Embracing Corporate Diversity: Insights from Different Cultures Driving Innovation and Sustainable Governance

Abstract

This research investigates the role of board cultural diversity in promoting corporate innovation and fostering sustainable corporate governance. The global sample comprises 45,298 firm-year observations from 8,025 listed firms across 41 countries for the period 2013-2022. The sample was tested as a whole and after being split into groups with high and low board cultural diversity. The theoretical framework draws on multiple approaches, namely stakeholder, institutional, legitimacy, resource dependence, and agency theories. The findings reveal that firms with culturally diverse boardrooms exhibit higher levels of innovation and better governance ratings than those with lower board cultural diversity. Furthermore, the impact of innovation on sustainable corporate governance is positive when board cultural diversity is high (β: 0.103***), whereas it is negative when diversity is low (β: -0.0570*). The findings were validated through a variety of robustness tests, including GMM, subsample analyses, the use of a substitute independent variable, time-averaging of the dependent variable, two-way clustering, and alternative fixed effects. Executives can apply these findings when designing board structures to include non-local members, whereas policymakers may establish incentives or guidelines to facilitate the appointment of non-local directors, enhance diversity, and promote innovation.