Board diversity faultlines and textual social and environmental disclosures

Abstract

AbstractBy creating a comprehensive corporate social- and environmental-related lexicon, this paper examines the extent to which board diversity impacts social and environmental disclosures. Contributing to diversity literature, we rely on the faultlines concept, postulated and developed by organizational research, which is hypothetical dividing lines that split a boardroom into relatively homogeneous subgroups based on directors’ diversified attributes. Employing a sample of FTSE All-share non-financial firms, our findings show that firms with higher faultline strength in the boardroom (i.e., relatively more homogeneous subgroups) exhibit significantly lower levels of both social and environmental disclosures in their narrative sections of annual reports. This implies that board diversity faultlines are likely to have a detrimental effect on corporate boards regarding reaching a consensus decision on disclosing information on social and environmental aspects. Our results remain robust after a battery of sensitivity tests and addressing potential endogeneity problems. Our results provide timely evidence-based insights into major recent structural reforms aiming at proposing remedies to corporate governance problems in the UK, specifically that interest should not be confined to board diversity per se but configurations (the extent of convergence) between the diversified attributes. Furthermore, the evidence provided by our paper should be of interest to the UK’s regulatory bodies (Financial Reporting Council) considering their increasing focus and pursuit to understand the underlying challenges of corporate social and environmental reporting.