Corporate Governance: The international journal of business in society

Board demographic diversity, independence, and corporate social performance

Lu Zhang
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Lu Zhang, (2012),"Board demographic diversity, independence, and corporate social performance", Corporate Governance: The
international journal of business in society, Vol. 12 Iss 5 pp. 686 - 700
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 Board demographic diversity,
independence, and corporate social
performance
Lu Zhang
Lu Zhang is Assistant
Professor of Management
in the School of Technology
Management, Ulsan
National Institute of Science
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and Technology, Ulsan,
South Korea.
Received: July 2011
Accepted: March 2012
PAGE 686 j CORPORATE GOVERNANCE
Abstract
Purpose – Drawing on agency theory and resource dependence theory, the study aims to link board
demographic diversity and independence to corporate social performance.
Design/methodology/approach – Data were collected from various sources for a sample of 475
publicly traded Fortune 500 companies between the years 2007 and 2008.
Findings – It is found that board gender diversity is positively related to institutional and technical
strength ratings, while board racial diversity is positively related to institutional strength rating only. Both
the proportion of outside directors and CEO non-duality were negatively associated with institutional and
technical weakness ratings.
Research limitations/implications – The sample was predominantly large, publicly traded national
and international corporations, which might limit the generalizability of the findings.
Practical implications – Management personnel should be cognizant of how board configurations and
leadership structure may influence their corporate reputation for social responsibility. Efforts should be
made to foster a group dynamic that is conducive to effective board functioning.
Originality/value – Few empirical studies have examined the relationship between board
characteristics and corporate social performance. This study contributes to the literature by
examining such associations.
Keywords Boards of directors, Demographic diversity, Outsider representation on boards,
Chief executive officer duality, Corporate social performance, Gender, Company performance
Paper type Research paper
esearch in the area of board diversity has grown exponentially in the last two
R decades as companies have been pressured to increase diversity on their boards of
directors along gender and race/ethnicity lines to reflect external environment and
represent the interests of different stakeholders. A plethora of studies have explored the
impact of board diversity on firm financial performance (e.g. Campbell and Mı́nguez-Vera,
2008; Erhardt et al., 2003; Zahra and Pearce, 1989) and strategic change (Goodstein et al.,
1994). Proponents of bringing diversity to the boardroom argue that board diversity
enhances the firm’s strategic decision making process through offering a broader range of
perspectives and ideas and facilitates the acquisition of critical resources for the
organization with wider social networks (Campbell and Mı́nguez-Vera, 2008; Goodstein
et al., 1994; Kosnik, 1990). It is also argued that demographically diverse directors are more
independent, as they are less likely to be part of an ‘‘old boys’ network’’ (Carter et al., 2003).
However, in spite of the general belief that board diversity may also enhance corporate
social performance (CSP), few empirical studies have examined such relationships (with a
few exceptions, see below). Therefore, drawing on the agency theory and resource
dependence theory, this paper aims to examine the relationship between board gender and
race/ethnicity diversity and CSP.
Some researchers have also sought to explore the role of board independence as an
effective governance mechanism. It is assumed that the board’s capability of overseeing
j VOL. 12 NO. 5 2012, pp. 686-700, Q Emerald Group Publishing Limited, ISSN 1472-0701 DOI 10.1108/14720701211275604
 and monitoring the management is a function of its independence from management (Fama
and Jensen, 1983; Wade et al., 1990). Extant research has identified several attributes
associated with independent boards, such as CEO duality (i.e. the CEO also performing
board chairperson duties) and the proportion of outside board members (Daily and Dalton,
1997; Zahra and Pearce, 1989). Agency theory suggests that boards with a higher
proportion of outside directors and non-dual leadership structure are more diligent in
pursuing their monitoring role, owing to their independence from top management (Daily
and Dalton, 1994; Zahra and Pearce, 1989). Numerous empirical studies have examined the
effect of board independence on the board’s monitoring capacity and firm financial
performance (e.g. Dalton et al., 1998). In the current study, I move beyond prior work by
exploring the relationship between board independence and CSP.
As business bottom line objectives have expanded to include economic, environmental, and
societal performance (Elkington, 1997), it is important to understand the implications of a
diverse and independent board for CSP. Accordingly, this paper addresses a timely topic by
investigating the relationship between board characteristics and CSP. In the sections to
follow, I provide a general overview of the relevant literature and develop rationales for
linking these board characteristics with CSP. As part of this review, I rely heavily on agency
theory and resource dependence theory, in addition to workgroup diversity research.
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Theoretical background
Corporate social performance
For the past several decades, business has been undergoing the most intense scrutiny it
has ever received from the public. A central question concerns what responsibilities
business has to society. As a result, many scholars and practitioners are paying increasing
attention to the construct of corporate social performance (CSP). For the purpose of this
study, I embrace Clarkson’s (1995) stakeholder view of CSP and define CSP as a company’s
responsibility to all parties affected by its actions. A social responsible company should not
only consider its shareholders in the decision making process, but also non-owner
stakeholders, such as customers, employees, and other important constituencies.
According to Clarkson (1995, p. 112), the management of ethics is the process of
managers making decisions to ‘‘resolve the inevitable conflicts between primary stakeholder
groups over the distribution of the increased wealth and value created by the corporation’’.
CSP is a multidimensional construct, encompassing a variety of social issues ranging from
employee relations to environmental protection. Researchers have extensively used CSP
index developed by The Kinder, Lydenberg, Domini & Co. (KLD). The index focuses on
observable corporate policies directed to address the needs of multiple stakeholders, such
as community relations, treatment of women and minorities, employee relations and
treatment of the environment. More recently, Mattingly and Berman (2006) distinguished
between the institutional and technical aspects of CSP underlying the KLD data. The
institutional aspect reflects a firm’s response to institutional pressures and involves social
actions toward community, environment, and diversity stakeholders. The technical aspect
pertains to a firm’s relationship with those stakeholders who are essential to business
operation and resource exchanges, such as employees, consumers (product safety and
quality), and stockholders (corporate governance). These authors also showed that the
strength and weakness ratings of CSP provided by KLD are not opposite ends of a single
continuum and should not be combined into a composite indicator of CSP. They identified
four latent factors underlying KLD data:
1. institutional strength;
2. institutional weakness;
3. technical strength; and
4. technical weakness.

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VOL. 12 NO. 5 2012 CORPORATE GOVERNANCE PAGE 687
 Consequently, the present study examined the relationship between the composite strength
and weakness indicators of KLD and the board attributes identified above.

Board functions
Two dominant theoretical underpinnings explaining the functions of the board are the
agency theory and resource dependence theory. From the agency perspective, managers’
interests are not necessarily aligned with the interests of shareholders due to the separation
of ownership and control in organizations (Fama and Jensen, 1983). The agency theory
views board of directors as an internal control mechanism for safeguarding shareholder
interests from managerial opportunism (Eisenhardt, 1989; Hillman and Dalziel, 2003).
Boards of directors have the fiduciary responsibilities to actively control and monitor top
management behaviors in order to ensure that they act in the interests of shareholders.
Boards monitor management behaviors and decisions by performing a variety of specific
activities, including monitoring CEO performance, monitoring the company’s performance
and strategy implementation, determining CEO compensation (Hillman and Dalziel, 2003;
Johnson et al., 1996).
The resource dependence theory emphasizes the provision of resources function of the
board, arguing that boards have the duty to link the firm to its external environment and bring
critical resources to the firm (Boyd, 1990; Daily and Dalton, 1994; Pfeffer, 1972). According
to this view, a valuable contribution of a board of directors is to use their social networks to
establish and enhance a firm’s external legitimacy and to improve its relationships with
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relevant stakeholders. The individual members of the board act as boundary spanners,
securing crucial resources from the environment (Pfeffer and Salancik, 1978). Further, a
board of directors can contribute to the strategic decision process by providing expert
advice and counsel to top management, improving the quality of strategic decision-making
(Johnson et al., 1996; Zahra and Pearce, 1989). The provision of resources function of the
board includes a set of related activities, such as increasing the firm’s legitimacy in its
environment, bolstering the public image of the firm, developing relationships with important
stakeholders, providing advice and counsel to top management, being involved in the
strategic decision process, and facilitating access to crucial resources (Hillman and Dalziel,
2003; Minichilli et al., 2009).

Board diversity and CSP

According to a 2008 report released by The Alliance for Board Diversity, women and minority
men held less than one-third of Fortune 100 board member seats, indicating that women and
minorities are still underrepresented in the boardroom. Furthermore, the percentage
representation of women and minority men remained stagnant from 2004 to 2008. This is in
stark contrast to legislative efforts and business diversity initiatives to increase diversity in
the boardroom (Miller and Triana, 2009). Therefore, there is a need for more academic
research to help practitioners understand how board gender and race/ethnicity diversity
relates to board effectiveness.
Theoretical support for linking board demographic diversity and CSP is rooted in agency
theory, resource dependence theory, and workgroup diversity research. From the agency
perspective, the board of directors’ primary responsibility is to exercise control over
management to protect interests of all stakeholders. Previous studies have suggested that
having female and minority board members increases the independence of the board, as
they do not come from traditional backgrounds (Carter et al., 2003). For example, Hillman
et al. (2002) scrutinized the attributes of female and racial minority directors and found that
they tended to come from non-business backgrounds, hold advanced degrees, and join
multiple boards at faster rates than white males. Wang and Coffey (1992) also suggested
that women and minority directors give more consideration to social issues and the welfare
of various stakeholders because of their social and economic background.
Thus, it is reasonable to expect that demographically diverse directors may help broaden
the domain of corporate governance beyond shareholders to other stakeholders, such as
employees, local communities, and special interest groups (Kang et al., 2007). That is,

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PAGE 688 CORPORATE GOVERNANCE VOL. 12 NO. 5 2012
 greater board diversity leads to closer monitoring of management decision making
pertaining to CSP to ensure that multiple stakeholder interests are represented in corporate
governance (Kang et al., 2007; Luoma and Goodstein, 1999).
Board demographic diversity may also improve strategic decision making of the board
involving social issues. Empirical research on top management team (TMT) diversity has
shown that TMT heterogeneity with regard to education, occupational and functional
background was positively related to innovative and quality solutions (Bantel, 1994; Bantel
and Jackson, 1989; Wiersema and Bantel, 1992). Corporate governance theorists have also
suggested that diversity among board members’ backgrounds can promote airing of
different perspectives, which, in turn, produces a wider range of solutions and alternatives
for strategic decisions (Kosnik, 1990). As noted above, demographically diverse board
members tend to come from different, non-traditional educational and occupational
backgrounds. Therefore, the level of board demographic diversity may capture or reflect the
board’s cognitive resources and ability to engage in complex and creative problem-solving.
As CSP has become more of a strategic issue for companies (Bansal and Roth, 2000), it is
crucial for the board to develop a growing capacity to bring about creative changes to
practicing CSP. For example, many companies consider environmental protection an
opportunity for innovation and competitive advantage. The quest for sustainability forces
companies to change their current ways of doing business and rethink business models as
well as products, technologies, and processes (Nidumolu et al., 2009). Consequently, I
argue that board demographic diversity can benefit CSP through its contribution to board
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strategic decision making.

Having demographically diverse directors can also improve a firm’s relationship with
relevant stakeholders, thereby increasing its social performance. Researchers have noted
that women and minorities tend to have a broader range of network relationships and
more weak ties, i.e. the social ties that help bridge otherwise disconnected social
networks, than White males do (Burt, 1982; Ibarra, 1993). The broader social networks, in
turn, enhance the firm’s capability in understanding and responding to its environment
and facilitate interactions with different stakeholder groups (Beckman and Haunschild,
2002).
As stakeholder relationships are the cornerstone of CSP (Clarkson, 1995; Mitchell et al.,
1997), it stands to reason that better relationships with diverse stakeholders would result in
improved CSP. Indeed, prior research has demonstrated that board demographic diversity
is positively associated with corporate philanthropic activities and community outreach
(Coffey and Wang, 1998; Stanwick and Stanwick, 1998; Wang and Coffey, 1992).
Finally, gender and race/ethnicity diversity in the boardroom can serve as signals to the
public of the firms’ dedication to social justice, and therefore influence the public’s
perception of its social performance (Bilimoria, 2000; Miller and Triana, 2009). Miller and
Triana (2009) argued that demographically diverse directors can enhance firm reputation by
signaling norm adherence and positive working conditions. Bear et al. (2010) found that the
number of female board members influenced corporate overall reputation indirectly through
its effect on CSP. In an environment where valuing diversity is the norm, a demographically
diverse board shows the firm’s commitment to advancing diversity at all levels, which
bolsters the firm’s public image (Bilimoria, 2000; Van der Walt and Ingley, 2003).
Furthermore, demographically diverse boards can send signals of the firms’ working
conditions, indicating the inclusion of diversity in organizational values and norms (Albinger
and Freeman, 2000; Turban and Greening, 1996). Consequently, diverse boards are
expected to have a positive relationship with CSP (Miller and Triana, 2009). Thus, I
hypothesize:
H1. Gender diversity of boards of directors will be positively related to CSP strength
ratings and negatively related to CSP weakness ratings.
H2. Racial/ethnicity diversity of boards of directors will be positively related to CSP
strength ratings and negatively related to CSP weakness ratings.

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 Board independence and CSP
Prior studies have used different proxies for board independence. I focused on two primary
proxies: proportion of outside directors and CEO duality. For the purpose of this study, a
director is considered an outsider when he/she is not an executive of the company. CEO
duality exists when the CEO serves concurrently as chairperson of the board of directors.
Proportion of outside directors. Prior research on corporate governance has emphasized the
benefits of increasing outside director proportion on the board (Pearce and Zahra, 1991;
Dalton et al., 1998). It has been argued that outside directors are in a better position to
exercise their fiduciary responsibilities given their independence from management
(Weisbach, 1988; Daily and Dalton, 1994). In contrast, inside directors tend to identify more
closely with the interests of management than with those of shareholders. Thus, a higher
proportion of outsiders on the board can monitor and control the opportunistic behaviors of
top management more effectively, mitigating agency problem (Fama and Jensen, 1983).
There exists some empirical evidence that greater outside director representation improves
corporate governance. For example, greater representation of outside directors has been
associated with reduced probability of paying greenmail in the context of acquisitions
(Kosnik, 1990), greater likelihood of CEO turnover for poorly performing firms (Weisbach,
1988), lowered likelihood of adoption of poison pill resolutions (Mallette and Fowler, 1992),
and fewer cases of fraudulent financial reporting (Beasley, 1996; Dunn, 2004). Research has
also demonstrated that poorly performing firms benefit from the entry of more outside
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directors (Hermalin and Weisbach, 1988). These studies suggest that outside board
members can foster a more open governance process that help constrain opportunistic
managerial behavior.
Following the agency logic reviewed above, I argue that outsider representation on the
board will positively relate to CSP. Board of directors is ultimately responsible for upholding
ethical business conduct. However, inside directors, owing to their close ties to top
management, are more likely to make decisions from the perspectives of management to
trade ethical standards and social responsibility for profit maximization. The nature of their
duties to shareholders (as corporate executives) may consistently create conflict of interest
situations, considering that earnings maximization are often in conflict with pursuit of such
social goals as environmental protection and product safety (Rose, 2007). As a
consequence, inside directors may neglect corporate social responsibility for increased
shareholder value. Independent, outside board directors, on the other hand, are in a better
position to advocate non-stockholder stakeholders’ interest (Ibrahim et al., 2003). In a
sample of board members in the service industry, Ibrahim et al. (2003) found that outside
directors exhibited greater concern about the discretionary component of corporate
responsibility and a weaker orientation toward economic performance.
Therefore, I argue outside board directors are more capable of representing not just
shareholders’ interests, but also other important stakeholders’ interests. Wang and Coffey
(1992) posited that outside board directors behave more like agents than inside directors do
because they have no direct claims on a firm’s earnings. Hence, outsiders tend to be less
profit driven and more likely to pursue nonprofit goals and make charitable contributions.
Like a diverse board can promote better stakeholder relationships, outside board directors
can act as boundary spanners, building relationships with a variety of relevant stakeholders
(Johnson et al., 1996; Pfeffer and Salancik, 1978). Thus, outside directors play an important
role in expanding a company’s horizons of corporate social responsibilities and representing
the interests of all relevant stakeholders (Coffey and Wang, 1998; Kang et al., 2007).
H3. The proportion of outside board directors will be positively related to CSP strength
ratings and negatively related to CSP weakness ratings.

CEO duality. Another indicator of board independence is CEO duality (i.e. a separation of the
CEO and board chair positions). Agency theorists posit that separation of the two key
positions weakens CEO influence over the board and enhances the independence of the
board (Dalton et al., 2008). On the other hand, CEO duality entrenches a CEO within a

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 company and compromises the board’s ability to monitor top management, which results in
management pursuing its own interests at the expense of shareholders’ interests (Baliga
et al., 1996; Finkelstein and D’Aveni, 1994). Thus, dividing the power at the top is an effective
mechanism to mitigate agency problems.
Empirical evidence provides support for the negative link between CEO duality and board
monitoring effectiveness. A recent study found that the presence of duality reduces the
boards’ allocation of attention to monitoring management through the CEO-chair’s control of
the board meeting’s agenda and location (Tuggle et al., 2010). Petra and Dorata (2008)
found that CEO duality had a positive effect on equity-based compensation received by
CEOs, resulting in CEOs pursuing short-term stock price growth rather than long-term
strategic goals. In addition, Goyal and Park (2002) found that it was more difficult for the
board to remove a poorly performing CEO when the CEO and chairman duties were vested
in the same individual.
In the context of this study, I propose that CEO duality will be negatively related to CSP. The
reasoning here is similar to that used in forming the previous hypothesis related to proportion
of outside directors. Prior research suggests that dual CEOs are under greater pressure to
improve financial performance than are nondual CEOs (Davidson et al., 2004). That is, the
extra power that duality affords a CEO comes with the expectations about fast and positive
effects on the bottom line. Dual leadership requires greater responsibility on the part of dual
CEOs to focus primarily on financial measures. Therefore, it is reasonable to expect that dual
CEOs are more profit driven and pursue profits more aggressively, oftentimes at the expense
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of social responsibility. In contrast, facing relatively less pressure to perform, non-dual CEOs
may afford to take a more balanced approach in managing the competing demands of
shareholder and other stakeholder groups. Further, separating the chairman and CEO
between two people the division of responsibility provides broader perspectives that can be
helpful in developing a broader definition of CSP and addressing the needs of diverse
stakeholders.
H4. CEO duality will be negatively related to CSP strength ratings and positively related
to CSP weakness ratings.

Method
Sample and data
The initial sample for this study consisted of publicly traded Fortune 500 companies in 2007.
Publicly traded companies were used because they are required to disclose company
profile and financial information to shareholders and Securities and Exchange Commission
(SEC). The final sample size was 475 companies.
The data used in this study were obtained for the years 2007 and 2008. The source of the
data on board demographic information was the 2007 Census of Women and Minorities on
Fortune 500 Boards conducted by the Executive Leadership Council. The corporate social
performance data source was the Kinder, Lydenberg, Domini (KLD) index. Data on outsider
representation on the board, CEO duality, and the control variables, as described below,
were collected from COMPUSTAT and ExecuComp databases.

Measures
Corporate social performance. Consistent with past research (e.g. Deckop et al., 2006;
Turban and Greening, 1996), I used the KLD index to measure CSP. KLD rated companies
on several major dimensions of CSP, including community relations, corporate governance,
diversity, employee relations, treatment of the environment, and product safety and quality.
Each dimension was further divided into several issues. A company in the KLD database
was given a ‘‘strength’’ and a ‘‘concern’’ score for each issue. Specifically, a company
received a rating for a specific issue from 0 (strength/concern not present) to 1
(strength/concern present). To develop composite indicators of CSP, I followed Mattingly
and Berman’s (2006) advice and treated strength and concern ratings as conceptually

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 distinct constructs. Specifically, institutional strength is the sum of strength ratings on
community and diversity issues while institutional weakness is the sum of concern ratings on
environmental and community issues. Similarly, strength and weakness ratings within
dimensions of consumer (product), stockholder (governance), and employee stakeholders
were summed to arrive at a total technical strength and weakness score, respectively. The
final CSP ratings entered in the analysis were the average of the ratings in years 2007 and
2008.
Board demographic diversity. I used data on the demographic composition of the Fortune
500 boards in 2007, as well as the board size, to develop measures of board gender and
race diversity. Blau’s (1977) index of heterogeneity was used, with a score of 0 indicating a
perfectly homogeneous group and a score of 1 indicating a perfectly heterogeneous group
(with members spread evenly among all categories) (see Bantel and Jackson, 1989).
The proportion of outside directors. The number of inside directors, i.e. executives who are
also board members, was retrieved from the ExecuComp database. I operationalized the
proportion of outside directors as 1 minus the ratio of the number of inside directors to board
size of Fortune 500 companies in 2007.
CEO duality. CEO duality was also obtained from ExecuComp by examining the current
title(s) held by CEOs. A dummy variable was created for this variable (duality ¼ 1).
Control variables. I controlled for several factors that have been shown in prior research to
influence CSP. A number of empirical studies have indicated that CSP is positively
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associated with financial performance (McWilliams and Siegel, 2000; Waddock and Graves,
1997). Therefore, I controlled for firm financial performance, with financial performance
being measured using both two-year average of return on equity (ROE) and return on assets
(ROA). Company size was controlled for because prior research has suggested that larger
companies need to meet higher expectations of the public by exhibiting more socially
responsible behaviors than do smaller companies (Ullman, 1985; Waddock and Graves,
1997). I measured firm size as the two-year average of number of employees. These data
were obtained from COMPUSTAT.
Data analysis strategy. Hierarchical linear regression was used to test the predicted
relationships. In the first step of the regression analyses, the control variables (ROE, ROA,
company size) were entered. In the second step, I entered board gender diversity, board
race diversity, proportion of outside directors, and CEO duality. Four regression equations
were tested in accordance with these steps for each of the four composite indicators of CSP
strength and weakness[1].

Results
Table I presents the means, standard deviations, and correlations among items. Among the
four composite indicators of CSP, I found that institutional strength was not correlated with
institutional weakness, corroborating Mattingly and Berman’s (2006) claim that social
weakness is not simply the converse of social strength and vice versa. All control variables
except ROE were significantly correlated with some of the CSP criteria, supporting their
inclusion as control variables. For example, company size was significantly correlated with
institutional strength and technical weakness. ROA was also positively correlated with
institutional weakness and technical strength.
Among the hypothesized relationships, I found board gender and race diversity were
positively correlated with institutional strength and technical strength. Board race diversity
was also positively correlated to technical weakness. Proportion of outside directors was
negatively correlated with all four CSP ratings. CEO duality had positive correlations with
CSP criteria except technical weakness. That the correlations between board attributes and
CSP strength were in the same direction as those with CSP weakness further justifies my
treatment of CSP strength and weakness as distinct constructs.
The variance inflation factors (VIF) were used in regression analysis to detect the presence
of multicollinearity. This measure indicates the degree to which each independent variable is

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Table I Means, standard deviations, and correlations between variables

Variable name Mean SD 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

1. Institutional strength 2.21 2.20 1.00

2. Institutional weakness 1.11 1.47 0.08 1.00
3. Technical strength 1.19 1.42 0.46** 0.39** 1.00
4. Technical weakness 3.20 1.95 0.34** 0.25** 0.17** 1.00
5. ROA 0.04 0.08 0.05 0.11* 0.20** 20.09 1.00
6. ROE 0.15 4.38 20.02 0.05 0.04 0.04 20.07 1.00
7. Number of employees (in thousands) 56.71 122.99 0.32** 0.06 0.09 0.42** 0.07 0.01 1.00
8. Board gender diversity 0.24 0.12 0.49** 0.01 0.18** 0.08 0.02 20.04 0.16** 1.00
9. Board race diversity 0.19 0.15 0.45** 0.10 0.16** 0.21** 0.07 20.01 0.19** 0.37** 1.00
10. Proportion of outside directors 12.85 6.83 20.23** 20.11* 20.12* 20.14** 20.02 20.03 20.07 20.26** 20.19** 1.00
11. CEO duality 0.62 0.48 0.11* 0.19** 0.17** 0.09 0.09 0.08 20.02 0.03 0.14** 20.15** 1.00

Notes: *p , 0:05; **p , 0:01; CEO duality was coded such that 0 ¼ Non-duality; 1 ¼ Duality

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VOL. 12 NO. 5 2012 CORPORATE GOVERNANCE PAGE 693
 linearly related to one another. Large VIF values denote high multicollinearity (Hair et al.,
1995). A common cutoff threshold for VIF is 10. In the present study, the VIF values
associated with the predictors ranged between 1.02 and 1.23, indicating that
multicollinearity was not a cause for concern.
H1, which predicted that board gender diversity would be positively related to CSP strength
ratings and negatively related to CSP weakness ratings, was partially supported. As shown
in Table II, there was a significant, positive relationship between board gender diversity and
institutional strength (b ¼ 0:33, p , 0:01) and technical strength (b ¼ 0:14, p , 0:05).
However, board gender diversity was not significantly related to either weakness ratings.
H2 predicted that board racial diversity would be positively related to CSP strength ratings
and negatively related to CSP weakness ratings. This hypothesis received mixed support.
As predicted, board racial diversity was positively related to institutional strength (b ¼ 0:26,
p , 0:01). However, contrary to my expectations, board racial diversity was positively
related to technical weakness (b ¼ 0:13, p , 0:01).
H3 stated that proportion of outside board directors would be positively related to CSP
strength ratings and negatively related to CSP weakness ratings. Consistent with my
hypothesis, the proportion of outside directors was marginally negatively related to
institutional weakness (b ¼ 20:09, p , 0:10) and technical weakness (b ¼ 20:09,
p , 0:10). Therefore, this hypothesis received partial support.
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H4 predicted that CEO duality would be negatively related to CSP strength ratings and
positively related to CSP weakness ratings. This hypothesis received partial support as CEO
duality was positively related to institutional weakness (b ¼ 0:16, p , 0:01) and marginally
positively related to technical weakness (b ¼ 0:08, p , 0:10). Contrary to expectations,
however, CEO duality was positively related to technical strength (b ¼ 0:13, p , 0:05).

Discussion
This study advances our understanding of the relationship between board demographic
diversity and board independence and CSP. In general, the results show support for some of
my proposed relationships. I found that board gender diversity was positively related to
institutional and technical strength ratings while board racial diversity was positively related
to institutional strength rating only. Both the proportion of outside directors and CEO
non-duality were negatively associated with institutional and technical weakness ratings.
However, there were some unexpected findings. For example, board racial diversity was
positively related to technical weakness. Also there was a positive relationship between CEO
duality and technical strength rating. I elaborate on these findings below.

Table II Hierarchical regression results

Institutional strength Institutional weakness Technical strength Technical weakness

Step 1
ROA 0.00 0.09* 0.18*** 20.13***
ROE 20.01 0.04 0.05 0.01
Number of employees 0.22*** 0.05 0.04 0.40***
DR 2 0.11*** 0.02* 0.05*** 0.19***

Step 2
Board gender diversity 0.33*** 20.05 0.14** 20.05
Board race diversity 0.26*** 0.06 0.06 0.13***
Proportion of outside directors 20.07 20.09* 20.05 20.09*
CEO duality 0.06 0.16*** 0.13** 0.08*
DR 2 0.27*** 0.04*** 0.06*** 0.04***
Total DR 2 0.38 0.06 0.11 0.23

Notes: * p , 0:10, ** p , 0:05; *** p , 0:01; Standardized regression coefficients are reported

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PAGE 694 CORPORATE GOVERNANCE VOL. 12 NO. 5 2012
 Theoretical implications
Board gender diversity seems to have the strongest relationship with CSP strength ratings
among the predictors. Consistent with prior research (e.g. Bear et al., 2010; Coffey and
Wang, 1998; Wang and Coffey, 1992), I found board gender diversity was positively related
to both institutional and technical strength ratings. The findings suggest that having female
board members contributes to positive institutional strength rating through meeting or
exceeding institutional expectations, i.e. the expectations of the diversity and community
stakeholders to promote diversity and provide philanthropic support to the community.
Board gender diversity was also positively associated with technical strength rating,
indicating that female board members can provide valuable advice and networking
opportunities to help improve relationships with critical stakeholders owing to their being
more socially oriented (Duehr and Bono, 2006) and sensitive to social causes (Wang and
Coffey, 1992). Furthermore, the positive link between board gender diversity and technical
strength suggests that having more women on a board can increase women’s voice and
participation in decision making process, which, in turn, improve their advocacy for different
stakeholder interests.
Similarly, board racial diversity was found to be positively associated with institutional
strength rating, suggesting that increasing minority representation on a board help enhance
a firm’s legitimacy in the eyes of institutional stakeholders. However, contrary to my
expectations, there was a positive relationship between board racial diversity and technical
weakness. It is possible that racially diverse boards may not have the ability to adequately
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process the greater pool of information and viewpoints brought in by minority board
members. Indeed, prior diversity studies have found that diversity in top management team
can be counter-productive because it results in greater process losses, which may slow the
team’s decision making (Milliken and Martins, 1996). Thus, a diverse board may be less
efficient when addressing the needs of technical stakeholders; hence the high technical
weakness ratings.
Another plausible explanation is that minority board members may be more profit-driven
than their white counterparts due to their different career trajectories. Researchers have
reported that minority executives’ career took off much later compared to White executives’,
owing to the negative stereotype of low competence associated with the former.
Consequently, they have to demonstrate their potential constantly by thinking and acting
more strategically and politically and show a sustained record of solid performance
(Thomas, 2001). Therefore, it stands to reason that minority board members, the majority of
whom have successfully climbed corporate ladder, may be more profit driven and have a
less balanced view of corporate social responsibility.
Consistent with my expectations, both proxies of board independence – the proportion of
outside directors and CEO non-duality – were negatively associated with institutional and
technical weakness ratings. This result supports my argument that board independence is
viewed positively by institutional and technical stakeholders and may help offset a damaged
reputation of CSP. However, the null relationships between either board independence proxy
and CSP strength ratings indicate that board independence, by itself, is not adequate to
enhance positive ratings of CSP. Together, these findings suggest that board independence
is overall a positive sign that can help mitigate bad corporate reputation.
It is interesting to note that there was a positive association between CEO duality and
technical strength rating. This result seems to support the theoretical perspective that CEO
duality may facilitate effective decision making by helping establish unity of command and
clarify decision-making authority (Daily and Dalton, 1997; Sanders and Carpenter, 1998).
Splitting the roles of CEO and chairperson, on the other hand, results in diffused information
processing and may impair strategic decision making of the top management team and
board (Donaldson and Davis, 1991). The positive association between CEO duality and
technical strength rating may reflect the disadvantages of separating CEO and chair
positions. It suggests that the division of responsibility may hamper decision makers’ ability
to act quickly to address stakeholder concerns. This finding, combined with the previous

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VOL. 12 NO. 5 2012 CORPORATE GOVERNANCE PAGE 695
 finding that CEO duality was positively related to institutional weakness ratings, provides
evidence to support the notion that CEO duality is a double-edged sword in that it enhances
unity of command while limiting the board’s ability to monitor top management (Finkelstein
and D’Aveni, 1994). It points to the importance of examining leadership structure as an
important governance arrangement in relation to CSP.
A final contribution of the study is that it supports Mattingly and Berman’s (2006) finding that
CSP strengths and weaknesses are distinct constructs that should not be combined in
empirical research. In the current study, all the predictors except CEO duality were related to
either strength or weakness, but not both. CEO duality was even positively related to both
technical weakness and strength ratings. These results further validate Mattingly and
Berman’s (2006) composite constructs of CSP by suggesting that social strength is not
simply the converse of social strength and vice versa.

Managerial implications
The finding that board demographic diversity, outsider representation, and CEO duality
influence CSP has relevance for managers as well. Management personnel should be
cognizant of how board configurations and leadership structure may impact their corporate
reputation for social responsibility. The finding that board gender diversity has a positive
impact on both CSP strengths is practically inspiring for women facing a glass ceiling in
corporate America. This study speaks to the vital resources women bring to the board, with
positive implications for CSP. It shows that female board members are not just mere window
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dressing, but contribute significantly to board strategic decision making.

Nevertheless, the picture is not as rosy for minority board members. The negative
association between board racial diversity and technical weakness suggests that racially
diverse boards do not function well, rendering them unable to harvest the potential benefits
of diversity. It appears that minority board members are often isolated or ignored due to their
different views and backgrounds (Manzoni et al., 2010). Therefore, boards should foster
value-in-diversity beliefs and a group dynamic that is conducive to constructive
disagreement. To this end, diversity training may be beneficial in helping board members
understand their differences and communication more effectively and work through
challenges. Equally important, the chairpersons should be equipped with the ability to
facilitate constructive group processes and ensure that dissenting voices get heard.
In addition, the finding that the proportion of outside directors and CEO non-duality were
negatively related to both weakness ratings has practical implications as well. From the
standpoint of shareholders, having greater outsider representation and avoiding duality is an
effective way to monitor management as evidenced by the lower institutional and technical
weakness ratings. However, the negative association between CEO-duality and technical
strength ratings reinforces the notion that CEO duality is a double-edged sword in
relationship to CSP. Companies, therefore, should make a conscious effort to balance the
risk of agency problem with the benefit of strong leadership when choosing leadership
structure.

Limitations and future research needs

My results should be interpreted within the possible limitations of the study. The first relates
to the composition of the sample, which was predominantly large, publicly traded national
and international corporations. This restriction limits the generalizability of my findings.
Future research using different samples should provide important additional insights.
Second, in my study I controlled for company size and financial performance in testing the
relationship between board demographic and structural configurations and CSP. There are,
however, some other variables that may play an important role in influencing CSP, such as
CEO’s and institutional investors’ preferences and influence (Agle et al., 1999; Weaver et al.,
1999). Future study should incorporate these important variables into my model.
A fruitful future research avenue is to explore how board attributes change board processes,
such as debate, devil’s advocates, constructive group conflict, and decision
comprehensiveness (Schweiger et al., 1989; Simons et al., 1999). Researchers can

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PAGE 696 CORPORATE GOVERNANCE VOL. 12 NO. 5 2012
 collect data from board members, asking them to explain how diverse and outside directors
may change the decision-making process in the boardroom. Doing so would provide a
better understanding of the cognitive and behavior processes underlying the relationships
between board demographics and independence and CSP.

Note
1. At the final step, each regression equation was specified as Y ¼ b0 þ b1 x ðROEÞ þ b2 x ðROAÞ þ b3
x (number of employeesÞ þ b4 x (board gender diversityÞ þ b5 x (board race diversityÞ þ b6 x
(proportion of outside directorsÞ þ b7 x (CEO duality). Four regression equations were estimated in
accordance with the four CSP criteria.

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Corresponding author
Lu Zhang can be contacted at: lzhang@unist.ac.kr

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