Social Diversity on Corporate Boards in a Country Torn by Civil War


Kamil Korhan Nazliben
Assistant Professor of Finance, Tilburg University
Luc Renneboog
Professor of Corporate Finance, Tilburg University, and a research member of the European Corporate Governance Institute (ECGI)
Emil Uduwalage
Senior Lecturer at the Wayamba University of Sri Lanka (WUSL), PhD candidate at Tilburg University

The issue of board diversity and inclusion has gained significant importance over the last two decades. A diversified board reflects the multicultural, gender-sensitive, and varying professional and personal backgrounds of its members. Diversity at the board level is not merely a matter of equitability, but has also cognitive and communication-oriented consequences (Milliken and Martins, 1996). It associates with effective decision-making, creativity, and innovation (Cox, 1991). Diverse boards may also be more independent given the heterogeneity of viewpoints, which may reduce agency costs in the firm. On the other hand, board heterogeneity could also induce problems as disagreements between directors that could escalate to conflicts (Adams and Ferreira, 2009) and could constrain fast and efficient decision-making (Goodstein, Gautam and Boeker, 1994).

In our recent paper entitled ‘Social Diversity on Corporate Boards in a Country Torn by Civil War’, we examine how social diversity and inclusiveness in corporate boards affect corporate performance and monitoring in Sri Lanka, a country subject to decades of polarization, civil war, and even genocide. We argue that interpersonal relations in the boardrooms are not immune to the quarter-century long ethnic conflict in the country. Sri Lankan board members (and by extension citizens) may experience permanent change in their risk perceptions, financial decision making and cooperative behavior as the result of being involved and witnessing ethnic conflict and violence (Voors and others, 2012).

Barely a decade after the Sri Lankan civil war, we find that board social diversity on the basis of ethnicity, language, religion, and gender of board members is positively related to corporate performance, both in terms of stock market performance and accounting returns, and to corporate financial stability. We find no evidence that inter-personal conflicts or communication problems among board members negatively affect firm performance. Even if some firms may suffer from some communication problems within the boardroom, the overall potential benefits of social diversity outweigh its possible costs. Contrary to Roberson and Park (2007), who report a curvilinear (U-shaped) relationship between diversity and corporate performance, we demonstrate that board social diversity enhances financial performance and that this relation does not disappear for the ‘overly diversified’ firms.

Our sample comprises the firms listed on the Colombo Stock Exchange (CSE) over the period from 2011 to 2018. We gather data on the ethnicity of the directors (Sinhalese-Buddhist, Sinhalese-Catholic, Tamil, Indian-Tamil, or Moor), the languages they speak, their gender and, in case of foreign directors, their nationality. We construct several indices (Herfindahl and Blau indices) to capture board social diversity by following the diversity literature (eg Alesina and La Ferrara, 2005, Bear, Rahman and Post, 2010, Roberson and Park, 2007), and perform a panel data analysis (IV-2SLS). We also test the robustness of our results with a set of alternative diversity measures and a matched-pair analysis.

While the majority of board diversity studies have concentrated on gender, only a few studies focus on ethno(-linguistic) diversity (Carter, Simkins and Simpson, 2003, Erhardt, Werbel and Shrader, 2003, Buse, Bernestein and Bilimoria, 2016). We consider a larger spectrum of diversity including ethnicity and religion, language, gender, and nationality. Sri Lanka’s highly complex social networks and culturally rich texture provide us a perfect corporate laboratory to investigate people’s interactions within the corporate boardrooms.

The Sri Lankan example showcases that firms with inclusive boards significantly outweigh firms with less socially diverse boards in terms of performance and financial stability despite the communication challenges in the boardrooms that ethnolinguistic diversity engenders. When directors represent different cultural aspects of societies within a country, firms can gain a competitive edge following from directors’ social connections and sensitivity to the expectations and requirements of minorities. Still, making directors from different ethnicities work together may still be challenging considering the recent wounds of the civil war and occasional resurfacing tensions. The evidence put forward in this paper confirms that governance reforms focused on reconciliation and efforts to stimulating ethnolinguistic diversity have a conspicuous positive pay-off.


Kamil Korhan Nazliben is an Assistant Professor of Finance,  Tilburg University.

Luc Renneboog is a Professor of Corporate Finance, Tilburg University, and a research member of the European Corporate Governance Institute (ECGI).

Emil Uduwalage is a Senior Lecturer at the Wayamba University of Sri Lanka (WUSL), and a PhD candidate in Tilburg University.


With the support of