Keywords

1 Introduction

Corporate governance concerns the actual behavior of firms, in terms of performance, efficiency, growth, financial structure, treatment of shareholders and other interesting parties and the rules and mechanisms under which firms are operating. Their normative framework is determined by the legal and the judicial system, and the financial and labor markets. Effective corporate governance has positive impact on their profitability, on investment returns through the efficient allocation of resources, on market value, on the creation of wealth and on firms’ contribution to the overall economy [1]. The board of directors is the main institutional mechanism of corporate governance, entrusted with legal obligation by the shareholders, to ensure their interests by taking responsible and accountable strategic decision and improve firm’s organizational value and performance [2, 3]. It is the main monitoring and controlling tool to ensure the reliability of the corporate governance structure and prevent fraud with the audit committee, and the adoption and implementation of audit activities [4, 5]. The composition of the board of directors affects the effectiveness of corporate governance concerning one of its goals, which is the elimination of fraud phenomena [6, 7]. The credibility of financial reporting system depends on the quality of board of directors’ governance [8, 9].

The number of independent directors, its tenure, its size, and its diversity contribute to disciplining and quality management, increase firms’ creativity and innovation and effectively solve problems [10]. Board diversity, as a variety of composition, includes race, nationality, ethnic backgrounds, gender, age, educational, functional, and occupational backgrounds, industry experience and organizational membership, and reflects society [11]. A greater diversity is company’s competitive advantage since it enhances information resources, a better understanding of the marketplace, and broadens the cognitive and behavioral range of the board [12, 13]. Differences in opinions, approaches and oversight perspectives encourage critical thinking, bring new ideas and interaction styles, and improve decision making process. Diversity creates more open communication environment and in combination of different qualification background, reduces both financial and nonfinancial information gap [14]. The integration of directors with different characteristics is the key to improve form’s performance [15]. Heterogeneous board including people with different demographic characteristics reduce the corporate risk in an uncertain environment by encouraging its monitoring and advisory role [16].

The aim of this study is to examine the effect of firm board diversity on firm performance. To do so, data from European firms operating in the retail industry are analyzed.

2 Literature Review

The board of directors are in charge of corporate governance and monitoring, and its characteristics including the influence of board gender diversity on corporate behaviors, affects firm performance [17], financial statements, and corporate risk, respectively [18]. Heterogeneous boards provide mitigation of conflict of interests between shareholders and managers, curtail the agency problem, raise organizational credibility, and eliminate the fraudulent activities [19].

The percentage of independent and non-executive directors in board of directors determine the likelihood of fraudulent activities [20]. The more independent members participate in the board, the greater its objectivity in decisions making process.

The role of female directors in board effectiveness is crucial since it broadens board’s perspective and differentiates its decision-making attitude. Women present different viewpoints and persist in well-informed decisions which are important for effective oversight [21]. They tend to closely supervise audit activities and seek to implement accountable procedures and practices. The are more likely to provide constructive criticism and independent thinking and to join monitoring committees charged with credible and transparent reporting [22]. Their decisions are more moderate, without much risk, risk-averse and less tolerant of self-interested and opportunistic behavior than men [23]. During their management, an improvement in the quality of the financial statements and an increase in the profits of the firms is observed [24]. Their business judgments are more ethical due to their higher ethical standards which strengthen the motivation of obeying the financial statement rules [25]. Gender representation improves board performance as well as corporate accounting and financial performance since women presence reduce accounting fraud and accounting conservatism increases significantly [26]. Higher rate of fraud detection is related to female leaders since they contribute significantly to reduce firms’ propensity to engage in fraud. Gender diversity improves financial reporting quality. Firms have better performance and superior governance quality with more female corporate leaders [17].

Age diversity is associated with working experience, impacts the process and the quality of decision making, and has effects on firms’ profitability. On the one hand, it improves the resources, knowledge, and networks of the board and on the other hand, it may suffer from cognitive conflicts and lower group cohesion [26]. Age is one of the characteristics that influence individual decisions, including risk taking behavior and commitment of fraudulent activities [27]. Maturity determines the level of prudence and conservative attitude and enhances the quality of the financial statements reported and improves market performance. Older mangers tend to be more conservative and more cautious. Young managers make riskier decisions, they are more creative with a greater risk appetite, and they are more likely to manipulate earnings and committee corporate financial fraud. The older executive age prefers lower risk due to the threat to financial security and is associated more to moral development and accurate diagnosis of information for decisions [28].

Based on the above analysis, the effect of board diversity on firms’ performance becomes obvious.

3 Research Methodology

To achieve the aim of this study the Refinitiv Eikon database, which includes financial analyzes from the global economy of listed firms [29] was analyzed. More specifically, the research sample consists of 213 listed firms belonging to the retail industry. This database was chosen as it covers almost 99% of the market capitalization and is therefore considered one of the most reliable. It includes data from 72,000 listed firms from around the world with quarterly and annual figures.

Finally, a random sample of 8 European countries was taken. The country from which most firms originate is Belgium (16%) and the country from which the fewest originate is Italy (9%). The size of 213 firms was selected based on the analysis of Saunders et al. [30] referring to the definition of a representative sample. Thus, the sample is considered as representative.

The collected data were analyzed using correlation analysis and panel data regression. The level of significance is set to 5%.

Firms’ performance is measured using three different variables: ROA, ROE, and Tobin’s Q. The variables of the research are presented in the following Table 1.

Table 1 Research variables
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4 Research Results

4.1 Correlation Analysis

To identify possible correlations between the examined variables, Pearson’s correlation coefficient is used.

Based on the following figure we obtain that ROA is positively correlated with gender diversity and board size, ROE is positively correlated with age profile and board size, while Tobin’s Q. However, all the above mentioned statistically significant correlations are found to be weak (Fig. 1).

Fig. 1
A 6 by 6 correlation matrix of R O A, R O E, Tobins Q, GENDIV, A G E P, and B SIZE. The matrix of GENDIV, A G E P, and B SIZE to R O A, R O E, Tobins Q, and GENDIV is highlighted.

Pearson’s correlation coefficient results

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4.2 Panel Data Regression Analysis

Three different panel data regression models are developed: one for each of the dependent variables.

Initially, Hausman’s test is used, to decide which model between the fixed effects and the random effects is more suitable [31]. In all the examined cased, the p-value of the test is lower than the level of significance. Thus, the test’s null hypothesis cannot be accepted, meaning that the fixed effects model is the proper model to be used.

The first model examines ROA as the dependent variable. Based on the results of the following table we obtain that age profile and board size positively affect profitability when defined using ROA ratio (Table 2).

Table 2 Fixed effects model for ROA examination results
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The second model examines ROE as the dependent variable. Based on the results of the following table we obtain that, as in the case of ROA, age profile and board size positively affect profitability when defined using ROE ratio (Table 3).

Table 3 Fixed effects model for ROE examination results
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Last, the third model examines Tobin’s Q as the dependent variable. Based on the results of the following table we obtain that also in this case, age profile and board size positively affect profitability when defined using Tobin’s Q ratio (Table 4).

Table 4 Fixed effects model for Tobin’s Q examination results
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5 Discussion and Conclusion

The nexus of board diversity and internal audit can play a significant role in a firm’s performance. The aim of this paper was to examine the relationship between board diversity and firms’ performance through the case of European firms operating in retail industry.

In summary, our research findings suggest that the age profile of board members and the size of the board have consistent and meaningful impacts on the financial metrics we examined. Gender diversity, on the other hand, does not appear to exhibit a strong correlation with these financial measures in this specific context. These insights provide valuable considerations for businesses and stakeholders aiming to optimize their financial performance and market valuation.

Despite the fact the regression models did not reveal an effect of gender diversity on firms’ performance, this effect is reported in several cases of the relevant literature, and it should not be neglected. This relationship can become even more important since the presence of women in the board of directors is found to positively affect the quality of internal audit as well [26].

Referring to the future research directions of the present study, it should be noted that since accounting variables are often influenced by management decisions, the use of stock market indices is important as well. Moreover, research based on the Corporate Sustainability Reporting Directive in accordance with the European Sustainability Reporting Standards would provide useful results, considering the importance of sustainability in firms’ performance [32, 33].