0.991)

Total 1.9308 1.2756 289

p value 3.89**

*p < 0.10; **p < 0.05; ***p < 0.01.



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Table7.

Pairwisecorre

lationsbetweenthestudysvariables

CAR_mm

SD

DD

IN

ST

FAM

RELSIZE

CA

SH

TARGETPUB

CROSSBORDER

HIGH-TECH

SD

0.030

DD

0.083

0.120**

INST

0.076

0.1

55***

0.100*

FAM

0.131**

0.097

0.087

0.3

38***

RELSIZE

0.121**

0.027

0.022

0.1

30**

0.045

CASH

0.038

0.138**

0.046

0.1

45**

0.179***

0.243***

TARGETPUB

0.218***

0.068

0.040

0.0

44

0.1

50**

0.064

0.30

8***

CROSSBORDER

0.123**

0.167***

0.086

0.1

18**

0.010

0.0

59

0.18

7***

0.212***

HIGH-TECH

0.084

0.032

0.017

0.0

29

0.008

0.023

0.07

2

0.0

56

0.1

58***

RELATED

0.012

0.090

0.0

52

0.0

49

0.128**

0.088

0.03

4

0.148**

0.020

0.072

Allcorrelationsarebas

edonthefullsampleof289observations.INST

,dummyvariablethatequals1whenthelargestshareholderatthe10%thresholdisaninstitutionalshareholder;

FAM,dummyvariable

thatequals1whenthelargestshareholderatth

e10%thresholdisanindividualorafamily;RE

LSIZE,valueoftransaction/acquirersmarket

value;CASH=

1

ifmethodofpaymentiscashonly,0otherwise;TARGETPUB=

1iftargetispubliclytraded,0iftargetisprivate

;CROSSBORDER=

1iftargetnationisnot

Canada,0ifitis;

HIGH-TECH=

1iftargetisoperatinginthehightechindustry;REL

ATED=

1ifthree-digitSICcodeofacquirer

andtargetarethesame,0ifnot.

*p

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