Main Article Content
Abstract
This study aims to investigate the effects of the Diversity and Inclusion Rating (DIR) score on profitability, comparing conventional and Islamic banks. Employing the available data on DIP and ESG (Environmental, Social, and Governance) scores from the Refinitiv database, this study took a dataset of 100 firm-year observations which consists of both conventional and Islamic banks in Indonesia and Malaysia. We conducted a random-effect regression model with the inclusion of some appropriate control variables as well as year and country dummies. The findings of this study prove that there is a positive and significant association between DIR and both profitability ratios of ROA and ROE. Meanwhile, for Islamic banks, DIR is negatively related to ROA and ROE for several reasons explained in this study, including the partial misalignment of conventional Diversity & Inclusion proxy with Sharia principles.
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Copyright (c) 2024 Yunice Karina Tumewang, Faaza Fakhrunnas, Kinanthi Putri Ardiami
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References
- Abdullah, S. N., & Ismail, K. N. (2013). Gender, ethnic and age diversity of the boards of large Malaysian firms. Journal of management, 38, 27-40.
- Abdullah, S. N., Ismail, K. N. I. K., & Nachum, L. (2016). Does having women on boards create value? The impact of societal perceptions and corporate governance in emerging markets. Strategic Management Journal, 37(3), 466-476.
- Adams, R. B., & Ferreira, D. (2009). Women in the boardroom and their impact on governance and performance. Journal of Financial Economics, 94(2), 291–309.
- Aggarwal, R., Jindal, V., & Seth, R. (2019). Board diversity and firm performance: The role of business group affiliation. International Business Review, 28(6), 101600.
- Alharasis, E. E., Alkhwaldi, A. F., & Hussainey, K. (2024). Key audit matters and auditing quality in the era of COVID-19 pandemic: the case of Jordan. International Journal of Law and Management. In-Press
- Amason, A. C. (1996). Distinguishing the effects of functional and dysfunctional conflict on strategic decision making: Resolving a paradox for top management teams. Academy of Management Journal, 39(1), 123-148.
- Arena, C., Cirillo, A., Mussolino, D., Pulcinelli, I., Saggese, S., & Sarto, F. (2015). Women on board: evidence from a masculine industry. Corporate Governance, 15(3), 339–356.
- Bax, K. (2023). Do diverse and inclusive workplaces benefit investors? An empirical analysis on Europe and the United States. Finance Research Letters, 52, 1–13.
- Boudawara, Y., Toumi, K., Wannes, A., & Hussainey, K. (2023). Shari'ah governance quality and environmental, social and governance performance in Islamic banks. A cross-country evidence. Journal of Applied Accounting Research. 24(5), 1004-1026.
- Carpenter, M. A. (2002). The implications of strategy and social context for the relationship between top management team heterogeneity and firm performance. Strategic Management Journal, 23(3), 275-284.
- Cardillo, G., Onali, E., & Torluccio, G. (2021). Does gender diversity on banks’ boards matter? Evidence from public bailouts. Journal of Corporate Finance, 71, 101560.
- Cheong, C. W. H., & Sinnakkannu, J. (2014). Ethnic diversity and firm financial performance: Evidence from Malaysia. Journal of Asia-Pacific Business, 15(1), 73–100.
- Cox, T. H., Lobel, S. A., & Mcleod, P. L. (1991). Effects of ethnic group cultural differences on cooperative and competitive behaviour on a group task. Academy of Management Journal, 34(4), 827-847.
- Dankwano, R. N., & Hassan, Z. (2018). Impact of gender diversity on indian firm's financial performance. International Journal of Management, Accounting and Economics, 5(5), 319-341.
- De Souza, N. P. R., & Gama, K. (2020). Diversity and inclusion: culture and perception in information technology companies. Revista Iberoamericana de Tecnologias Del Aprendizaje, 15(4), 352–361.
- Elsayed, K., & Paton, D. (2005). The impact of environmental performance on firm performance: Static and dynamic panel data evidence. Structural Change and Economic Dynamics, 16(3), 395-412.
- Fakhrunnas, F., Nugrohowati, R. N. I., Haron, R., & Anto, M. H. (2023). The asymmetric relationship between macroeconomic determinants and nonperforming loans: Evidence from the banking industry of Indonesia. Buletin Ekonomi Moneter Dan Perbankan, 26(1), 145–174.
- Haque, F., & Ntim, C. G. (2022). Do corporate sustainability initiatives improve corporate carbon performance? Evidence from European firms. Business Strategy and the Environment, 31(7), 3318-3334.
- Harrell, F. E. (2017). Regression modelling strategies. Bios, 330, 14.
- Hillman, A. J., Cannella, A. A., & Paetzold, R. L. (2000). The resource dependence role of corporate directors: Strategic adaptation of board composition in response to environmental change. Journal of Management Studies, 37(2).
- Hillman, A. J., Shropshire, C., & Cannella, A. A. (2007). Organizational predictors of women on corporate boards. The Academy of Management Journal, 50(4).
- Ibrahim, M. H., & Law, S. H. (2019). Financial intermediation cost in dual banking system; The role of Islamic banking. Bulletin of Monetary Economics and Banking, 22(4), 529–550.
- Refinitiv. (2022). ICD-Refinitiv Islamic Finance Development Report 2022; Embracing Change. Retrieved Dec 23, 2023, from https://www.refinitiv.com/en/resources/special-report/islamic-finance-development-report-2022
- Jabari, H. N., & Muhamad, R. (2020). Gender diversity and financial performance of Islamic banks. Journal of Financial Reporting and Accounting, 19(3), 412–433.
- Joecks, J., Pull, K., & Vetter, K. (2013). Gender diversity in the boardroom and firm performance: What exactly constitutes a “critical mass?”. Journal of Business Ethics, 118, 61–72.
- Kabir, A., Ikra, S. S., Saona, P., & Azad, Md. A. K. (2023). Board gender diversity and firm performance: new evidence from cultural diversity in the boardroom. LBS Journal of Management & Research, 21(1), 1–12.
- Khasawneh, A. Y. (2016). Vulnerability and profitability of MENA banking system: Islamic versus commercial banks. International Journal of Islamic and Middle Eastern Finance and Management, 9(4), 454–473.
- Kim, D., & Starks, L. T. (2016). Gender diversity on corporate boards: Do women contribute unique skills? American Economic Review, 106(5), 267–271.
- Konrad, A. M., Kramer, V., & Erkut, S. (2008). Critical mass: The impact of three or more women on corporate boards. Organizational dynamics, 37(2), 145-164.
- Lawal, B. (2012). Board dynamics and corporate performance: Review of literature, and empirical challenges. International Journal of Economics and Finance, 4(1).
- Marimuthu, M., & Kolandaisamy, I. (2009). Ethnic and gender diversity in boards of directors and their relevance to financial performance of Malaysian companies. Journal of Sustainable Development, 2(3), 139-148.
- Milojević, S., Milašinović, M., Mitrović, A., Ognjanović, J., Raičević, J., Zdravković, N., Knežević, S., & Grivec, M. (2023). Board gender diversity and banks profitability for business viability: Evidence from Serbia. Sustainability, 15(13).
- Moudud-Ul-Huq, S., Ashraf, B. N., Gupta, A. D., & Zheng, C. (2018). Does bank diversification heterogeneously affect performance and risk-taking in ASEAN emerging economies? Research in International Business and Finance, 46, 342-362.
- Orazalin, N. S., Ntim, C. G., & Malagila, J. K. (2023). Board sustainability committees, climate change initiatives, carbon performance, and market value. British Journal of Management. 35(1), 295-320.
- Papangkorn, S., Chatjuthamard, P., Jiraporn, P., & Chueykamhang, S. (2021). Female directors and firm performance: Evidence from the great recession. International Review of Finance, 21(2), 598-610.
- Pathan, S. (2009). Strong boards, CEO power and bank risk-taking. Journal of Banking & Finance, 33(7), 1340-1350.
- Pelled, L. H., Eisenhardt, K. M., & Xin, K. R. (1999). Exploring the black box: An analysis of work group diversity, conflict and performance. Administrative Science Quarterly, 44(1), 1-28.
- Pfeffer, J. and Salancik, G.R. (1978). The external control of organizations: A resource dependence approach, New York: Harper and Row Publishers.
- Ramlan, H., & Adnan, M. S. (2016). The Profitability of Islamic and Conventional Bank: Case Study in Malaysia. Procedia Economics and Finance, 35, 359–367.
- Saif-Alyousfi, A. Y. H., & Saha, A. (2021). Determinants of banks' risk-taking behavior, stability and profitability: evidence from GCC countries. In International Journal of Islamic and Middle Eastern Finance and Management, 14(5).
- Suciu, M. C., Noja, G. G., & Cristea, M. (2020). Diversity, social inclusion and human capital development as fundamentals of financial performance and risk mitigation. Amfiteatru Economic, 22(55), 742–757.
- Trad, N., Trabelsi, M. A., & Goux, J. F. (2017). Risk and profitability of Islamic banks: A religious deception or an alternative solution? European Research on Management and Business Economics, 23(1), 40–45.
- Trinugroho, I., Santoso, W., Irawanto, R., & Pamungkas, P. (2021). Is spin-off policy an effective way to improve performance of Islamic banks? Evidence from Indonesia. Research in International Business and Finance, 56, 101352.
- Vafaei, A., Ahmed, K., & Mather, P. (2015). Board diversity and financial performance in the top 500 Australian firms. Australian Accounting Review, 25(4), 413–427.
- Zarrouk, H., Ben Jedidia, K., & Moualhi, M. (2016). Is Islamic bank profitability driven by same forces as conventional banks? International Journal of Islamic and Middle Eastern Finance and Management, 9(1), 46–66.
References
Abdullah, S. N., & Ismail, K. N. (2013). Gender, ethnic and age diversity of the boards of large Malaysian firms. Journal of management, 38, 27-40.
Abdullah, S. N., Ismail, K. N. I. K., & Nachum, L. (2016). Does having women on boards create value? The impact of societal perceptions and corporate governance in emerging markets. Strategic Management Journal, 37(3), 466-476.
Adams, R. B., & Ferreira, D. (2009). Women in the boardroom and their impact on governance and performance. Journal of Financial Economics, 94(2), 291–309.
Aggarwal, R., Jindal, V., & Seth, R. (2019). Board diversity and firm performance: The role of business group affiliation. International Business Review, 28(6), 101600.
Alharasis, E. E., Alkhwaldi, A. F., & Hussainey, K. (2024). Key audit matters and auditing quality in the era of COVID-19 pandemic: the case of Jordan. International Journal of Law and Management. In-Press
Amason, A. C. (1996). Distinguishing the effects of functional and dysfunctional conflict on strategic decision making: Resolving a paradox for top management teams. Academy of Management Journal, 39(1), 123-148.
Arena, C., Cirillo, A., Mussolino, D., Pulcinelli, I., Saggese, S., & Sarto, F. (2015). Women on board: evidence from a masculine industry. Corporate Governance, 15(3), 339–356.
Bax, K. (2023). Do diverse and inclusive workplaces benefit investors? An empirical analysis on Europe and the United States. Finance Research Letters, 52, 1–13.
Boudawara, Y., Toumi, K., Wannes, A., & Hussainey, K. (2023). Shari'ah governance quality and environmental, social and governance performance in Islamic banks. A cross-country evidence. Journal of Applied Accounting Research. 24(5), 1004-1026.
Carpenter, M. A. (2002). The implications of strategy and social context for the relationship between top management team heterogeneity and firm performance. Strategic Management Journal, 23(3), 275-284.
Cardillo, G., Onali, E., & Torluccio, G. (2021). Does gender diversity on banks’ boards matter? Evidence from public bailouts. Journal of Corporate Finance, 71, 101560.
Cheong, C. W. H., & Sinnakkannu, J. (2014). Ethnic diversity and firm financial performance: Evidence from Malaysia. Journal of Asia-Pacific Business, 15(1), 73–100.
Cox, T. H., Lobel, S. A., & Mcleod, P. L. (1991). Effects of ethnic group cultural differences on cooperative and competitive behaviour on a group task. Academy of Management Journal, 34(4), 827-847.
Dankwano, R. N., & Hassan, Z. (2018). Impact of gender diversity on indian firm's financial performance. International Journal of Management, Accounting and Economics, 5(5), 319-341.
De Souza, N. P. R., & Gama, K. (2020). Diversity and inclusion: culture and perception in information technology companies. Revista Iberoamericana de Tecnologias Del Aprendizaje, 15(4), 352–361.
Elsayed, K., & Paton, D. (2005). The impact of environmental performance on firm performance: Static and dynamic panel data evidence. Structural Change and Economic Dynamics, 16(3), 395-412.
Fakhrunnas, F., Nugrohowati, R. N. I., Haron, R., & Anto, M. H. (2023). The asymmetric relationship between macroeconomic determinants and nonperforming loans: Evidence from the banking industry of Indonesia. Buletin Ekonomi Moneter Dan Perbankan, 26(1), 145–174.
Haque, F., & Ntim, C. G. (2022). Do corporate sustainability initiatives improve corporate carbon performance? Evidence from European firms. Business Strategy and the Environment, 31(7), 3318-3334.
Harrell, F. E. (2017). Regression modelling strategies. Bios, 330, 14.
Hillman, A. J., Cannella, A. A., & Paetzold, R. L. (2000). The resource dependence role of corporate directors: Strategic adaptation of board composition in response to environmental change. Journal of Management Studies, 37(2).
Hillman, A. J., Shropshire, C., & Cannella, A. A. (2007). Organizational predictors of women on corporate boards. The Academy of Management Journal, 50(4).
Ibrahim, M. H., & Law, S. H. (2019). Financial intermediation cost in dual banking system; The role of Islamic banking. Bulletin of Monetary Economics and Banking, 22(4), 529–550.
Refinitiv. (2022). ICD-Refinitiv Islamic Finance Development Report 2022; Embracing Change. Retrieved Dec 23, 2023, from https://www.refinitiv.com/en/resources/special-report/islamic-finance-development-report-2022
Jabari, H. N., & Muhamad, R. (2020). Gender diversity and financial performance of Islamic banks. Journal of Financial Reporting and Accounting, 19(3), 412–433.
Joecks, J., Pull, K., & Vetter, K. (2013). Gender diversity in the boardroom and firm performance: What exactly constitutes a “critical mass?”. Journal of Business Ethics, 118, 61–72.
Kabir, A., Ikra, S. S., Saona, P., & Azad, Md. A. K. (2023). Board gender diversity and firm performance: new evidence from cultural diversity in the boardroom. LBS Journal of Management & Research, 21(1), 1–12.
Khasawneh, A. Y. (2016). Vulnerability and profitability of MENA banking system: Islamic versus commercial banks. International Journal of Islamic and Middle Eastern Finance and Management, 9(4), 454–473.
Kim, D., & Starks, L. T. (2016). Gender diversity on corporate boards: Do women contribute unique skills? American Economic Review, 106(5), 267–271.
Konrad, A. M., Kramer, V., & Erkut, S. (2008). Critical mass: The impact of three or more women on corporate boards. Organizational dynamics, 37(2), 145-164.
Lawal, B. (2012). Board dynamics and corporate performance: Review of literature, and empirical challenges. International Journal of Economics and Finance, 4(1).
Marimuthu, M., & Kolandaisamy, I. (2009). Ethnic and gender diversity in boards of directors and their relevance to financial performance of Malaysian companies. Journal of Sustainable Development, 2(3), 139-148.
Milojević, S., Milašinović, M., Mitrović, A., Ognjanović, J., Raičević, J., Zdravković, N., Knežević, S., & Grivec, M. (2023). Board gender diversity and banks profitability for business viability: Evidence from Serbia. Sustainability, 15(13).
Moudud-Ul-Huq, S., Ashraf, B. N., Gupta, A. D., & Zheng, C. (2018). Does bank diversification heterogeneously affect performance and risk-taking in ASEAN emerging economies? Research in International Business and Finance, 46, 342-362.
Orazalin, N. S., Ntim, C. G., & Malagila, J. K. (2023). Board sustainability committees, climate change initiatives, carbon performance, and market value. British Journal of Management. 35(1), 295-320.
Papangkorn, S., Chatjuthamard, P., Jiraporn, P., & Chueykamhang, S. (2021). Female directors and firm performance: Evidence from the great recession. International Review of Finance, 21(2), 598-610.
Pathan, S. (2009). Strong boards, CEO power and bank risk-taking. Journal of Banking & Finance, 33(7), 1340-1350.
Pelled, L. H., Eisenhardt, K. M., & Xin, K. R. (1999). Exploring the black box: An analysis of work group diversity, conflict and performance. Administrative Science Quarterly, 44(1), 1-28.
Pfeffer, J. and Salancik, G.R. (1978). The external control of organizations: A resource dependence approach, New York: Harper and Row Publishers.
Ramlan, H., & Adnan, M. S. (2016). The Profitability of Islamic and Conventional Bank: Case Study in Malaysia. Procedia Economics and Finance, 35, 359–367.
Saif-Alyousfi, A. Y. H., & Saha, A. (2021). Determinants of banks' risk-taking behavior, stability and profitability: evidence from GCC countries. In International Journal of Islamic and Middle Eastern Finance and Management, 14(5).
Suciu, M. C., Noja, G. G., & Cristea, M. (2020). Diversity, social inclusion and human capital development as fundamentals of financial performance and risk mitigation. Amfiteatru Economic, 22(55), 742–757.
Trad, N., Trabelsi, M. A., & Goux, J. F. (2017). Risk and profitability of Islamic banks: A religious deception or an alternative solution? European Research on Management and Business Economics, 23(1), 40–45.
Trinugroho, I., Santoso, W., Irawanto, R., & Pamungkas, P. (2021). Is spin-off policy an effective way to improve performance of Islamic banks? Evidence from Indonesia. Research in International Business and Finance, 56, 101352.
Vafaei, A., Ahmed, K., & Mather, P. (2015). Board diversity and financial performance in the top 500 Australian firms. Australian Accounting Review, 25(4), 413–427.
Zarrouk, H., Ben Jedidia, K., & Moualhi, M. (2016). Is Islamic bank profitability driven by same forces as conventional banks? International Journal of Islamic and Middle Eastern Finance and Management, 9(1), 46–66.