Does diversity in supervisory boards affect profitability and corporate social responsibility?

• Published date: 01 October 2023
• Author: Muhammad Taufik,Jessie Fircayanthi Oh
• Date: 01 October 2023
• DOI: http://doi.org/10.1002/jcaf.22633

Received: August  Revised:  March  Accepted:  March 

DOI: ./jcaf.

RESEARCH ARTICLE

Does diversity in supervisory boards affect profitability and

corporate social responsibility?

Muhammad Taufik Jessie Fircayanthi Oh

Department of Accounting, Universitas

Internasional Batam, Batam, Indonesia

Correspondence

Muhammad Taufik, Department of

Accounting, Universitas Internasional

Batam, Batam, Indonesia

Email: m.taufik@uib.ac.id

Abstract

This study analyses how individuals who bring diversity to the membership

of supervisory boards (IDSBs) affect profitability and corporate social responsi-

bility (CSR) by looking at their human capital, tokenistic leadership potential,

and tendencies. IDSBs are females, younger people, those with PhDs, account-

ing experts, and foreign members. Their effect will be interpreted by utilizing

resource dependence theory and tokenism theory. Additionally, their counter-

parts, namely board members who are male, older, who do not have PhDs, are

not accounting experts, and are local nationals, were also examined. Indonesian

corporations from  to  were analyzed using panel data. The proportion

and number of IDSBs were classified as token leaders. Despite their rarity, female

supervisory board members increased profitability.CSR was, however, negatively

affected by women, accounting experts, and foreigners serving on supervisory

boards due to their role as tokenistic leaders. Additionally, supervisory board

members who are younger,have PhDs, and are accounting experts contributed to

a drop in profitability.Surprisingly, supervisory board members who are younger

(older) and have PhDs (non-PhDs) did not yield empirical evidence regarding

CSR, so it is beyond the scope of the perspective on tokenism. Finally, foreign

board members increased profitability but this is limited to firm value.

KEYWORDS

corporate social responsibility (CSR), individuals who bring diversity to supervisory boards

(IDSBs), profitability, resourcedependence theory, tokenism theory

1 INTRODUCTION

In corporate governance, supervisory boards have become

essential since they supervise, monitor, and reduce the

opportunistic behavior of executives (Imran Khan et al.,

; Ismail Khan et al., ). As the representatives of

shareholders, supervisory boards ensure wealthmaximiza-

tion since it is considered a firm’s primary goal (Zaid

et al., ). Arvidsson () has demonstrated that %

of investors are interested in earnings, while the remaining

% are interested in corporate social responsibility (CSR).

However,Arvidsson () has also revealed that CSR con-

tinues to play a significant role in business sustainability.

Hence, supervisory boards should ensure there is symme-

try between profit and CSR (Ibrahim & Hanefah, ;

Kagzi & Guha, ; Setiawan et al., ;Zaidetal.,).

This study has concentrated on individuals who bring

diversity to supervisory boards (IDSBs) as determinants

of profitability and corporate social responsibility (CSR).

Board diversity was initially divided into organizational

and individual dimensions (Magnanelli & Pirolo, ).

Organizational diversity dimensions—such as supervisory

46 ©  Wiley Periodicals LLC. J Corp Account Finance. ;:–.wileyonlinelibrary.com/journal/jcaf

TAUFIK OH 47

board independence—have been avoided in this study

since they represent employee status rather than human

capital. The authors also do not consider board size. It has

been claimed by Beji et al. () that board size is part of

board diversity, but board size is measured by the num-

ber of board members. This raises questions: What is the

point of the diversity of board size? If a board does not

exist, firms cannot be established, so the debate on effective

board sizes will never be settled. Bycontrast, IDSBs empha-

size human capital and determine whether their status

can become “tokenism” in terms of leadership. Hence, this

study could contribute to the literature on board diver-

sity. IDSBs consist of female and younger board members,

those with PhDs, accounting experts, and foreigners. To

ensure symmetry between profit and CSR, this study seeks

to answer the following research questions: (i) Does the

human capital of IDSBs affect profitability and CSR? (ii)

What is the role of tokenism in leadership? and (iii) What

is the tendency of IDSBs’ effects on profit and CSR? By

addressing these questions, this study makes four distinct

contributions in terms of (i) board diversity literature, (ii)

methodology, (iii) theory, and (iv) business practice.

As a contribution to board diversity literature, this study

fills three distinct gaps. First, Arvidsson () mapped the

tendencies of investors with regardto profitability and CSR

qualitatively. As for quantitative research, previous stud-

ies have tended to analyze board diversity separately for

profitability (Fernández-Temprano & Tejerina-Gaite,;

Kagzi & Guha, ; Mahadeo et al., )andforCSR

(Elmagrhi et al., ;Nguyenetal.,; Rao & Tilt, ).

This study fills those gaps by investigating the tenden-

cies of the effects of IDSBs on profitability and CSR using

quantitative methods. Therefore, this study responds to the

claim made by Kassinis et al. () that profitability and

CSR constitute business sustainability. Second, most pre-

vious studies have examined women’s impact on boards,

while this study addresses the call made by Imran Khan

et al. () to examine the diversity attributes of each indi-

vidual on the board. Third, other studies did not directly

explain the influence of accounting experts as board mem-

bers on CSR since they tested supervisory boards from nine

(Katmon et al., ) and five educational backgrounds

(Imran Khan et al., ; Ismail Khan et al., ).

As a contribution to methodology, four fallacies from

previous studies are criticized in this study. First, the

Blau Index was used by Kagzi and Guha () and Issa

et al. (). This index measures the heterogeneity(homo -

geneity) of boardrooms, but it is quite inaccurate when

recording the number of female board members. Sim-

ply put, Kagzi and Guha () and Issa et al. ()

demonstrated that women have difficulty being involved

in strategic decision-making since female representation

on boards is small. This analysis raises the question: what

number of female board members is considered “small”?

Second, Fernández-Temprano and Tejerina-Gaite ()

used the standard deviation to challenge a question similar

to the one above. Third, different measurements havebeen

used in previous studies. Katmon et al. ()employedthe

percentage of female board members and the Blau index

measured other diversity attributes of individual board

members. These measurements lack rationality,raising the

question: Why are the research objectives similar when

the variable measurement is different? Fourth, Post et al.

() found that an average boardag e of  wasassociated

with positive and significant CSR. However, neither their

measurement nor findings answer the following two ques-

tions straightforwardly: Is  years of age consideredyoung

or old? Which boards—those with young members or old

members—have the most significant impact on CSR?

The authors propose three approaches to address the

lack of previous studies on methodology. First, this study

measured the percentage of females, younger people,

PhDs, accounting experts, and foreigners on supervisory

boards. Thus, this study assesses diversity directly rather

than in general terms of “gender,age, education, expertise,

and nationality”. Second, individuals who bring diversity

to a board are usually in the minority (Konrad et al., ;

Torchia et al., ). Thus, this study incorporates the per-

centage of the counterparts of IDSBs that are males, old,

without PhDs, who are not accounting experts, and who

are local nationals (i.e. not foreigners), which will provide a

comparison of the results. Therefore, this study can record

the presence of IDSBs and answer inquiries about their

impact as human capital. Finally, the number of IDSBs

could answer the possibility of their status as tokenistic

leaders, allowing a more profound analysis.

As a contribution to the theory, this study responds to

Nguyen et al. () who reported that corporate boards’

influence on financial and non-financial performance

was dominated by a single theory rather than a multi-

theoretical perspective. This study has employed resource

dependence theory to assess the human capital of IDSBs

and tokenism theory to assess tokenistic leadership. On

one hand, the authors have found that females were repre-

sented on less than one out of six supervisory boards, and

accounted for just % of board members, but they increased

profitability significantly. Therefore, they retained profit-

generating capabilities and removed the label of being

symbolic leaders. On the other hand, they significantly

and negatively affected CSR. Since women possess unique

characteristics, they are undoubtedly capable but have

been characterized as symbolic leaders in the field of CSR.

There is a lack of previous studies that actually apply both

theories and analysis to their methodology, results, dis-

cussions, and implications, although they are discussed in

their hypothesis development. Fernández-Temprano and