International Journal of Business and Management; Vol. 10, No. 9; 2015 ISSN 1833-3850 E-ISSN 1833-8119 Published by Canadian Center of Science and Education 182 The Effect of Board Diversity on the Performance of Banks: Evidence from Turkey Merve Kilic 1 1 Department of management, Canik Basari University, Turkey Correspondence: Merve Kilic, Department of management, Canik Basari University, Turkey. E-mail: mervekilic@basari.edu.tr Received: May 19, 2015 Accepted: July 10, 2015 Online Published: August 22, 2015 doi:10.5539/ijbm.v10n9p182 URL: http://dx.doi.org/10.5539/ijbm.v10n9p182 Abstract This study has primary two aims. The first is to determine the characteristics of boards of directors in the Turkish banking industry and the second is to investigate the effect of board diversity on performance of the banks. The analyses in this study are built on the banking industry of Turkey in the period from 2008 to 2012. The impact of the board diversity, as measured by the percentage of women and foreign directors on the board and the Blau index, on financial performance is investigated by conducting panel data analysis. The findings of the study provide evidence of a negative relationship between board diversity and financial performance. Hence, the findings do not support the economic case for board diversity, which implies that diverse directors will increase the financial performance of the banks. This study provides additional evidence to the sparse literature regarding the association between board diversity and financial performance in an emerging market context. Furthermore, most prior studies regarding the relationship between gender diversity and performance have excluded financial firms from their samples. In addition, there are few studies that examine the impact of foreign directors on the performance of banks. Keywords: board of directors, board diversity, financial performance, corporate governance, banking industry, Turkey 1. Introduction Boards of directors control and monitor the top management of firms on behalf of the shareholders. Due to complexities within the banking sector, the boards of banks take on a special relevance within the framework of limited competition, intense regulation, and high informational asymmetries (de Andrés & Vallelado, 2008). Failure in bank governance can create significant costs (Pathan & Faff, 2013). Thus, the boards of banks play a vital role in controlling the behavior and strategy identification, with inherent implications, of their managers (de Andrés & Vallelado, 2008). Moreover, well-governed banks contribute to the proper functioning of non-financial firms and sustain a more efficient allocation of resources across the economy (Pathan & Faff, 2013). In the aftermath of corporate scandals, including, Enron, Worldcom, Tyco, and Parmalat, a number of practitioners have highlighted the monitoring role of board of directors (Campbell & Mínguez–Vera, 2008) and the importance of board diversity (Ujunwa, Okoyeuzu, & Nwakoby, 2012). Board composition has recently gained a tremendous amount of interest in public debate, academic research, and government agenda due to the supposed benefits derived from diversity in boardrooms (Dang, Nguyen, & Vo, 2013). Many countries, including Norway, Spain, France, and Italy, have enacted laws on the presence of women on the boards of listed companies (Schwizer, Soana, & Cucinelli, 2012). All such legislations aim to increase the quality of the corporate governance system through the presence of women directors (Schwizer et al., 2012). However, most company boards still have only one woman or a small minority of women directors, who can still be considered tokens (Torchia, Calabrò, & Huse, 2011). The number of foreign directors on boards is increasing in Turkey as a result of international mergers and acquisitions, including in the banking industry. Hence, an increasing number of studies have investigated the impact of board diversity on board effectiveness and firm performance. Many prior studies have argued that the presence of women or foreign directors on the board may improve firm performance if they bring different perspectives to the decision-making processes of the company boards. The main objective of this study is to examine the relationship between board diversity and financial performance in an emerging country, Turkey.