FODA

This study has some limitations that might warrant future investigations. Firstly, this research investigated the influence of board independence in the form of representation of ‘outside independent directors’ on firm performance and efficiency. The requirement of appointing outside independent members in the Jordanian boardrooms, was mandatory only from 2009. Hence, there were no independent directors before 2009 and that may have influenced the results of this study. Secondly, the research’s data relating to the CG variables, was manually collected from firm annual reports, to carry out quantitative analysis, however, annual reports may not be accurate. Therefore, future research may support this research’s evidence by using qualitative research methods, such as conducting face-to-face interviews. A third limitation is the inclusion of only one board characteristic, i.e. board composition, however, it is suggested that a future research direction would be to explore the effect of various other company board characteristics on firm performance and efficiency or agency cost. Forthly, the current study excluded financial firms, because these are managed by different rules and instructions, thus the sample size was decreased from 224 firms to 80, which is a limited number. Finally, the empirical analyses of this research are based on a single country setting. Future study can examine CG across different Arab countries with similarly shared cultures, economies, institutional settings and financial infrastructure. Additional future research may find that outside independent directors are considered an important resource to the firm in that they may provide advice, legitimacy and counsel, which enhance performance. Therefore, future research could use resource dependence theory by investigating certain board characteristics, such as gender, age, experience and qualifications, which may improve firm performance and mitigate agency cost. This study addressees the importance CG mechanisms within the industrial and services sector in Jordan, and provides a basis for other related research.

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Chapter Four: Paper Two

Board Gender Diversity, Firm Performance and Efficiency

in Jordanian Boardrooms: A Revisit of Resource

Dependence Theory

Jebreel Mohammad Al-Msiedeen1

PhD Student, School of Commerce, University of Southern Queensland, Toowoomba, Australia

Afzalur Rashid

Senior Lecturer, School of Commerce, University of Southern Queensland, Toowoomba, Australia

and Syed Shams

Senior Lecturer (Acting), Accounting and Finance Coordinator Learning and Teaching, School of Commerce, University of Southern Queensland, Springfield,

Australia.

1 _{Corresponding author: School of Commerce, West Street, University of Southern Queensland,} Toowoomba, 4350, Qld, Australia, +61 7 4631 5764; [email protected]

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Board Gender Diversity, Firm Performance and Efficiency in

Jordanian Boardrooms: A Revisit of Resource Dependence Theory

Abstract

Purpose – This study aims to examine the impact of board gender diversity in the form of the representation of ‘women on the board of directors’ on firm performance and efficiency, also termed firm’s agency cost, in the context of a developing country, by considering Jordan as a case study and taking the data from that nation’s listed firms.

Design/methodology/approach – By utilising data from 880 firm-year observations of non-financial firms listed on the Amman Stock Exchange for the period of 2006- 2016, and by employing two measures each for firm performance (return on assets and Tobin’s Q), and firm’s agency cost or firm efficiency (asset utilization and expense ratio), this study uses a regression model to test its hypotheses.

Findings – The results of the estimation of random effect regression indicate a non- significant and positive relationship between the number of women on the board of directors and the return on assets, Tobin’s Q and asset utilization. The random effect regression also produces weak evidence (significant in one of four measures) that there is a significant and negative link between board gender diversity and firm efficiency in terms of the expense ratio. These findings have passed many robustness checks. Therefore, the results do not support the predictions of resource dependence theory.

Research limitations/implications – The study’s data relating to the corporate governance variables, were manually collected from company annual reports to conduct a quantitative analysis, however annual reports may not be accurate.

Practical implications – The empirical evidence of this study does not support the gender quota law to increase the percentage of women on companies’ boards. Thus, the decision to appoint females to a company’s board should not be based on the view that gender diversity on corporate boards will promote the performance and efficiency of firms.

Originality/value – This study contributes to the literature on the practices of corporate governance mechanisms, such as board gender diversity in the context of developing countries, by considering Jordan as a case study.

Keywords Resource dependence theory, corporate governance, agency cost, firm efficiency, firm performance, board gender diversity, Jordan.

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Board Gender Diversity, Firm Performance and Efficiency in

Jordanian Boardrooms: A Revisit of Resource Dependence Theory

In modern companies, the separation of ownership and control leads to problems associated with this situation: so-called agency problems (Shleifer & Vishny 1997). Drawing on agency theory, company managers have the tendency to use the firm’s resources for their own benefit, not that of company owners (Jensen 1986). That is, whilste shareholders are interested in increasing their returns, managers are concerned with growing their wealth at owners’ expense (Agrawal & Knoeber 1996; Nazir & Afza 2018). Agency costs consist of the sacrifice of wealth by the shareholders and the potential costs associated with monitoring the managers (Jensen & Meckling 1976). As well, information asymmetry is another cause of these agency conflicts, where managers have more information than owners (Jurkus et al. 2011). Therefore, the appearance of agency problems in corporations, hinders firm performance by increasing the firm’s agency cost.

Interestingly, there are mechanisms in place, such as the board of directors, which can mitigate the non-convergence of interests (Brickley et al. 1994). Worldwide, the vast majority of firms are governed and managed by a board of directors (Hermalin & Weisbach 2003). The composition of the company board is a vital tool within the corporate governance (CG) structure. The company’s board is the most important internal control mechanism seeking to monitor corporate management activities to hinder managers from opportunistic behaviour (Fama & Jensen 1983).

The value added by the board of directors of a firm is twofold. Firstly, board members are expected to fulfil a variety of roles that include the monitoring of managers to reduce the company’s agency cost (Jensen 1993). It is argued that the “board of directors is only one of many institutional arrangements that have been invented for controlling agency cost” (Baysinger & Butler 1985, p. 120). Secondly, it may provide new external resources to companies (Pfeffer 1972). It is confirmed that boards of directors function “as vehicles for co-opting important external organisations with which they are interdependent” (Pfeffer & Salancik 1978, p. 167). Therefore, the board of directors can serve as monitors of a corporation’s management; they also serve as a vital device to provide external resources to the firm (Hillman et al. 2000).

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However, the financial crisis of 2008 and company scandals such as the bankruptcies of WorldCom and Enron in the United States, and HIH, Ansett and OneTel in Australias have led to rising shareholders’ concerns about the effectiveness of CG practices in organisations. As a consequence, there has been growing attention about promoting the effectiveness of the board of directors, especially ways of ‘cleaning up’ the firm boardroom (Liu et al. 2014; Wahid 2018).

Amongst these is the issue of board gender diversity. To maximise owner’s wealth, reports on CG (e.g., Higgs Report, 2003, Cadbury Report 1992, Sarbanes-Oxly Act 2002, Smith Report 2003 and Ramsay Report 2001) support many boardroom reforms (Rashid 2018), such as the participation of women on the board of directors (Ahmadi et al. 2018). For instance, the Higgs Report in the United Kingdom suggested females be included on firms’ boards (Adams & Ferreira 2009) specifically, in an effort to enhance the effectiveness of boards. Furthermore, these reforms have been promoted by many advocacy organisations, such as Catalyst (Marquardt & Wiedman 2016). Reforms to increase the number of women on the board of directors have extensively been adopted. Increasing efforts for gender diversity equality have led to a spread of laws and regulations that plan to increase women’s representation on companies’ boards across the world (Dale-Olsen et al. 2013; Bianco et al. 2015). It has been argued that these laws and regulations provide guidelines on board gender diversity, which make it obligatory upon firms to comply with laws and regulations (Saeed et al. 2016). For example, many countries have adopted specific legalisation to promote gender diversity in the corporate boardrooms (Francoeur et al. 2008; Armstrong et al. 2010). Botero et al. (2004) supported the presence of employment protection laws. In many countries around the world, the board of directors must now comprise 30-50% of females according to gender quotas (Hillman 2015).

In 2003, Norway introduced a gender quota law to increase the percentage of females on companies’ boards from 9% to 40% by 2005 (Ahern & Dittmar 2012). Until recently, Spain and France have followed Norway to support a gender quota law for a rise to 40% by 2015 and 2017, respectively (Adams & Ferreira 2009). In a similar move in Italy, women must take on 33% of Italian companies’ board positions by 2015 (Chapple & Humphrey 2014). The Netherlands has supported the idea of a gender quota law (Bøhren & Strøm 2010). Other countries, such as Australia, Canada and the United Kingdom, have issued soft laws based on ‘the comply or explain principle’, to encourage gender diversity in the corporate boardrooms (Kumar & Zattoni 2016). The

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reason behind the increasing participation of women on corporate boards is premised upon the idea that this has a positive influence on CG, and ultimately, on firm value (Green & Homroy 2018).

However, developing countries such as Jordan remain unregulated in terms of company board gender diversity. This is due to the fact that CG regulations, laws and rules are less developed and enforced (World Bank 2005; European Bank 2017). Regulations and rules that require increased board independence may lead to creating new opportunities for females to serve on firms’ boards. More recently, there has been a heated debate on the concept of board diversity in the CG literature, including how board gender affects firm performance and efficiency (e.g., Smith et al. 2006; Brammer et al. 2007; Rose 2007; Triana et al. 2013; Nguyen et al. 2015; Sila et al. 2016; Ahmadi et al. 2018; Green & Homroy 2018). The reasons behind the preference for board gender diversity can be categorised into two principal groups: firstly, social and individual justice and secondly, the business case. According to social justice principles, it is argued that as women constitute approximately half of the total population, they should hold half of the corporate board seats. Similarly, as claimed by proponents of individual justice, there should be support for the concept of the equal treatment of individuals (Kumar & Zattoni 2016). Drawing on business case justifications, gender diversity on firms’ boards is conducive to an increase in a firm’s number of options, and therefore, may make a positive mark on its creativity and the efficiency of its collective decision-making (Hillman 2015). This third justification is elaborated on at the end of Section 2.

This study tests whether board gender diversity lowers agency cost that in turn, ultimately improves firm performance in the context of a developing country by considering Jordan as a case study. The current study is noteworthy for the following four key reasons. Firstly, investigating firm efficiency or agency cost is interesting in that it may be argued that the company’s performance is enormously correlated with its agency costs (Bruton et al. 2002), and the CG literature has provided evidence that board gender diversity can reduce a firm’s agency cost (Jurkus et al. 2011).

Secondly, most of the earlier studies on gender diversity were using data from developed economies with firms featuring diffuse ownership, such as in Australia (Kang et al. 2007), Canada (Ben-Amar et al. 2013), Italy (Zona et al. 2013), and the United States (Carter et al. 2003; Hillman et al. 2002). Unfortunately, much less attention has been given to gender diversity issues in developing countries, such as

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Jordan (Wellalage & Locke 2013; Adams et al. 2015; Nguyen et al. 2015; Saeed et al. 2016). Therefore, there is not enough information or knowledge about the determinants of gender diversity in countries with different institutional, regulatory and legal systems. This study provides new insight into practices of CG in the context of a far less examined kind of institutional setting. The legal institutions in Jordan regarding CG, investor protections and accounting standards, are much less developed than those in developed countries.

Thirdly, with a unique ownership structure that differs from the developed markets, Jordan offers an exciting setting for the study of board gender diversity. A high level of ownership concentration is a distinct feature of the Jordanian firms sector. It has been asserted that 90 % of Jordanian firms are owned and controlled by families (Al-Azzam et al. 2015). By contrast, listed firms in developed countries are characterised by a high level of dispersed ownership.

Fourthly, unlike in developed countries, Jordanian firms are distinguished by an insider structure of CG. In Jordan, significant shareholders control most of the company’s decision-making as well as the appointment of board members. Therefore, gender diversity on boards may well be useful for countries such as Jordan, in which practices of CG are weak. It is argued that weakly governed firms may benefit from including more females on their boards, thus enhancing firm value. Gul et al. (2011, p. 314) pointed out that the gender diversity of a board “could act as a substitute mechanism for corporate governance that would be otherwise weak”.

Finally, with a unique culture that differs from Anglo-American ideologies, Jordan has a distinct cultural setting. It is argued that cultural differences can affect management actions, leadership and individuals’ behaviour. Furthermore, company management philosophies ordinarily develop in synchrony with the national culture (Wellalage & Locke 2013). It is timely to shed light on the notion of board gender diversity in the agency relationship, in the particular context of Jordan. Therefore, this study aims at examining the influence of board gender diversity on firm performance and efficiency, also known as agency cost, in 80 non-financial listed firms in Jordan, over an eleven-year period from 2006 to 2016.

The study proceeds as follows. In Section 2, corporate governance, firm performance and board gender diversity are discussed. In Section 3, board gender diversity in Jordan is explained. Selected previous studies on board gender diversity, firm performance and efficiency, are reviewed in Section 4, followed by a justification

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for the theoretical foundation of this study, in Section 5. In Section 6 the hypotheses for this research are developed. In Section 7, the research method is described. Section 8 deals with the presentation and discussion of the results. The final section offers a conclusion, the study’s limitations and its implications.

2 Good corporate governance, firm performance and board gender diversity

CG is a general concept that includes many aspects related to specific issues, including both theories and the actual board practices of executive and non-executive directors (Maassen 2002). Daily et al. (2003) describe governance as the mechanism board members use, firstly, to determine which organisational resources will be deployed, and secondly, to establish the resolution of conflicts of interest among the related parties in a company. The idea that the board of directors must include outside directors, with independence from company management, is not a new phenomenon. Chandler (1975, p. 75) stated: “If it is true that the board must steadfastly represent the stockholders in making a continuous evaluation of the chief executive officer’s (CEO) performance, then a board of predominantly (even overwhelmingly) outsiders logically follows”. Therefore, many of the earlier studies addressed a single question regarding the board of directors: does having more outside directors improve firm performance?

The structure of the board is closely related to the quality of CG mechanisms. From a review of the literature, it appears that weak governance practices and an inadequate protection of shareholder rights may lead to more agency problems. Hence, the presence of an active board of directors can avoid the opportunistic behaviour of directors, and determine the alignment of their aims with those of the firms’ shareholders (Rubino et al. 2017). Good CG attempts to effect the improvement of practices and systems, which make certain the accountability of managers (agents) and promote better firm performance. Recent proposals for CG reforms have emphasised the effectiveness of board gender diversity in the corporate boardrooms, for ultimately better CG (Brammer et al. 2007; Adams & Ferreira 2004).

Walt and Ingley (2003) define ‘board diversity’, from the point of view of CG, as the composition of the board and the commixture of characteristics, attributes, expertise, qualities and expertise, contributed by board members about corporate board processes and other decision-making. Pelled (1996) pointed out that there are two categories of diversity. The first set is demographic diversity, such as gender, academic

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level and race. The second set is non-visible attributes (e.g., skills, knowledge and individual capacities).

This study focuses on board gender diversity for many reasons. Firstly, there is growing attention paid to board gender diversity through legislation, such as for gender quotas, in many countries around the world (e.g., Spain, Norway, France, Canada and the Netherlands). Secondly, gender diversity is the most easily distinguished demographic characteristic in comparison to culture, ethnicity, religion and age, for instance. Finally, this study aims to support the idea of board gender diversity in Jordan, which is a setting where gender diversity is very low, external mechanisms of CG are ineffective, and ownership is concentrated. Furthermore, there are obstacles for women in the labour market, such as more female unemployment and lower wages.

Business case related arguments for gender diversity on boards, have been supported by research in a number of ways. Two main rationales are presented here. It has been confirmed that gender diversity plays a vital role in improving board monitoring, and women board members tend to take their tasks very seriously in such companies, which can lead to better CG, enhancing firm performance and reducing agency costs (Liu et al. 2014; Low et al. 2015). Singh (2007, p. 2131) has indicated that such corporations show that “they are responding to calls for increased diversity for better governance or better use of available talent”. Empirical studies by Liu et al. (2014) and Adams and Ferreira (2009), revealed that women managers tend to be more efficient in controlling activities, which may lead to more audit and management accountability. Hence, the findings of previous studies have noted that the increased diversity of the gender on corporate boards, is linked to better performance. In addition, the presence of females may develop management team performance, due to more gender diversity potentially leading to the exchange of a broader range of ideas, and therefore achieving better decision-making. These decisions can eventually lead to higher performance (Burgess & Tharenou 2002). Thus, gender diversity is a pivotal dimension of CG practices.

3 Board gender diversity in Jordanian boardrooms

Gender diversity is a relatively recent phenomenon in the CG literature (Gopalan & Watson 2015). Although CG practices have gained increasing international importance, as has improving government laws, regulations and rules to exercise more pressure on publicly listed firms to increase the number of more diverse boards (Wahid