Diversity, Corporate Governance and Implication on Firm Financial Performance

Recent research in corporate governance has focused primarily upon minimization of agency costs in the shareholder-management relationship. Particularly, a number of studies in developed countries have carried out to investigate the effect of corporate governance on firm performance. Board characteristics play an important role in organizations to improve their corporate governance and firm performance. This paper will investigate a complimentary perspective, which is a diversity dimension at top-level management based upon upper echelon theory. Diversity comprises on demographic and cognitive dimensions. The objective of this paper is to theoretically examine and explain the effect of diversity on board of directors with regard to firm financial performance. The upper echelon theory contended that demographic and cognitive diversity dimensions at Top Level Management may impact on firm financial performance. This study contributes to potential investors, shareholders, top managements and stakeholders. It provides clear information about how to measure a firm performance. In fact, it also contributes to top managements and helps in reducing the principal-agent problem by considerate the effect of diversity in terms of BODs on firm performance. Based on this study, shareholders, stakeholders, managements and potential investors will know more how the significant roles of diversity are playing in the measurement of firm value.