The Influence of Board Diversity: An Investigation of Management Fraud

Abstract

This study investigates the relationship between the board of directors’ structure and the occurrence of management fraud. Specifically, I examine the relationship between the presence of female and ethnic minority board members of fortune 1500 companies and the existence of fraud perpetrated by managers. The Resource Dependence Theory (Pfeffer & Salancik, 1978) suggests that organizations exert control of their environments by co-opting the necessary resources for survival by choosing board members that bring different perspectives, experiences, values, social capital, and competences to the firm. This study explores the presence of female and ethnic minority board members to examine the Resource Dependence Theory. The logit regression method is used to investigate differences in the presence of women and ethnic minorities by matching one hundred and thirty-one companies that were prosecuted for fraud and a control group of one hundred and thirty-one companies that did not commit fraud. Results reveal significant structural differences between companies that committed fraud and those that did not commit fraud. Specifically, boards of directors of no-fraud firms are significantly more likely to have a higher percentage of both female and ethnic minority directors than fraud firms. Hence, diversity is correlated with fraud, such that more diverse boards were less likely to have a fraud allegation.