From Fragmentation to Cohesion: How Board Ethnic Diversity Shapes Environmental and Social Performance

ABSTRACT Extant research examining the link between board ethnic diversity (BED) and environmental and social (ES) performance has produced contradictory evidence, calling for further investigation and clarification. Drawing on a 6‐year panel of South African listed firms, this study disentangles the prior research findings by demonstrating a U‐shaped relationship between BED and ES performance. In this study, we integrate social identity and critical mass theories to argue firstly that the increase of ethnic diversity may cause communication barriers and distinct social categorizations that hinder boards' ability to make cohesive and impactful ES decisions. However, as ethnic diversity further increases to a very high level, the minority will reach critical mass, and such barriers will diminish, unlocking the advantages of broader perspectives and richer resources, which ultimately drive stronger ES outcomes. Using data from nonfinancial firms listed on the Johannesburg Stock Exchange (JSE) between 2015 and 2020, and employing the generalized method of moments (GMM) and two‐stage least squares (2SLS) to address endogeneity and the Heckman two‐stage model to deal with selection bias, we provide robust evidence supporting this nonlinear relationship. Additionally, we show that the negative effects of moderate diversity are mitigated when ethnic directors bring advanced education and international experience to the table—qualities that foster collaboration and bridge divides. Our study contributes to both theory and practice by deepening insights into the nexus between BED and ES performance.