Impact of Board of Director Diversity on Environmental, Social, and Governance Scores and Financial Performance

Research Question/Issue: This study examines the differential effects of board diversity on environmental, social, and governance (ESG scores) and financial performance across different types of companies. We also assess the impact of the 2021 NASDAQ rule relating to board diversity on ESG scores and financial performance. Research Findings/Results: We find the percentage of non-white board members to have a positive impact on financial performance, while the percentage of female board members has a positive effect on Tobin’s Q, but a negative effect on social ratings. Moreover, we find the NASDAQ rule requiring boards to have at least one minority member to have a negative impact on governance ratings. Theoretical/Academic Implications: This paper explores various theories that explain how board diversity impacts firm performance. These theories include agency, resource dependency, human and social capital, stakeholder, upper echelons, social identity, and critical mass theories. Practical Implications: Our results suggest that firms with greater board diversity may have a greater potential for above average financial returns. Moreover, institutional lenders may view these firms to have lower reputational risk. Relatedly, the positive effect of outside directors on environmental scores may attract financial managers who want to invest in environmentally conscious firms.