CORPORATE GOVERNANCE AND LEGAL COMPLIANCE: EVALUATING THE ROLE OF BOARD DIVERSITY IN ENHANCING ETHICAL BUSINESS PRACTICES

Abstract

The relationship between corporate governance and legal compliance has received renewed scholarly and regulatory attention in the wake of recurrent corporate scandals and the steady expansion of environmental, social, and governance mandates across markets. Board diversity in this debate has been one of the possible causative factors of enhancing ethical decision-making and compliance failure. The paper reconciles both the available theoretical knowledge and empirical evidence to establish whether or how various boards would influence ethical business practice and legal adherence and it also come up with a rigorous research design in order to estimate these effects in the different jurisdictions. The discussion, relying on the resources dependence theory, the stakeholder theory and the institutional theory, indicates the mechanisms that may allow the demographic, cognitive and experiences diversity at the top of the firm improve the quality of oversight and the breadth of the ethics, the quality of risk identification, and the legitimacy of corporate values. The paper hypothesizes a multi-method research design to overcome the correlational findings, implying that it makes use of quasi-natural experiments of gender quota launches, adoption of corporate governance codes in a staggered manner, and exogenous shocks to the intensive enforcement of the regulations. It establishes the operationalizations of board diversity and the ethical/compliance outcomes, it deals with the problem of endogeneity and measurement, and proposes the tests of heterogeneous treatment effects in terms of industry risk, ownership structure, and cultural context. Implications on the practice of regulators and boards are provided as the conclusion of the paper, and the limitations of using ethics with observable proxies and an agenda of follow-up research that will bring behavioral data, text analysis, and field experimentation to better isolate causal channels of action between boardroom composition and moral outcomes of the firm are found.