THE IMPACT OF BOARDROOM NATIONAL DIVERSITY ON FIRMS' PERFORMANCE AND BOARDS' MONITORING IN EMERGING MARKETS: A CASE OF MALAYSIA

Abstract

Like many other theories, agency theory and thus most of the corporate governance (CG) regulations
around the world support boardroom diversity with a variety of rationales. Accordingly, the recently
introduced Malaysian Code on Corporate Governance (MCCG) in March 2012 also recommends an
increase in boardroom diversity. Being a broader construct, boardroom diversity can be classified
into quantifiable (age, gender, experience, education, race/ethnicity and nationality) and nonquantifiable
(leadership style, interpersonal communication, the locus of control and team-building
skills) characteristics of the directors. However, except age and gender of the directors, the previous
literature has rarely focused on other aspects of the boardroom diversity. Among others, the
nationality of the directors is a vital element of the boardroom diversity particularly in multi-ethnic
and multi-cultural societies like Malaysia. Therefore, this study aims to investigate the impact and
role of the directors with foreign nationality on the Malaysian boards in a stratified random sample of
350 non-financial listed companies from 2010 to 2014. By employing Panel Corrected Standard
Errors (PCSEs), the study found that foreign directors have a significant positive impact on firms'
performance measured by ROE, ROA and market value. However, as expected, foreign directors have
a significant negative impact on monitoring role of the board. Besides filling the exhibited gap in the
previous literature, the study also updates regulators and other policymakers by providing important
insights for improving policy and practice in the future.