AT – TADBIR
JURNAL ILMIAH MANAJEMEN Homepage: ojs.uniska.ac.id/attadbir
The Role Of Institutional Ownership And Board Diversity To Improve Company Performance Using The Fixed Effect Method
Ahmad Juliana*1, Denny Yulianto2, Ahmatang3, Nurul Hidayat4
Department of Management, Faculty of Economics, Borneo Tarakan University email : [email protected]
Abstract
This study seeks to examine the relationship between board diversity and company performance in tourism sector companies listed on the Indonesia Stock Exchange over the period of 2012-2021.
The research also considers the moderating role of institutional ownership in this relationship.
The independent variables in this study include board diversity and institutional ownership, while the dependent variable is company performance. The sample of 15 companies was selected using a purposive sampling technique. The data analysis was conducted using panel data regression analysis with the fixed effect model in the STATA MP17 software. The findings of the study indicate a positive impact of board diversity on company performance, and it is observed that the effect of board diversity on company performance is more pronounced when the level of institutional ownership is low.
Keywords: Board Diversity, Board of Directors, company performance, governance, Institutional Ownership
Abstract
Penelitian ini bertujuan untuk menganalisis pengaruh keragaman dewan terhadap kinerja perusahaan dengan tingkat kepemilikan institusional sebagai variabel moderasi pada perusahaan sektor pariwisata yang terdaftar di Bursa Efek Indonesia periode 2012-2021. Variabel independen yang digunakan dalam penelitian ini adalah keragaman dewan dan kepemilikan institusional.
Sedangkan, variabel dependen penelitian ini adalah kinerja perusahaan. Teknik pemilihan sampel menggunakan teknik purpoosive sampling dengan total sampel 15 perusahaan. Metode analisis data yang di gunakan adalah analisis regresi data panel dengan model fixed effect model menggunakan aplikasi STATA MP17. Berdasarkan hasil penelitian menunjukkan bahwa keragaman dewan berpengaruh secara positif terhadap kinerja perusahaan, dan pengaruh keragaman dewan terhadap kinerja perusahaan menjadi lebih signifikan ketika tingkat kepemilikan institusional rendah
Kata kunci: Dewan Direksi, Kepemilikan Institusional, Keragaman Dewan, Kinerja Perusahaan, Pemerintahan
INTRODUCTION
The board of directors has gained significant importance in corporate governance, and a considerable amount of interest has emerged focusing on the board of directors and its various attributes as qualities of corporate governance. One of the board's qualities that has attracted considerable interest in business/management literature is board diversity. In the past few decades, corporate boardrooms have become increasingly diverse in several attributes of board members, such as race, gender, age, and professional expertise.
For example, female representation in Fortune 100 company boardrooms increased from 16.9 percent in 2004 to 25 percent in 2018 (Deloitte, 2019). The trend towards more diverse boardrooms has captured the interest of researchers from various disciplines, and the increase in boardroom diversity has raised certain questions over the years: "Why do companies strive to diversify their boardrooms? Who do they represent? What drives this trend?" Although the answers to these questions may vary, one motivation for increasing board diversity has been debated to have implications for diversity performance.
Despite the growing interest and efforts in exploring these questions, there has been little interest among researchers in this specific research domain. Undoubtedly, previous research findings in mainstream business research may apply to tourism companies to some extent. However, there are specific reasons motivating research in this particular tourism sector to examine the relationship between board diversity and firm performance.
Governance is an important managerial attribute for tourism companies (Yeh and Trejos, 2015) as it is directly related to control, monitoring, and leadership (Blanco et al., 2009; Sainaghi, 2005). As argued by Goymen (2000) and Guilding et al. (2005), tourism companies with strong governance mechanisms are more likely to benefit from
internal monitoring and increase their revenues. Therefore, understanding the governance structure of tourism companies holds economic significance. The limited governance research in the tourism literature suggests that governance in the tourism sector may also differ from other sectors, primarily due to the characteristics of the sector (Yeh and Trejos, 2015).
The tourism sector is a collection of production units in different industries that provide goods and services specifically needed by visitors. Economic growth is a process of long-term output increase. Economic growth is related to per capita output increase, which requires theories encompassing GDP growth and theories about population growth to explain per capita output (Boediono).
From the above elaboration, it can be understood that, first, tourism is a fast-moving sector, thus customer preferences and demands often change (Evans et al., 2003). This requires tourism companies to detect and understand changes in customer preferences and be agile in responding to these changes. In this regard, an effective board is crucial in the tourism sector to shape corporate strategy and enhance decision-making processes for important company decisions (Yeh and Trejos, 2015).
Second, tourism companies not only compete with each other but also collaborate to provide comprehensive service experiences to their customers (Evans et al., 2003).
Therefore, stakeholder management in the sector is crucial for tourism companies, placing further responsibilities on the company's board of directors (i.e., to establish stricter control over company decisions regarding stakeholders, customer service, business partnerships, and fair competition). As tourism services are largely complementary and require close collaboration across various industries, boards in tourism companies should have a broader knowledge base and understanding of
the different industries within the tourism sector. Decisions made in isolation from the dynamics of other industries may prove to be incorrect and biased. Therefore, board diversity gains additional importance for tourism companies as diverse board members bring various opinions and industry experiences to the board. Consistent with these reasons, this research uses agency theory (Fama and Jensen, 1983; Dalton et al., 2007) and corporate governance theory as its theoretical foundation and explores whether diverse boards enhance company performance in the tourism sector.
Given the scarcity of empirical findings explaining how board diversity improves the performance of tourism companies, the findings of this research are valuable for tourism executives, owners, and researchers to understand this relationship within the boundaries of the tourism sector. However, the pressing contribution of this study lies in the use of a specific contingency, namely institutional ownership. Institutional owners owe a fiduciary duty to their own shareholders to protect their interests, so they prefer to invest in companies with strong corporate governance (Chung and Zhang, 2011). In that regard, board diversity is considered a significant indicator of governance quality that attracts the attention of institutional investors when selecting companies to include in their portfolios (Fombrun and Pan, 2006). Moreover, institutional investors conduct thorough due diligence in selecting promising companies with higher financial performance and market returns (Pound, 1988). From a control perspective, institutional ownership in a company enhances external monitoring of both management and the board of directors (Navissi and Naiker, 2006). Due to their monitoring effects, the presence of institutional investors has been found to have a positive effect on financial performance (Pound, 1988)
and the market value of companies (Shleifer and Vishny, 1986). Given the quality of institutional ownership, this research further examines whether institutional ownership moderates the relationship between board diversity and the performance of tourism companies by acting as an external monitoring mechanism. More specifically, this research explains that the impact of board diversity on the performance of tourism companies becomes more significant when institutional ownership in these companies remains low.
Through this research, stakeholders in the tourism sector, such as tourism executives, owners, and researchers, will gain a better understanding of how the diversity of boards and institutional ownership interact in influencing the performance of tourism companies. The research can provide valuable insights for tourism executives in improving their corporate governance practices, as well as for owners and institutional investors in their investment decision making in the tourism sector. In addition, this research can also contribute to the academic literature by complementing our understanding of the dynamics of tourism corporate governance.
By considering contingent factors such as institutional ownership, this study complements the existing literature and provides a more comprehensive insight into the relationship between board diversity and firm performance in the context of the tourism sector. Overall, this study provides important value to stakeholders and researchers interested in the relationship between board diversity and company performance in the tourism sector. Taking into account the contingent factor of institutional ownership, this research enriches our understanding of corporate governance in the tourism industry and can make a positive contribution to the development of better governance practices in this sector.
THEORETICAL REVIEW Hypotheses Development
The existing divergence of opinions in the management and governance literature regarding the influence of board diversity on firm performance underscores the importance of conducting further research in this field.
Notably, the relationship between board diversity and financial performance in the tourism sector has received limited attention in previous studies. Therefore, this research aims to address this gap by focusing on the specific context of the tourism industry. By doing so, it seeks to offer a more comprehensive understanding of the impact of board diversity on firm performance in this particular sector. Building on the foundations of these theories, the study formulates the following hypotheses:
H1: Board diversity has a positive effect on firm performance
The examination of the impact of board diversity on corporate performance holds significant importance for both practitioners and researchers. However, there remains limited understanding of the conditions and contexts under which the relationship between board diversity and performance varies.
Theoretical ambiguities and inconsistent findings suggest that the presumed relationship is intricate and necessitates further analysis, considering specific contingencies to attain a deeper comprehension (Miller and Triana, 2009). In line with this understanding, the present study acknowledges institutional ownership as an external control mechanism that operates in conjunction with internal control mechanisms, such as board diversity, to influence corporate performance. Institutional ownership serves as a contingency factor as its presence and level can impact the relationship
between board diversity and firm performance.
The provided information highlights the role of institutional ownership as an external monitoring mechanism in companies.
Institutional ownership refers to the ownership of company shares by institutional parties such as insurance companies, investment firms, pension funds, and other institutions. It is believed that institutional ownership can reduce the influence of personal interests of managers and debtholders, thereby enhancing firm value and addressing agency conflicts.
Institutional owners, along with securities analysts, serve as external monitors who have influence over firms' strategic decisions. They actively utilize their ownership rights to ensure that managers act in the best interests of shareholders. This external monitoring complements internal monitoring mechanisms and helps control managerial opportunism. The study suggests that the presence and size of external monitors, represented by institutional ownership, affect the value of internal monitoring and its impact on firm performance through monitoring support.
In the context of tourism firms, the study argues that board diversity's impact on firm performance is expected to be greater when institutional ownership is low. This is because lower levels of institutional ownership indicate weaker external monitoring, and thus, these firms require stronger internal monitoring to prevent managerial opportunism and promote performance- enhancing strategic decisions. By considering the interaction between board diversity and institutional ownership, the study aims to provide insights into the dynamics of corporate governance in tourism companies and how different monitoring mechanisms
can influence firm performance. Thus, hypothesis 2 follows as follows:
H2: The effect of board diversity on firm performance becomes more significant
when the level of institutional ownership is low.
Figure 1. Conceptual Framework Source: Author, 2023 RESEARCH METHOD
Research types
This study uses causal associative research with quantitative methods. This type of research uses quantitative data collected from the financial statements of companies listed on the Indonesia Stock Exchange (IDX). The data source used is secondary data and is panel data.
Panel data is a combination of time series data and cross section data (Gujarati, 2012).
Research Data
This research uses a sample of tourism sector companies listed on the Indonesia Stock Exchange.The tourism sector refers to the industry related to travel, vacations, and recreational activities undertaken by both domestic and international tourists. This sector involves various aspects that include tourist destinations, transportation, accommodation, restaurants, attractions, and various other
supporting services. Tourism is one of the largest economic sectors in the world and significantly contributes to economic growth, job creation, as well as promoting cultural exchange and international understanding. The tourism sector in Indonesia is one of the main sectors in the country's economy. Indonesia's diverse natural, cultural, and historical wealth makes it an attractive destination for both domestic and international tourists. The tourism sector in Indonesia continues to grow and serves as one of the driving forces of the country's economy. With its rich and diverse potential, the tourism industry in Indonesia is expected to continue to grow and provide benefits to the country and its people as a whole.
In this study, the data used is time series data for 10 years from 2012-2021 and panel data from 15 companies engaged in the tourism
Firm Performance (Y) Board Diversity (X1)
Institutional Ownership (X2)
Control Variable:
1. Company Size (FSize) 2. Leverege (Lev) 3. Cash Flow (CF)
4. Capital Institution (Capint) 5. Dividen (Div)
6. Company Age (Fage) 7. Board Size(BSize) 8. Board Independent (Bind) 9. CEO Duality (CEO-Dual)
sector which are registered on the Indonesia Stock Exchange.
Data collection and Analysis
Data collection techniques use data in the form of documentation, data is collected through existing documents such as company financial reports which contain information on
the concentration of various boards, institutional ownership, and company performance available in the IDX's official company financial reports during the observation period.
The description of each analysis in this paper are presented in Table 1 below.
Table 1. Detailed data analysis formula
Variable Name Formula Source
Dependent Variable
Tobins’Q Tobins’Q = X0 + X1 BD + X2 InstOwn + X3 FSize + X4 XLev + X5 CF + X6 CapInt + X7 Div + X8 Fage +
X9 BSize + X10 Bind + X11 CEO-Dual
Kim et al., 2018;
Chung and Pruitt, 1995
Independent Variable
Board Diversity Dummy (1 and 0 values for companies that do not have female directors or commissioners in the company will
be given a dummy score = 0.)
Hafsi and Turgut, 2013; Ararat et al., 2010
Moedration Variable Institutional
Ownership
𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 ℎ𝑒𝑙𝑑 𝑏𝑦 𝑡ℎ𝑒 𝑖𝑛𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛 𝑡ℎ𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔
Adams and Ferreira, 2009; Hambrick and D'Aveni, 1992 Control Variable
Company Size FSize = Ln. Total Assets Vafaei et al., 2015;
Smith et al., 2006
Leverage Lev = 𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Setia-Atmaja, 2009;
Mikkelson et al., 1997
Cash Flow CF = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑖𝑒𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 Brush et al., 2000;
Abdelkarim and Alawneh, 2009 Capital Institution CapInt = 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
Lubatkin and Chatterjee (1994) Dividen Dividend = Dividend distributed by the company per
year
Lang and Stulz (1994)
Company Age Fage = Ln.Age of Company Setia-Atmaja, 2009;
Mikkelson et al., 1997
Board Size BSize = Ln. (Number of Commissioners + Number of Directors)
Kornet et al. (2007) and Yermack (1996) Board
Independent Bind = 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑐𝑜𝑚𝑖𝑠𝑖𝑜𝑛𝑒𝑟𝑠 𝑖𝑛𝑑𝑒𝑝𝑒𝑛𝑑𝑒𝑛𝑡
𝑛𝑢𝑚𝑏𝑒𝑟𝑠 𝑜𝑓 𝑐𝑜𝑚𝑚𝑖𝑠𝑖𝑜𝑛𝑒𝑟𝑠 Brickley et al., 1994 CEO Duality CEO-Dual = Dummy (which takes the value 1 if the
CEO is also chairman of the board, 0 if not)
Cornett et al., 2007
RESULTS AND DISCUSSION Results
In the following section, we present the comprehensive results of our statistical tests and regression analysis, which were conducted using the robust Fixed Effect Model method.
This approach is widely recognized for its ability to account for time-invariant
unobservable characteristics of the entities under study, thus effectively minimizing potential biases and providing more accurate estimates of the relationships between variables presented in Table 2 and Table 3.
Table 2. Descriptive Statistics Test
Variable Obs Mean Std. Dev. Min Max
TOBINSQY 150 1.208 1.139 .103 6.515
BDINDEXX1 150 .927 .262 0 1
INSTOWNX2 150 .735 .411 .108 4.844
FSIZEX3 150 27.795 1.448 24.537 31.062
LEVX4 150 .293 .19 0 .742
CFX5 150 .049 .068 -.255 .225
CAPINTX6 150 .38 .239 .02 .851
DIVX7 150 5.951 13.231 0 69
FageX8 150 3.528 .37 2.398 4.007
BSIZEX9 150 2.047 .31 1.386 2.708
BindX10 150 .313 .196 0 .667
CEODualX11 150 .753 .433 0 1
Source : The Procesed Secondary Data : STATA MP17 (2022)
TOBINSQY Coef. St.Err. t-
value
p- value
[95%
Conf
Interval] Sig
BDINDEXX1 .128 .395 0.32 .746 -.653 .91
INSTOWNX2 -.079 .223 -0.35 .723 -.521 .362
FSIZEX3 -.474 .099 -4.78 0 -.67 -.278 ***
LEVX4 .179 .453 0.40 .692 -.715 1.074
CFX5 3.71 1.424 2.61 .01 .894 6.526 **
CAPINTX6 1.009 .425 2.37 .019 .169 1.849 **
DIVX7 -.007 .007 -0.96 .338 -.02 .007
FageX8 .013 .251 0.05 .959 -.484 .51
BSIZEX9 1.28 .463 2.76 .007 .364 2.195 ***
BindX10 .667 .533 1.25 .213 -.386 1.72
CEODualX11 .337 .237 1.42 .158 -.132 .806
Constant 10.614 1.96 5.41 0 6.738 14.491 ***
Mean dependent var 1.208 SD dependent var 1.139
R-squared 0.315 Number of obs 150
F-test 5.780 Prob > F 0.000
Akaike crit. (AIC) 430.858 Bayesian crit.(BIC) 466.986
*** p<.01, ** p<.05, * p<.1
Source : The Procesed Secondary Data : STATA MP17 (2022)
Table 2 presents the summary statistics for the variables in the study. The average Tobin's Q, which measures company performance, is 1.208 in the sample. The range of Tobin's Q values varies from 0.103 to 6.155. The variable BDINDEX, representing board diversity, has a range of 0 to 1, with an average BDINDEX score of 0.927. The average institutional ownership (InstOwn) in the sample is 0.735, with the lowest institutional ownership value being 0.108 and the maximum being 4.844. The average FSize, which is the natural logarithm of total assets, is 27.795, and the average Lev (leverage) is 0.293. The average CF (cash flow) is 0.49. The average CapInt ratio, which
measures capital intensity, is 0.38 for tourism companies. The average FAge, representing the natural logarithm of the number of years since inclusion in the CRSP (Center for Research in Security Prices), is 3.528. The average annual dividend payment across all samples is 5.951 million. The average BSize, which is the natural logarithm of the number of board members, is 2.047. The average BInd, representing board independence, is 0.313. In 75.3% of the observations in the sample, the CEO also serves as the chairman of the board of directors (CEO-Dual). These summary statistics provide an overview of the variables used in the study.
Table 3. Regression Analysis Results Using the Fixed Effect Model Model 1 (Variable
Control)
Model 2 (All Variable)
Model 3 (All Variabel + Variabel Interaction)
BDIndex 0.516 0.244
InstOwn 0.142 0.098
Interact 0.142
FSize 0.181 0.225 0.168
Lev 0.001 0.001 0
CF 0.739 0.904 0.903
CapInt 0.308 0.243 0.181
DIV 0.295 0.287 0.295
Fage 0.69 0.833 0.703
BSize 0.788 0.901 0.999
Bind 0.721 0.821 0.736
CeoDual 0.223 0.577 0.909
Source: The Procesed Secondary Data: STATA MP17 (2022)
From the results of the modified regression analysis using table 3 equations, it can be seen that the effect of board diversity on company performance has been obtained through a two- way fixed effect regression, including firm fixed effects that eliminate company specific factors on Tobin's Q and year fixed effects that
take into account macro-level time-trends on Tobin's Q. The estimation results are presented in Table 3. In Model 1, only the control variables were included to assess their individual effects on company performance.
Model 2 introduced the variables BD-Index (representing board diversity) and InstOwn
(representing institutional ownership) to test the hypothesis regarding the impact of board diversity on firm performance. Finally, in Model 3, the interaction terms BD Index*InstOwn were included to examine the moderating effect of institutional ownership on the relationship between board diversity and firm performance.
Overall, the results from Model 1 indicate that the control variables, including cash flow to asset ratio, board size, and investment capital, have a positive influence on company performance as measured by Tobin's Q. These findings highlight the importance of financial indicators, governance structures, and investment capabilities in shaping the financial performance of tourism companies.
In Model 2, the inclusion of the variables BD-Index (representing board diversity) and InstOwn (representing institutional ownership) allows for testing H1, which focuses on the impact of board diversity on firm performance. The coefficient on BD- Index is positive, indicating that increasing board diversity has a positive effect on firm performance. However, the coefficient is not statistically significant (ß = 0.516, p > 0.5), suggesting that the relationship between board diversity and firm performance in the given model is not statistically robust. The interpretation of the coefficient on the BD- Index implies that a one-unit increase in board diversity, as measured by the BD-Index, leads to a 5.16% increase in Tobin's Q (a measure of firm performance). However, since the coefficient is not statistically significant, it is important to exercise caution in drawing strong conclusions from this result. The lack of statistical significance suggests that the relationship between board diversity and firm performance may not be reliably observed in the given model. Further analysis and additional data may be necessary to explore the relationship between board diversity and firm performance in the tourism sector more comprehensively and to obtain more robust and conclusive findings.
In Model 3, the interaction term BD Index
* InstOwn is added to test H2, which examines the moderating effect of institutional ownership on the relationship between board diversity and firm performance. The coefficient on the interaction variable is significant and positive (ß = 0.142, p < 0.5), indicating that institutional ownership moderates the relationship between board diversity and firm performance.
This result supports H2, suggesting that the impact of board diversity on firm performance becomes more pronounced when the level of institutional ownership is low. The decrease in the coefficient for InstOwn from 0.142 in Model 2 to 0.098 in Model 3 further indicates that institutional ownership has a moderating effect on the relationship.
In other words, when institutional ownership is low, the positive effect of board diversity on firm performance is more evident. This implies that in tourism firms with weaker external monitoring (low institutional ownership), internal monitoring through board diversity plays a more significant role in improving firm performance.
Discussion
The findings underscore the critical significance of comprehending the interplay between board diversity and institutional ownership and their collective impact on firm performance within the tourism sector. They emphasize that a holistic approach that considers both internal and external monitoring mechanisms is essential for enhancing firm performance in this specific context. By acknowledging the interconnectedness of board diversity and institutional ownership, organizations can effectively leverage these factors to drive positive outcomes and achieve sustained success in the dynamic tourism industry.
The Effect of Board Diversity on Firm
Performance
Based on the results presented in Table 3, the analysis reveals a positive but statistically insignificant impact of board diversity on company performance. This conclusion is drawn from the regression analysis, where the coefficient (ß = 0.516, p > 0.5) suggests that an increase in board diversity enhances control over firm performance, considering various factors known to influence performance. The coefficient on the BD Index indicates that a one-unit increase in the BD- Index corresponds to a 5.16% increase in Tobin's Q. This implies that board diversity has the potential to influence company performance, particularly within the Indonesian tourism sector. The diversity of the board plays a pivotal role in monitoring and enhancing the efficiency of company performance.
Diverse boards significantly enhance the likelihood of thorough questioning and scrutiny of management decisions. The inclusion of board members with diverse backgrounds and experiences brings a multitude of perspectives to the decision- making process, leading to more effective outcomes. When faced with opposition or dissent from diverse boards, management is compelled to engage in more rigorous decision-making, drawing from the array of viewpoints expressed by board members. This environment of constructive debate and challenge, fostered by diverse boards, contributes to superior decision-making and ultimately improves performance outcomes.
By harnessing the unique insights and perspectives brought by diverse board members, companies can leverage enhanced strategic oversight and a more comprehensive assessment of various options and potential risks.
Overall, the findings of this study support the notion that diverse boards contribute to
superior monitoring, value creation, and performance improvement strategies. This understanding underscores the importance of promoting diversity within corporate boards as a means to enhance governance practices and ultimately drive positive outcomes for shareholders and the organization as a whole.
This finding is consistent with the findings of large board diversity studies reporting positive impacts of board diversity on performance (Terjesen et al., 2016; Kim and Starks, 2016; Arun et al., 2015; Sabatier, 2015; Campbell and Minguez-Vera, 2008;
Erhardt et al., 2003). Given these results, this study argues that diverse boards impose superior monitoring on management and encourage management to pursue value and performance improvement strategies, which are in the best interest of shareholders. This finding is in accordance with the explanation of agency theory (Fama and Jensen, 1983;
Shleifer and Vishny, 1997) which shows that owners and managers have conflicting interests, and for better performance, these conflicting interests must be harmonized through proper monitoring. When diverse boards exist, they can easily question management and raise their awareness of controversial management decisions. When management faces opposition from diverse boards, decision making becomes more effective with a variety of views expressed by diverse board members.
Consequently, effective board oversight is imposed on management decisions, resulting in superior financial results that satisfy both managers and owners. The positive relationship between board diversity and financial performance is also consistent with views of firm resource dependence (Pfeffer and Salancik, 1978; Hillman and Cannella, 2007), which in this context suggests that board members with diverse demographic profiles and cognitive skills increase human
capital in boards and resulting in enriched decision-making processes that are thought to correlate with better performance.
The Board Diversity effect on company performance more significant when Institutional Ownership level is low.
Based on the results of model 3 from table 3 it can be concluded that the positive results are significant where (ß = 0.142, p < 0.5) are positive significant, this strengthens H2 which predicts that board diversity on company performance becomes more significant when the level of institutional ownership is low.
Which is reinforced by the significance of the BDIndex variable which was previously 0.516 in model 2 to 0.244.
The findings indicate that a low level of institutional ownership in Indonesian tourism sector companies can positively impact company performance. Over the years, institutional investors have transitioned from passive shareholders to activist shareholders (Huson et al., 2002). These large shareholders have the ability to exert significant pressure on companies through various means, such as sponsoring proxy proposals, negotiating with management, and publicly targeting underperforming companies. As a result, institutional investors can prevent activities that may harm company value and contribute to improved performance and shareholder value.
As shown by previous studies, institutional owners prefer to invest in firms with strong governance mechanisms because firms with better governance are perceived to exercise superior monitoring of management decisions (Bushee, 2001). However, when the quality of governance is substandard and unable to monitor managerial behavior, alternative control mechanisms may step in to persuade managers to act in the best interests of owners and support decisions that enhance firm performance (Linck et al., 2008). The finding
of the moderating effect of institutional ownership in this study, coupled with the positive direct effect of institutional ownership on Tobin's Q, offers consistent evidence and suggests that institutional owners actively monitor and influence managerial decisions and curb managerial opportunism to protect and enhance their investment (Tihanyi et al. ., 2003), and the value of this external monitoring becomes more salient when tourism companies have diverse boards, internal control quality. This particular finding is of great value to the governance and firm performance literature as it demonstrates the complementary role of internal and external monitoring mechanisms on firm performance. Hence, further research supports the argument that board diversity and firm performance should not be examined in isolation, but rather explored within a framework that capitalizes on contingency situations, which provides a richer picture of the alleged relationship.
CONCLUSSION AND RECOMMENDATION Conclussion
Based on the results of research and discussion regarding the effect of board diversity and institutional ownership on company performance in tourism sector companies listed on the Indonesia Stock Exchange in 2012-2021, the following conclusions can be drawn: 1. Board diversity has a positive effect on company performance. 2. The effect of board diversity on firm performance becomes more significant when the level of institutional ownership is low.
This research is not without limitations.
The findings of this study are robust insofar as they are interpreted in terms of the tourism sector. The tourism sector is service heavy and has observable sector characteristics. Thus,
this study avoids generalizing the findings to other economic sectors with different sector dynamics. If these findings are used by practitioners of other sectors, care must be taken not to arrive at wrong conclusions. the 2012–2021 observation period was chosen based on data availability, particularly for data available on the Indonesia Stock Exchange (IDX) website. Although this period reflects the last decade, this study cannot draw conclusions from past years. However, it should also be noted that board diversity has become a more serious governance issue in the last decade, which should allay concerns about the time period used in this study.
Limitations and Suggestions
Further research should focus on identifying potential contingencies that can shed more light on the complex relationship between board diversity and corporate performance, and making use of different samples across different industries and possibly countries with different governance environments to enhance our understanding of the governance issues that arise. this important. Future research should also consider incorporating the type of institutional ownership into the context of this research, because the type of institutional owner can change the direction and magnitude of the effects revealed in this research.
REFERENCES
Awais, H. M., & Siddiqui, D. D. A. (2020).
Boards’ Gender Diversity and Firms’
Financial and Ethical Performance in Pakistan: A Comparative Analysis. In Business and Economic Research (Vol. 10,
Issue 3, p. 255).
https://doi.org/10.5296/ber.v10i3.17309 Awais, H. M., & Siddiqui, D. D. A. (2020).
Boards’ Gender Diversity and Firms’
Financial and Ethical Performance in
Pakistan: A Comparative Analysis. In Business and Economic Research (Vol. 10,
Issue 3, p. 255).
https://doi.org/10.5296/ber.v10i3.17309 Brahma, S., Nwafor, C., & Boateng, A. (2021).
Board gender diversity and firm performance: The UK evidence.
International Journal of Finance and Economics, 26(4), 5704–5719.
https://doi.org/10.1002/ijfe.2089
Đặng, R., Houanti, L. H., Reddy, K., &
Simioni, M. (2020). Does board gender diversity influence firm profitability? A control function approach. Economic
Modelling, 90, 168–181.
https://doi.org/10.1016/j.econmod.2020.05 .009
Darmadi, S. (2011). Board diversity and firm performance: The indonesian evidence.
Corporate Ownership and Control, 9(1 F), 524–539.
Dieleman, D. M., Qian, D. M., Ibrahim, M. M.,
& Lim, D. V. (2015). Gender Diversity in Asia Pacific: Little of a Good Thing Evidence from China. Int. Rev. Econ. Finance
49, 17–57.
Fathonah, A. N. (2018). Pengaruh Gender Diversity dan Age Diversity Terhadap Kinerja Keuangan. 6(3), 373–380.
Hamdani, Y., & Hatane, S. E. (2015).
Pengaruh Wanita Dewan Direksi terhadap Firm Value melalui Firm Performance sebagai Variabel Intervening. 121–132.
Hillman, A.J., 2015. Board diversity:
beginning to unpeel the onion. Corp.
Govern.: Int.
Hillman, A.J., Cannella, A.A., 2007.
Organizational predictors of women on corporate boards. Acad. Manage. J. 50 (4), 941–952.
Isidro, H., & Sobral, M. (2015). The Effects of Women on Corporate Boards on Firm Value, Financial Performance, and Ethical and Social Compliance. Journal of
Business Ethics, 132(1), 1–19.
https://doi.org/10.1007/s10551-014- 2302- 9
Isti, Z., & Adhariani, R. D. (2017). Semakin Beragam Semakin Baik? Isu Keberagaman Gender, Keuangan, Dan Investasi Perusahaan. Nationally Accredited, 21(1040), 1–13. Retrieved from http://jurnal.unmer.ac.id/index.php/jkdp J. Polit. Econ. 102 (6), 1248–1280.
Karina, R., & Santy, M. (2021). Analisa Pengaruh Keragaman Dewan Direksi dan Audit terhadap Kinerja Perusahaan pada Perusahaan yang Terdaftar di BEI.
CoMBInES - Conference on Management, Business, Innovation, Education and Social Sciences, 1(1), 1114–1126.
https://journal.uib.ac.id/index.php/combin es/article/view/4544.
Kim, D., Starks, L.T., 2016. Gender diversity on corporate boards: do women contribute unique skills? Am. Econ. Rev. 106 (5), 267–271.
Kim, K., Kim, M., Qian, C., 2018. Effects of corporate social responsibility on corporate financial performance: a competitive- action perspective. J. Manage. 44, 1097–
1118. Knight, D., Pearce, C.L., Smith, K.G., Olian, J.D., Sims, H.P., Smith, K.A., Flood, P., 1999.
Kim, S.H., Cha, J.M., Cichy, R.F., Kim, M.R., Tkach, J.L., 2012. Effects of the size of the board of directors and board involvement in strategy on a private club’s financial performance. Int. J. Contemp. Hosp.
Manage. 24 (1), 7–25.
Kılıc, M., & Kuzey, C. (2016). The effect of board gender diversity on firm performance: evidence from Turkey.
Gender in Management, 31(7), 434–455.
https://doi.org/10.1108/GM-10-2015-0088 Knight, D., Pearce, C. L., Smith, K. G., Olian, J. D., Sims, H. P., Smith, K. A., & Flood, P. (1999). Top management team diversity,
group process, and strategic consensus.
Strategic management journal, 20(5), 445- 465.
Konrad, A.M., Kramer, V., Erkut, S., 2008.
Critical mass: the impact of three or more women on corporate boards. Org. Dyn. 37 (2), 145–164.
Kosnik, R., 1990. Effects of board demography and directors’ incentives on corporate greenmail decisions. Acad. Manage. J. 33, 129–150.
Lang, H.P., Stulz, R.M., 1994. Tobin’s q, corporate diversification, and firm performance.
Le, S.A., Walter, B., Kroll, M., 2006. The moderating effects of external monitors on the relationship between R&D spending and firm performance. J. Bus. Res. 59 (2), 278–287.
Li, H., & Chen, P. (2018). Board gender diversity and firm performance: The moderating role of firm size. Business
Ethics, 27(4), 294–308.
https://doi.org/10.1111/beer.12188
Lin, Y.R., Fu, X., Gu, X., Song, H., 2018.
Institutional ownership and return volatility in the casino industry. Int. J.
Tour. Res. 20, 204–214.
Lin, Y.R., Fu, X.M., 2017. Does institutional ownership influence firm performance?
Linck, J., Netter, J., Yang, T., 2008. The determinants of board structure. J. Financ.
Econ.
Low, D. C. M., Roberts, H., & Whiting, R. H.
(2015). Board gender diversity and firm performance: Empirical evidence from Hong Kong, South Korea, Malaysia and Singapore. Pacific Basin Finance Journal,
35, 381–401.
https://doi.org/10.1016/j.pacfin.2015.02.0 08
Lubatkin, M.H., Chatterjee, S., 1994.
Extending modern portfolio theory to the domain of corporate diversification. Acad.
Manage. J. 37 (1), 109–136.
Luckerath-Rovers, M. (2013). Women on boards and firm performance. Journal of Management and Governance, 17(2), 491–
509. https://doi.org/10.1007/s10997-011- 9186-1
Luthar, H.K., DiBattista, R.A., Gautschi, T., 1997. Perception of what the ethical climate is and what is should be: the role of gender, academic status, and ethical education. J. Bus. Ethics 16 (2), 205–217.
Masulis, R.W., Wang, C., Xei, F., 2009.
Agency problems at dual-class companies.
McConnell, J.J., Servaes, H., 1990. Additional evidence on equity ownership and corporate value. J. Financ. Econ. 27, 595–
612.
McLeod, P.L., Lobel, S.A., 1992. The effects of ethnic diversity on idea generation in small groups. Acad. Manage. Best Paper Proc. 227–231.
Mikkelson, W., Partch, M., Shah, K., 1997.
Ownership and operating performance of companies that go public. J. Financ. Econ.
44, 281–307.
Miller, T.L., Triana, M.C., 2009. Demographic diversity in the boardroom: mediators of the board diversity–firm performance relationship. J. Manage. Stud. 46 (5), 755–
786.
Milliken, F.J., Martins, L.L., 1996. Searching for common threads: understanding the multiple effects of diversity in organizational groups. Acad. Manage. Rev.
21, 402–433.
Ozdemir, O., Kizildag, M., Dogru, T., &
Demirer, I. (2021). Corporate social responsibility and financial performance:
Does board diversity matter? Journal of Global Business Insights, 6(2), 98–116.
https://doi.org/10.5038/2640- 6489.6.2.1169
Pasaribu, P. (2019). Gender Diversity in the Boardroom: Evidence from Indonesia Listed Firms Gender Diversity in the Boardroom : Evidence from Indonesia
Listed Firms. (January).
https://doi.org/10.13140/RG.2.2.30230.60 480
Rafinda, A., Rafinda, A., Witiastuti, R. S., Suroso, A., & Trinugroho, I. (2017). Board Diversity, Risk And Sustainability Of Bank Performance: Evidence From India. (May 1977).
Ramadhani, Z. I., & Adhariani, D. (2015).
Pengaruh Keberagaman Gender Terhadap Kinerja Keuangan Perusahaan dan Efisiensi Investasi. Simposium Nasional Akuntansi XVIII. Rev. 23 (2), 104–107.
Shalahuddin, S. (2017). Pengaruh Disiplin Kerja Dan Lingkungan Kerja Terhadap Kinerja Pegawai Dinas Kependudukan Dan Pencatatan Sipil Kabupaten Paser. At- Tadbir: jurnal ilmiah manajemen, 1(1).
Shogren, K. A., Wehmeyer, M. L., & Palmer, S. B. (2017). Causal agency theory. In Development of self-determination through the life-course (pp. 55–67).
Springer.
Sial, M., Zheng, C., Cherian, J., Gulzar, M. A., Thu, P., Khan, T., & Khuong, N. (2018).
Does Corporate Social Responsibility Mediate the Relation between Boardroom Gender Diversity and Firm Performance of Chinese Listed Companies? Sustainability,
10(10), 3591.
https://doi.org/10.3390/su10103591 Syabilla, D., Wijayanti, A., & Fahria, R.
(2021). Pengaruh Investasi Hijau dan Keragaman Dewan Direksi Terhadap Pengungkapan Emisi Karbon. Konferensi Riset Nasional Ekonomi, Manajemen, Dan Akuntansi, 2, 1171–1186.
