Independent Board Members and Financial Performance: ESG Mediation in Taiwan

Abstract

This study investigates the relationship between independent board members and corporate financial performance in Taiwan, emphasizing the mediating role of environmental, social, and governance (ESG) factors. Using panel data regression analysis on data from the Thomson Reuters Eikon database from 2009 to 2021, the study examines 173 Taiwanese companies reporting ESG information. Results indicate a positive correlation between independent directors and financial performance, with ESG factors significantly mediating this relationship. The findings suggest that board diversity and ESG considerations are crucial for enhancing corporate governance and financial results. The study highlights the importance of regulatory and market pressures in driving companies to integrate ESG considerations into their strategies. It encourages policymakers and businesses to promote board independence and robust ESG practices to achieve sustainable development and improved financial outcomes. The research fills a gap by empirically investigating the intermediary role of ESG between board independence and financial performance, contributing valuable insights for enhancing corporate governance and stakeholder engagement.

1. Introduction

The study delves into two crucial aspects: firstly, the impact of a company’s independent board of directors on its financial performance (FP); and secondly, the intermediary role played by the ESG pillars (environmental, social, and governance) within this dynamic. It illuminates the ongoing discourse surrounding how ESG considerations influence the interaction between independent board members (IBMs) and a company’s financial outcomes. The discussion highlights the growing acknowledgment of board diversity’s influence on ESG practices in recent years [1,2]. Moreover, it emphasizes the pivotal role of independent directors in corporate governance [3], elucidating their contributions to oversight [4], reduction of agency costs [5], and enrichment of innovation and problem-solving within the board by introducing fresh perspectives and expertise [6]. Consequently, the intersection between IBMs and business performances has emerged as a central focus of contemporary scholarly inquiry. Consequently, the relationship between IBMs and business performance has garnered significant attention in contemporary research.

Board diversity is classified into structural type, i.e., board independence [7], functional division, and demographic type, i.e., gender, age, education level, nationality, and tenure [8]. The multifaceted role of the board encompasses supervisory and advisory responsibilities to enhance business performance within the frameworks of agency theory and resource-based perspectives [9]. In addition, the board of directors has enough dependent and independent directors, which allows them to exercise oversight responsibilities, deal with agency issues, and protect minority shareholders from potential exploitation or undue influence by major shareholders [10]. Therefore, board independence is not only a complement to diversity but is essential for effective governance [11]. Moreover, it suggests a potential positive relationship between board independence and FP, underscoring the pivotal contribution of IBMs in enhancing decision-making processes and, consequently, fostering enhanced financial results for the organization.

Environmental, social, and governance (ESG) principles offer an investment framework that emphasizes sustainability, social equity, and ethical management. Unlike traditional strategies focused solely on financial returns, ESG prioritizes long-term value creation through responsible corporate practices. Originating from the corporate social responsibility (CSR) movement, ESG gained momentum through voluntary efforts by the public and non-profit organizations [12]. Thomson Reuters has played a key role in steadily developing an ESG performance and disclosure assessment system under the Refinitiv brand. These assessments are typically conducted by third-party rating agencies [13], evaluating a company’s engagement and performance in CSR activities. Environmental, social, and governance (ESG) metrics have become a pivotal indicator of market engagement, driven by intensified regulatory scrutiny and rising consumer consciousness about environmental and social concerns. Although the importance of ESG is increasingly recognized, existing literature presents mixed findings on its impact on firm performance [14], primarily concentrating on the determinants and outcomes of ESG practices [15,16].

In the context of Taiwan, where corporate governance frameworks are continuously evolving, understanding the interaction between IBM, ESG activities, and financial performance is particularly essential. Taiwanese companies are increasingly integrating ESG considerations into their strategic objectives, driven by regulatory pressures and market demands. Taiwan is used for this study due to its unique political, economic, and cultural context. Politically, Taiwan has an independent political system, but China considers Taiwan part of its territory. Therefore, Taiwan is not a member of the United Nations, but it maintains informal relations with many countries. Economically, Taiwan is a developed economy with exports as the main driving force. The country is renowned for its technology and manufacturing industries, especially semiconductor manufacturing. Culturally, Taiwan blends Chinese, Japanese, and indigenous Taiwanese elements, creating a rich and diverse culture. These factors create a distinct research environment compared to other countries, an aspect that needs to be considered when examining the relationship between board independence, ESG, and financial performance.

The primary emphasis of the research is to offer theoretical insights and empirical support for understanding the influence of IBMs on FP, considering the mediation of three critical ESG components: environmental, social, and governance pillars. Notably, prior research has often overlooked the intermediary role of ESG disclosure in the context of the connection between the ratio of independent directors and FP. This supervision is increasingly significant in the context of today, where sustainability is a key objective for businesses and countries worldwide. This study seeks to enhance understanding by empirically investigating how the three ESG pillars mediate the connection between board independence and a company’s FP.

Our study is based on an experiment using data from 173 Taiwanese companies that have disclosed their ESG commitments from 2009 to 2021. We collected these data from the Refinitiv Eikon data system, provided by Thomson Reuters. The results indicate a positive correlation between a higher proportion of independent directors within a company and improved FP. Furthermore, from a stakeholder perspective, the findings indicate that the three pillars of ESG mediate regarding the relationship between IBMs and the FP.

The study centers on companies with ESG disclosure, implying a preference for companies that prioritize sustainability. The research investigates the independence of a company’s board of directors from the perspective of stakeholders and representatives. It aims to understand how the presence of IBM impacts the company’s FP. The study explores the mediating role of ESG’s three pillars concerning the company’s sustainability. This provides deeper insights into sustainable development approaches. The study’s results and arguments complement existing academic literature in the ESG field. The research encourages policymakers and businesses to consider the proportion of IBMs in a manner that fosters sustainable development and enhances a company’s FP.

The subsequent sections of the research paper are structured as follows: Part two: Literature Review. Part three: Research Methods, Data, Techniques, and Analysis. Part four: Research Findings. Part five: Discussion. Part six: Conclusion.

2. Literature Review

2.1. Independent Board Member and ESG

Stakeholder theory provides a comprehensive framework for understanding the link between independent board members (IBMs) and ESG pillar factors [17]. According to this theory, companies ought to prioritize the interests of all stakeholders, rather than focusing solely on shareholders, when making decisions [18], rather than focusing solely on shareholders’ interests. IBMs are instrumental in ensuring that a company adheres to this inclusive approach, particularly in the context of ESG considerations [19].

Stakeholder theory asserts that businesses should aim to create value for a diverse range of stakeholders [20], encompassing shareholders, employees, customers, suppliers, communities, and the environment. Unlike the traditional shareholder-centric approach, which focuses on maximizing shareholder value, this theory promotes a fairer approach. Thanks to their independence, IBMs can ensure that the interests of different stakeholders are considered in the company’s decision-making process [21]. Their independence allows them to evaluate ESG initiatives without conflicts of interest, balancing short-term financial performance (FP) with long-term stakeholder value [21].

IBMs can advocate for environmental policies that not only reduce the company’s ecological footprint but also benefit local communities and ecosystems [22]. For instance, promoting sustainable resource management and reducing emissions align with the interests of both the environment and the community [23]. They ensure that social initiatives, including equitable employment practices as well as diversity, inclusion, and community engagement, are effectively implemented [24]. These initiatives support employees, suppliers, and communities, thereby strengthening the company’s social license to operate. IBMs can also enhance governance practices to ensure ethical conduct and transparency [25], helping build trust with all stakeholders, including investors, regulators, and the public.

IBMs are integral to the effective implementation of stakeholder theory in the context of ESG. Their ability to provide objective oversight, align ESG goals with stakeholder interests, and foster stakeholder engagement ensures that companies can achieve sustainable and responsible. Building on stakeholder theory and past research, we put forth the following hypothesis:

H1a: 

Board independence is positively related to the environmental pillar.

H1b: 

Board independence is positively related to the social pillar.

H1c: 

Board independence is positively related to the governance pillar.

2.2. Independent Board Member and Financial Performance

Independent (non-executive) board members play a pivotal role in corporate governance [3], significantly influencing managerial oversight and shareholder interests [26]. Regulatory bodies, researchers, and investors agree on the necessity of increasing the number of independent directors to ensure equitable governance. This consensus aligns with agency theory, which recommends a predominantly independent board to mitigate management opportunism and conflicts of interest [27]. Proponents of greater board independence argue that it enhances oversight and reduces agency costs [5], generally deemed beneficial for corporate governance.

However, empirical evidence on the effectiveness of independent boards is inconsistent. Some studies identify a positive correlation between board independence and firm value, suggesting that greater independence leads to better performance [28,29]. Conversely, other studies report a negative association between board independence and firm performance [30]. This opposing view highlights that an excessive focus on independence might not always yield positive outcomes. Moreover, some studies find no conclusive evidence linking board independence to firm performance [31,32].

In summary, despite extensive research on board independence, understanding how independent directors relate to financial performance (FP) remains underexplored. The proposed hypothesis offers a valuable starting point for investigating this relationship and its potential influence on the financial success of firms.

H2: 

Independent Board Member is positively associated with FP.

2.3. The Relationship between ESG Practices and Financial Performance

The interaction between environmental, social, and governance (ESG) practices and financial performance (FP) is a topic of interest among investors, companies, and researchers. ESG practices constitute operational standards that socially conscious investors employ to evaluate potential investments [33].

The environmental pillar focuses on a company’s effect on the natural environment, addressing issues such as climate change, resource management, pollution, and biodiversity. Companies with high environmental scores typically comply well with regulations [34], reducing the risk of fines, litigation, and legal costs, thereby enhancing their reputation [35], and attracting customers, investors, and employees. This leads to better revenues and easier access to capital. Research shows that these companies often achieve better long-term financial results [36], such as superior stock market performance and higher returns on assets and equity.

The social pillar focuses on a company’s commitment to ethical relationships and practices, including labor standards, human rights, diversity and inclusion, community engagement, and customer satisfaction. Companies with high social scores often have higher employee morale and engagement, leading to better efficiency and innovation, lower employee turnover, and reduced recruitment and training costs. This enhances their reputation [37], attracts loyal customers, increases sales and profits, and improves overall FP [38].

The governance pillar emphasizes the frameworks and procedures a company uses to manage itself, including board structure, executive compensation, shareholder rights, transparency, and anti-corruption measures. Companies with high governance scores typically have strong internal controls and audit mechanisms, preventing fraud and scandals, reducing financial losses [39], and reducing reputational damage. Good governance practices ensure compliance with regulations, avoiding costly fines, and building investor trust, which results in higher stock valuations and improved access to financial markets [40]. These companies are often perceived as lower-risk, resulting in lower capital costs and better FP. Numerous studies have shown that companies with good governance practices tend to perform better financially, with higher returns on equity, better stock performance [41], and greater profitability, due to improved risk management, better decision-making, and enhanced investor confidence [42].

Based on these assertions, the author proposes the following hypotheses:

H3a: 

The environmental pillar has a positive impact on FP.

H3b: 

The governance pillar has a positive impact on FP.

H3c: 

The social pillar has a positive impact on FP.

2.4. Mediating Effects of ESG

In the context of increasing climate change risks and rising stakeholder expectations for sustainability and corporate social responsibility [43], ESG practices have become essential for businesses to enhance their overall value. Companies with strong ESG performance are often perceived by the public as having green and low-carbon production methods, reducing material consumption [44], and engaging in environmentally responsible activities. This perception helps increase the perceived value of the business. Jun, Shiyong, and Yi [45] highlight that CSR programs play a crucial role in developing intangible assets by attracting potential customers, enabling businesses to secure a larger market share, and fostering a positive social image.

Shifting from shareholder-centric governance to stakeholder-centric governance helps balance the interests of investors and non-investors, mitigating risks and safeguarding the intrinsic value of the firm [46]. ESG activities provide a more comprehensive assessment of CSR performance and the company’s sustainable development prospects, reducing uncertainty about the company’s future [47], attracting investment, promoting innovation, creating competitive advantages, cost savings, and increasing brand recognition [48].

According to Broadstock, Chan [49], ESG principles can significantly enhance management and mitigate risks. ESG acts as a soft control mechanism, influencing risk-taking decisions and improving company value by limiting unnecessary risks.

Pedersen, Fitzgibbons and Pomorski [50] suggest that companies with good ESG performance reduce operational risks and better withstand crises, protecting their reputation. ESG also helps reduce debt costs [51], increase access to external financing [52], and enhance company value [53].

Combining the roles of independent board members and ESG, the author proposes the fourth hypothesis:

H4: 

ESG pillars play a mediating role in the relationship between independent board members and financial performance.

3. Methodology

3.1. The Refinitiv Database

The author used data from Refinitiv, also known as Refinitiv Eikon, a reputable database created by Thomson Reuters. Refinitiv was chosen due to its global reputation and extensive ESG database with over 450 ESG indicators. Researchers prefer Refinitiv for its transparent data calculation methods.

The study utilized ten specific data parameters, as outlined in

Table 1. Variables and their definitions.

Variables	Abbreviation	Explanation
Dependent variables
Return on assets	ROA	It represents the profitability of total assets and is calculated by dividing net income after tax by total assets.
Return on equity	ROE	It represents the return on invested equity from an accounting perspective and is calculated by dividing net income after tax by total equity.
Earnings per share	EPS	It is calculated by dividing a company’s profit by the outstanding shares of its common stock.
Independent variable
Independent board members	IBM	Percentage of independent board members as reported by the company.
Mediation variables
Environment pillar score	EnPS	It is the weighted average relative rating of a company based on reported environmental information and the resulting scores from three environmental categories.
Governance pillar score	GPS	The weighted average relative rating of a company based on reported governance information and the resulting scores from three governance categories.
Social pillar score	SPS	The weighted average relative rating of a company based on reported social information and the resulting scores from four social categories.
Control variables
Logarithm of total assets	LA	It is measured by the logarithm of total assets, which represent the value of everything a person or company owns.
Market-to-book value	MBV	This is defined as the market value of the common equity divided by the balance sheet value of the common equity in the company.
Board size	BS	The total number of board members at the end of the fiscal year.

Source: authors.

. These parameters encompass independent board members (IBMs); environmental, social, and governance pillar scores; board size; total assets; market-to-book value; return on assets; return on equity; and earnings per share. The data collected for this study reflect the most recent Refinitiv framework available as of June 2023. The use of Refinitiv is a common practice in prior research, including fields such as banking [12,54,55] and various other fields [56,57,58].

3.2. Sample

Our dataset comprises data from 173 Taiwanese companies with ESG reports available on the Refinitiv database for the years 2002–2022. It is worth noting that the ESG data for most of these companies during the period from 2002 to 2007 are missing (‘NA’). Additionally, the global financial crisis occurred between 2007 and 2008, which may have impacted the accuracy of the data for those years. To ensure data completeness and balance, the author chose to analyze data for the period from 2009 to 2021, as data for 2022 were either largely unavailable or not updated. Out of the 173 companies included in the study, the majority (approximately 89.6%) operate in the manufacturing and service industries, while the remaining 10.4% are in other sectors.

3.3. Statistical Models and Methods

Figure 1 shows the proposed model, including control variables to study the influence of independent board members on financial performance (FP), in which 3 dimensions of ESG play an intermediary role.

ESG_Pillar_ny = b₀ + b₁ IBM_ny + b₂LA_ny + b₃MBV_ny + b₄BS_ny + e_ny

(1)

Financial_Performance_ny = b₀ + b₁ IBM_ny + b₂LA_ny + b₃ MBV_ny + b₄BS_ny + e_ny

(2)

Financial_Performance_ny = b₀ + b_1–3 ESG_Pillar_ny + b₄LA_ny + b₅ MBV_ny + b₆BS_ny + e_ny

(3)

Financial_Performance_ny = b₀ + b₁IBM_ny + b₂EnPS_ny + b₃GPS_ny + b₄LA_ny + b₅ MBV_ny + b₆BS_ny + e_ny

(4)

In this study, we utilize a set of variables to examine the association between corporate financial performance (FP), board independence, ESG performance, and firm-specific characteristics. Table 1 provides an overview of these variables, with explanations based on data obtained from the Refinitiv Eikon database.

Financial_Performance: This variable represents corporate FP and is measured by three dependent variables: ROA, ROE, and EPS of the enterprise. These metrics are measured in a specific year (y) for a particular enterprise (n).

IBM: This variable measures the level of independence of the board of directors within the enterprise (n) during a specific year (y).

ESG_Pillar (ESG Performance): This is an intermediate variable that reflects the environmental, social, and governance (ESG) performance of the business (n) during a specific year (y).

Enterprise_specific: Represented by the size measured by LA, MBV, and BS, which serve as firm-specific control variables for enterprise (n), in years (y); b₀ represents constant; b_1–6 are the coefficients of the predictor and control variables; and e represents the estimation error.

The model equations were estimated using the static panel data method with Stata 14 software. The xtgls command was utilized to obtain the results for the static panel analysis. Panel data provides researchers with a comprehensive dataset that enhances degrees of freedom and reduces multicollinearity among independent variables.

The use of fixed and random effects specifications offers the advantage of controlling for unobserved heterogeneity without requiring the identification of the source of that heterogeneity. In this study, a static panel data model was chosen for estimation after addressing issues related to variable variance and autocorrelation through feasible generalized least squares (FGLS) estimates.

To determine the appropriateness of a fixed-effects versus a random-effects model, the Hausman test was conducted. The results indicate that the fixed-effects model offers the most precise estimates.

3.4. Control Variables

The author has taken measures to control for various factors that could impact a firm’s financial performance (FP), including firm size, market-to-book ratio (MTB), and board size.

Firstly, firm size is measured using the natural logarithm of total assets [59,60]. Firm size is expected to have a positive correlation with FP, supported by previous studies indicating that larger companies tend to perform better financially due to superior management [61].

Secondly, FP is adjusted for using the MTB. Lewellen [62] research underscores that low-growth firms typically exhibit lower stock prices and MTB. Furthermore, firms with limited growth prospects, reflected in low MTB, are considered more susceptible to market volatility, a notion emphasized [63]. Consequently, a positive relationship is predicted between FP and MTB.

Lastly, board size is represented by the total number of directors serving at the end of the financial year. Existing evidence suggests that firms with larger boards tend not to achieve strong FP [64]. Therefore, an inverse connection between board size and FP is expected.

4. Results

Table 2. Descriptive statistics.

Variable	Obs	Mean	Std. Dev.	Min	Max
ROA	2046	6.205894	7.818644	−88.09	58.23
ROE	2046	15.00965	148.6969	−888.35	6620.58
EPS	2072	5.178219	13.66453	−82.925	210.698
IBM	1667	26.54602	14.43207	0	80
EnPS	1670	44.31274	27.4732	0	98.7
GPS	1670	47.71417	23.88783	0.7	95.22
SPS	1670	44.61356	28.91025	0.15	97
LA	2073	18.38158	1.708222	12.52441	23.16735
MBV	2069	2.023958	1.909692	−4.26	24.31
BS	1670	10.32455	3.512376	1	28

Source: Authors’ calculation.

and

Table 3. Correlation matrix.

Variable	ROA	ROE	ESP	IBM	EnPS	GPS	SPS	LA	MBV	BS
ROA	1.0000
ROE	0.1526 ***	1.0000
EPS	0.4979 **	0.0507 **	1.0000
IBM	0.0678 ***	0.0665 ***	0.0283	1.0000
EnPS	−0.1060 ***	−0.0712 ***	−0.0980 ***	0.3439 ***	1.0000
GPS	−0.1054 ***	−0.0242	−0.0677 ***	0.3571 ***	0.5078 ***	1.0000
SPS	−0.0683 ***	−0.0250	−0.0238	0.3804 ***	0.8191 ***	0.5406 ***	1.0000
LA	−0.3045 ***	−0.0388 *	−0.0198	0.0501 **	0.3852 ***	0.3425 ***	0.3990 ***	1.0000
MBV	0.4956 ***	0.2853 ***	0.2960 ***	0.0307	−0.0481 *	−0.0222	−0.0618 **	−0.3011 ***	1.0000
BS	−0.1799 ***	−0.0871 ***	−0.1105 ***	−0.2056 ***	0.1382 ***	0.0163	0.0698 ***	0.3810 ***	−0.1060 ***	1.0000

Note: The Pearson correlation coefficients are presented. ***, **, and * denote statistical significance at 1%, 5% and 10% levels, respectively. Source: Authors’ calculation.

illustrate the descriptive statistics and correlations of the variables in the research model. The coefficients are estimated using the static panel data method for the period spanning 2009 to 2021.

The results indicate that the percentage of IBMs influences the three ESG pillar scores as well as the FP variables (

Table 4. Regression Results.

	EnPS	GPS	SPS	ROA	ROE	EPS
	Model 1	Model 2	Model 3	Model 4	Model 5	Model 6
	Coef. (se)	Coef. (se)	Coef. (se)	Coef. (se)	Coef. (se)	Coef. (se)
Independent Variable
IBM	0.208 *** (0.022)	0.366 *** (0.019)	0.262 *** (0.027)	0.004 (0.005)	0.028 *** (0.009)	0.013 *** (0.004)
Mediation Variables
EnPS
GPS
SPS
Control Variables
LA				−0.870 *** (0.064)	0.276 *** (0.104)	0.587 *** (0.100)
MBV				1.356 *** (0.077)	2.937 *** (0.133)	1.389 *** (0.078)
BS				−0.078 *** (0.020)	−0.214 *** (0.037)	−0.103 *** (0.024)
Constant	38.869 *** (1.006)	38.454 *** (0.838)	40.048 *** (1.200)	19.910 *** (1.245)	2.487 (2.015)	−9.044 *** (1.867)
Hausman chi2	14.13 ***	1.88	11.21 ***	25.30 ***	29.23 ***	132.70 ***
Modified Wald (He) chi2	3.9 × 10−33 ***		2.2 × 10−31 ***	2.2 × 10−35 ***	1.8 × 10−35 ***	1.1 × 10−34 ***
Breusch and Pagan Lagrangian multiplier(he) chibar2		3196.83 ***
Wooldridge (AR1)F	481.219	140.990	667.541	14.713	83.875	11.341
Observation/subject	1656/162	1656/162	1656/162	1564/155	1576/155	1576/155
Wald chi2	83.67 **	347.68 ***	93.31 ***	725.85 ***	633.84 ***	322.39 ***

Note: The Pearson correlation coefficients are presented. *** and ** denote statistical significance at 1% and 5% levels. Source: Authors’ calculation.

and

Table 5. Regression results.

	ROA	ROE	EPS	ROA	ROE	EPS
	Model 7	Model 8	Model 9	Model 10	Model 11	Model 12
	Coef. (se)	Coef. (se)	Coef. (se)	Coef. (se)	Coef. (se)	Coef. (se)
Independent Variable
IBM				0.011 *** (0.003)	0.059 *** (0.006)	0.031 *** (0.004)
Mediation Variables
EnPS	−0.013 *** (0.003)	−0.054 *** (0.007)	−0.022 *** (0.004)	−0.012 *** (0.003)	−0.072 *** (0.006)	−0.025 *** (0.004)
GPS	−0.013 *** (0.002)	−0.033 *** (0.004)	−0.012 *** (0.003)	−0.017 *** (0.002)	−0.045 *** (0.004)	−0.014 *** (0.003)
SPS	0.020 *** (0.002)	0.036 *** (0.006)	0.024 *** (0.003)	0.018 *** (0.002)	0.051 *** (0.005)	0.024 *** (0.003)
Control Variables
LA	−0.665 *** (0.066)	0.872 *** (0.095)	0.584 *** (0.076)	−0.651 *** (0.063)	0.757 *** (0.110)	0.481 *** (0.069)
MBV	1.356 *** (0.066)	3.131 *** (0.116)	1.791 *** (0.076)	1.412 *** (0.061)	3.004 *** (0.113)	1.859 *** (0.075)
BS	−0.094 *** (0.020)	−0.266 *** (0.032)	−0.208 *** (0.023)	−0.082 *** (0.019)	−0.245 *** (0.034)	−0.214 *** (0.022)
Constant	16.490 *** (1.141)	−5.972 *** (1.763)	−7.911 *** (1.335)	15.905 *** (1.082)	−4.483 ** (2.108)	−6.443 *** (1.198)
Hausman chi2	33.72 ***	39.74 ***	73.37 ***	29.74 ***	34.35 ***	159.77 ***
Modified Wald (He) chi2	8.9 × 10−34 ***	1.2 × 10−35 ***	1.4 × 10−35 ***	9.7 × 10−34 ***	5.3 × 10−34 ***	4.6 × 10−34 ***
Breusch and Pagan Lagrangian multiplier(he) chibar2
Wooldridge (AR1)F	14.978	84.035	11.581	14.941	83.585	11.551
Observation/subject	1568/156	1580/156	1580/156	1564/155	1576/155	1576/155
Wald chi2	1201.60 ***	1913.91 ***	703.13 ***	1531.44 ***	8698.49 ***	873.37 ***

Note: The Pearson correlation coefficients are presented. *** and ** denote statistical significance at 1% and 5% levels. Source: Authors’ calculation.

). Specifically, the environmental, governance, and social pillars serve as dependent variables in models 1, 2, and 3, respectively. FP variables such as ROA, ROE, and EPS are the dependent variables in models 4 through 12. Additionally, the intermediary role of the three ESG pillars between the independent variable and the dependent variable is clearly demonstrated in models 10, 11, and 12.

The author presents the results in a systematic structure: initially examining the impacts of independent variables to test hypotheses H1a, H1b, H1c, and H2; then investigating the effects of the environmental, governance, and social pillars related to hypotheses H3a, H3b, and H3c; and finally exploring the mediating role related to hypothesis H4.

Table 4 and Table 5 provide details on the significance of the IBM variable’s coefficients, showing that these coefficients are statistically significant and positively affect the environmental, governance, and social pillars, as well as many other firm performance indicators, except ROA. Thus, hypotheses H1a, H1b, H1c [65,66], and H2 [67] can be confidently affirmed, consistent with previous studies.

The results indicate that a higher IBM ratio enhances the company’s monitoring and organizational capacity, thus improving management control and promoting ESG activities. This, in turn, helps reduce risks, stimulate innovation, increase efficiency in sustainable practices, save costs, strengthen brand reputation, and attract loyal customers.

When evaluating the impact of the three ESG pillars on firm performance, it is important to note the statistical significance of the coefficients. However, the coefficients exhibit distinct characteristics: the coefficient related to the social pillar is positive, while those for the environmental and governance pillars are negative. This observation supports the validity of hypotheses H3a, H3b, and H3c, in line with existing research [68].

The analysis includes several regression models, each serving a distinct purpose: Models 1, 2, and 3 show regression results for the IBM variable concerning the three pillars (environmental, governance, and social) as mediating variables; Models 4, 5, and 6 examine the impact of independent directors on firm performance; Models 7, 8, and 9 assess the effects of the three ESG pillars on performance variables such as ROA, ROE, and EPS; and Models 10, 11, and 12 combine the effects of IBM, EnPS, GPS, SPS, LA, MBV, and BS on the firm’s performance.

Notably, the results of regressions in Models 1, 2, and 3 show that the coefficients of the IBM variable are significantly positive, with values of β1 = 0.208, β2 = 0.366, and β3 = 0.262. However, when compared to the IBM coefficients in Models 10 (β7 = 0.011), 11 (β8 = 0.059), and 12 (β9 = 0.031), the impact weakens. This indicates that when the effects of the three ESG pillars are included in the model, the impact of IBM on ROA, ROE, and EPS decreases. These results underscore the significant mediating role of the three ESG pillars in the relationship between IBM and firm performance, providing strong support for hypothesis H4.

5. Discussion

This study delved deeply into the impact of board diversity and ESG performance on the financial performance (FP) of Taiwanese listed firms. The findings showed the positive impact of independent board members (IBMs) on ESG performance as well as FP. These findings align with those of several existing studies [28,69]. Although debates about whether IBMs affect listed firms’ FP continued, the findings of this research provide empirical evidence on the monitoring role of board diversity in a developed economy with Asian characteristics that can be generalized to other similar ones.

The study also provides empirical results regarding the intermediary role of ESG performance on the link between IBMs and FP in the case of Taiwanese publicly listed companies. In general, these findings align with several previous studies [46,53]. Indeed, these nuanced effects arise from the shift from shareholder-centered governance to stakeholder-centric governance, aiming to balance the interests of both investors and non-investors. The findings of this study provide several critical implications for academic research, practical applications, and government policy.

5.1. Academic Implications

The findings of this study reported that the independent board member has an important role in corporate governance, which in turn positively affects FP. These results provide some insight into the mixed findings of prior studies. These can be explained by agency theory, which reflects the role of independent directors in solving agency conflicts between the interests of shareholders and other parties, potentially leading to increased corporate performance [28]. To improve corporate governance efficiency, businesses can apply green and environmentally responsible production methods to reduce material consumption and raise awareness of environmental protection within businesses. This will help businesses save costs and create a positive image in the eyes of customers and stakeholders. In addition, businesses can improve social scores by improving labor standards, human rights, community engagement, and customer satisfaction. This helps companies improve employee morale and engagement, leading to higher work efficiency, lower turnover rates, and reduced recruitment costs. Building strong and effective management processes also helps businesses improve the effectiveness of their internal control systems, thereby helping to prevent fraud and minimize financial losses and reputational damage. Finally, businesses can increase the independence and diversity of their boards by combining non-executive directors with executive directors on diversity points such as gender, age, and culture. At the same time, periodic assessments should be conducted to ensure the effectiveness and independence of board members, thereby improving their ability to monitor and provide objective strategic direction. However, scholars have argued that structuring a board of directors, including independent members, may lead to a waste of resources, increased costs, and external pressures [30]. Thus, this implies that the change in the percentage of IBMs leads to a change in the study’s findings.

Furthermore, the results of this study indicated the mediating role of the three ESG pillars in linking IBMs and FPs of Taiwanese listed firms. Because independent board members contribute to board diversity in corporate governance, the research outcomes have shown the relationship between internal governance factors and the FP of listed companies. This implies a potential hierarchical interaction between the component pillars of corporate governance and their effects on corporate performance.

5.2. Practical Implication

This study has confirmed the direct influence of independent directors as well as the indirect influence of ESG performance on corporate FP. There is no denying the positive effects of independent directors, such as increasing the ability to monitor the company, improving corporate governance [70], taking relative advantages in expertise, and making political connections [71]. This means that businesses should value independent directors in improving the quality of governance and performance of the company. However, we must also mention the double-edged sword of independent directors [72]. So, which proportion of IBMs is good, and to what extent does it enhance CSR practices and firm performance? This is implicated from a managerial perspective.

As shown in the results of Table 4, the ESG pillars have a multidimensional role in firm performance, in which the effects of the environment and corporate governance pillars are negative while the effects of the social pillars are positive. From stakeholders’ perspectives, CSR practices in order to gain social legitimacy following regulations and standards are sometimes viewed as symbolic actions (i.e., environmental protection or board structure, which are influenced by laws), causing opposing effects in comparison with substantial CSR actions (i.e., social activities such as charity, donation, community support, etc.) [73]. This implies that business managers should consider priorities when practicing CSR. This means that businesses need to be vigilant in implementing CSR and ESG activities, ensuring that these actions deliver real and lasting value while avoiding measures that are merely symbolic without bringing real results.

This study provides valuable insights for improving corporate governance, promoting sustainable business practices, and achieving better financial performance in Taiwanese companies. At the same time, this is also a worthy consideration for companies and policymakers around the world, helping to promote more effective corporate governance and ESG practices.

5.3. Government Policy Implications

The results of the positive impact of IBMs on the FP of Taiwanese listed firms analyzed in this study, along with the controversy about the double-edged sword of board diversity, have implications for Taiwanese policymakers. These implications extend to countries with similar cultures and traditions in terms of establishing and revising relevant laws, rules, and regulations. Furthermore, the multidimensional mediation effects of the ESG pillars on the relationship between IBMs and firm performance in this study can be elucidated by Taiwan’s cultural characteristics, historically influenced by Confucian familism and crony capitalism. The ethos of Confucian familism implies that familial interests are prioritized over those of individuals outside the family. Embedded in the context of Taiwanese companies, when considering companies as a large family, Taiwanese listed companies tend to be concerned with CSR practices related to internal issues or rules rather than social practices. This aligns with the findings of a 2005 survey by Global View in Taiwan, which showed that Taiwanese companies engage more actively in CSR when subjected to external pressures [74]. Therefore, the presence of IBMs might serve as an external pressure, potentially leading to changes in CSR practices. This may create a positive corporate image in stakeholders’ minds and leverage firm performance. Thus, policymakers should consider that policies on CSR practices need to balance both historical–cultural aspects and external factors to ensure that investment in CSR is as effective as expected. At the same time, policymakers can create incentive mechanisms or create pressure for companies to perform this practice well. This mechanism may involve taxes or tangible or intangible incentives. Finally, the government can also promote engagement between businesses and stakeholders to create a sustainable ecosystem, in which the government will act as an arbitrator to resolve issues that arise in the process. this relationship.

5.4. Limitations and Future Recommendations

The study focuses on 173 Taiwanese companies that have publicly committed to implementing ESG from 2009 to 2021. This selection may bias the results, as the assessment process does not capture the overall performance of all businesses in Taiwan. The data are sourced from the Refinitiv Eikon database, known for its comprehensive ESG metrics. However, to ensure the robustness of the results, you can run the model with a different database.

While the study includes several control variables (firm size, market-to-book value, and board size), there may be other unobserved variables that influence FP. Factors such as global climate change, macroeconomic conditions, etc. may affect the results. Ignoring such variables can lead to biased estimates and inaccurate inferences. In this study, there may be reverse causality or omitted variable bias, in which the relationship between IBM and FP may be influenced by factors not accounted for in the model.

While this research provides valuable insights into the relationship between IBM, ESG factors, and FP, it is essential to recognize and address its potential limitations. Acknowledging these biases and methodological limitations can help improve future research and increase the robustness of conclusions drawn from such analyses. Further studies could incorporate more diverse data sets, advanced econometric techniques, and longitudinal analyses to address these limitations and improve our understanding of the dynamic complications that are going on.

It is proposed to study board composition and the impact of ESG in different countries to account for contextual differences. Propose a detailed examination of the environmental, social, and governance pillars to identify specific factors affecting the plan. Advocate for a more diverse approach to analyzing how IBM and its employees interact with ESG, shedding light on governance structures.

Proposes studying board compositions and ESG effects across different countries to account for contextual variations. Recommends a granular examination of environmental, social, and governance pillars to identify specific factors impacting FP. Advocates for a more diverse approach in analyzing how IBMs and employees interact with ESG, shedding light on governance structures.

To address the limitations related to modeling studies, future research should consider incorporating the following factors: The study could be evaluated in many countries and regions other than Taiwan, thereby getting a more comprehensive view. Data from many different sources can be used, and analytical data can include companies that are not listed on the stock exchange in Taiwan. Can combine qualitative and quantitative research methods in the evaluation and analysis process. Research can incorporate additional industry-specific factors to evaluate the relationship between IBM, ESG, and FP. Finally, the study could consider macroeconomic factors such as birth rates, economic growth, and international labor migration into Taiwan, as these significantly impact Taiwanese companies in terms of social and governance issues.

6. Conclusions

The study highlights the crucial role of independent board members (IBMs) in positively influencing a company’s financial performance (FP). Boards with a higher proportion of independent members are associated with better decision-making due to enhanced cognitive abilities. A higher ratio of independent members on the board is believed to enhance corporate oversight, reduce agency costs, and ultimately contribute to improved FP. The research indicates that ESG disclosure acts as a moderator, partially influencing the relationship between the ratio of independent directors and FP. This suggests that ESG disclosures can impact the influence of IBMs on financial outcomes.