The Effect of Board Characteristics on ESG Commitment in Saudi Arabia: How Diversity, Independence, Size, and Expertise Shape Corporate Sustainability Practices

Abstract

This research investigates the effect of board characteristics on environmental, social, and governance (ESG) disclosure among firms listed on the Saudi Stock Exchange (Tadawul) from 2021 to 2023. Motivated by the global shift toward sustainable development and the Saudi Vision 2030 agenda, this study examines how board size, gender diversity, independence, expertise, and compensation impact ESG disclosure practices. Drawing on stakeholder and agency theories, the regression model uses a sample of 78 Saudi-listed companies. ESG disclosure is measured using a content analysis-based checklist that conforms to international and Saudi ESG reporting frameworks. The findings indicate that background and skills, female representation, and compensation positively correlate with ESG disclosure. Conversely, board size and independence do not show significant relationships. The results highlight the pivotal role of board composition in emphasizing business practices for sustainability in emerging markets, particularly within the unique institutional setting of Saudi Arabia. The study contributes to the growing body of ESG literature by offering factual proof from an under-researched context and practical ramifications for investors, legislators, and business executives, as well as seeking to enhance transparency and accountability through effective board governance.

1. Introduction

ESG originated in the late 20th century and achieved general acceptance in the early 21st century [1]. The UN’s call to incorporate sustainable development aspects into companies’ strategies significantly catalyzed the global adoption of ESG principles. The Global Reporting Initiative (GRI) is a prominent worldwide standard that is optimal practice for organizations seeking to enhance their ESG performance [2]. Following the global fiscal crisis, investors understood that firms should take greater responsibility for the environment and society than merely profiting. Corporate stakeholders have recently sought increased transparency in ESG disclosures [3]. It comprises three parts: the ecological part, which deals with pollution and sustainability; the social part, which deals with how a company treats its workers, community, and clients, stressing diversity and anti-corruption; and the governance part, which includes stakeholders and shareholders and follows best practices in corporate governance [4]. Listed firms have focused on releasing ESG reports in response to investors’ and authorities’ increasing need for non-financial information. However, the cost of ESG results in firms lacking incentives to raise the standard of ESG disclosure [5].

Recently, demand from stakeholders and investors for non-financial disclosures has increased. This movement has arisen due to financial crises, compensation scandals, and growing apprehensions over corporate economic activity’s social and environmental repercussions [6]. ESG disclosures are non-financial information increasingly attracting investors’ attention and worldwide awareness, particularly about how companies address non-financial issues, which entails evaluating financial and non-financial factors in their investment analyses and decisions [7]. ESG disclosure assists companies in preserving reputation and brand equity, mitigating supply chain and regulatory concerns, and securing long-term viability. This transition has garnered considerable interest from both the academic and corporate sectors, particularly regarding the advantages and quality of non-financial disclosures. The quality of non-financial disclosure within the ESG framework is influenced by various aspects, including the characteristics of the board and management [8].

The phrase “board characteristics” usually refers to those of a company’s board of directors, encompassing its size, independence, diversity, and members’ educational backgrounds, all of which can affect governance practices and strategic decision-making. These traits substantially impact business outcomes by ensuring accountability, encouraging a range of viewpoints, and utilizing experience to improve decision-making. Regarding ESG performance, the board of directors is vital to achieving sustainability objectives [9]. Moreover, the board is crucial in ensuring businesses adhere to sustainability pledges and ESG policies. A major foundation in ESG disclosure is identifying diverse boards composed of individuals with varying cultures, ideas, opportunities, experiences, knowledge, philosophies, and educational backgrounds, which, when effectively harnessed, can significantly influence the attainment of company goals. When skillfully harnessed, it can significantly impact the achievement of company goals [8].

Current research indicates that board qualities significantly influence ESG performance. External directors can offer independent perspectives, monitor ESG, and enhance it [9]. Moreover, variables like board size and the educational qualifications of the directors are deemed to influence ESG performance significantly [10]. Conversely, certain studies argue that external directors may possess an insufficient understanding of the company’s internal processes, hence complicating the implementation of ESG enhancements in practice [11].

Since 2000, Saudi corporate governance standards have significantly improved with the issuance of guidelines for internal control. The Saudi Capital Market Authority in 2006 promulgated the inaugural corporate governance code. Up to 2010, this code was optional, but it became compulsory [12]. The most recent amendments to the Saudi corporate governance code were enacted in 2017. The implementation of Saudi Arabian ESG disclosure presents significant challenges. Fragmentation of regulations continues to be a significant barrier, as companies must manage changing legislation in conjunction with a varied set of international reporting standards [13]. The restricted proficiency in ESG reporting systems, especially within SME firms, exacerbates conformity challenges [14].

In recognition of the unique socioeconomic landscape of Saudi Arabia, the implementation of ESG principles is further complicated by social norms and expectations. Integrating cultural considerations in the Marcos of ESG is vital for the participation of interested parties and corporate responsibility [15]. However, as recent studies highlight, continuous transformation towards a greater awareness of ESG gradually remodels public perceptions and corporate responsibility [16]. ESG principles offer a promising way for Saudi Arabia to align sustainable development with economic growth. While the challenges are considerable, the multifaceted opportunities presented by integrating ESG with a conducive regulatory environment and social commitment demonstrate a forward route. As Saudi Arabia navigates this critical situation, continuous research and collaboration efforts will be essential to carry out their ambitious vision while adding to the tensions inherent in the transformation of traditional commercial practices towards a sustainable future [17]. This change is essential to maintain the impulse to achieve the objectives of Vision 2030. The link between ESG indicators, digitalization, and green initiatives is gaining traction to promote economic growth, with more research suggesting that integrating these factors can generate significant benefits. Despite the positive direction, several challenges persist in embedding ESG in the Saudi corporate ecosystem. Many companies still exhibit the dissemination of ESE, driven by the lack of regulatory frameworks and insufficient pressure from interested parties [18].

Previous research on ESG has concentrated on developed marketplaces characterized by sophisticated ESG practices and disclosures. Limited research is available in emerging economies [19]. For example, Arayssi et al. and Alahdal et al. [20,21] noted that while GCC countries have adopted a positive position towards the United Nations Sustainable Development Goals (SDGs) through substantial ESG reforms, adherence to ESG principles remains voluntary. Furthermore, the investigation regarding the impact of board composition on ESG disclosure within the Gulf Cooperation Council, Saudi Arabia, is minimal. Among the studies that addressed this topic in the KSA, the study of [22] emphasizes the importance of independent directors and investigates whether corporate environmental sustainability strategies impact business value. Ammer et al. [23] examined how family ownership and the traits of the CEO affect CSR reporting in Saudi Arabia [23] and investigated how both CEOs and family ownership characteristics affect Saudi Arabian CSR reporting. Al-Duais et al. [24] analyzed how Saudi-listed firms’ stock returns are affected by environmental sustainability disclosure, taking financial constraints into account as a moderating factor. Alregab [25] investigated how institutional ownership affects ESG reporting in Saudi Arabian publicly traded enterprises. Alsahlawi [26] investigated how board composition affected Saudi Arabia’s ESG disclosure while considering the moderating effect of corporate governance reforms. Alsahlawi [26] also analyzed how CEO authority affects the relationship between disclosure of ESG factors and financial success in emerging economies. Therefore, our study’s goal is to fill in the gaps in the literature about ESG and composition in Saudi companies. The study’s findings also have several ramifications for lawmakers, investors, company management, and regulators.

The motivations for undertaking this research within the framework of KSA are as follows: First, it is a G20 nation and is regarded as a premier global oil exporter. According to KSA Vision 2030, the capital market is experiencing rapid advancement, and the government is undertaking substantial initiatives to attract investments and shift to a more diverse economy. Second, by experimentally investigating the relationship between board composition and ESG disclosure, this study adds to the body of knowledge on ESG in the Kingdom of Saudi Arabia’s (KSA) developing market. The results of this relationship have been ambiguous and inconclusive. Third, the boards in KSA businesses are controlled by families and the government, which may facilitate access to a broad network and improve financial performance. However, Qasem et al. [27] suggested that these boards are likely to exhibit a shortcoming in endorsing social and environmental disclosure. Finally, researchers have advocated for specific requirements to improve ESG assessment data, seeking a more standardized evaluation of ESG companies’ efforts [28]. The ESG disclosure index reflects Saudi companies’ degree of ESG transparency. Saudi and international ESG reporting rules and standards are included in this score based on the literature [29]. This paper fills a vacuum in the literature on ESG measurement by providing more data about the effectiveness, dependability, and trustworthiness of several measurement channels for measuring ESG-related information.

The next sections of this work are organized as follows: The study’s institutional environment is examined in Section 2. A review of the literature is given in Section 3, and the study methods and empirical results are described in Section 4 and Section 5. Conclusions are presented in Section 6.

2. Institutional Background

The KSA, the largest petroleum exporter in the world and the country with the second-highest confirmed oil reserves, has long been linked to oil. However, the necessity to diversify and lessen its reliance on oil earnings has caused a significant transformation in the Saudi economy in recent years [29]. Vision, a comprehensive strategy to reduce the country’s dependency on oil, encourage the growth of the private sector, and develop new industries, including technology, entertainment, and tourism, was introduced by Saudi Arabia to address these problems [30]. Additionally, the program emphasizes foreign direct investment (FDI), privatization, and expanding the private sector’s contribution to GDP [31]. Launched in 2016, Saudi Vision 2030 is a comprehensive strategy framework aimed at diversifying the economy and making Saudi Arabia a world powerhouse in investment. Increased ESG disclosure requirements and aligning national priorities with international sustainability norms are part of this strategy [32]. Vision 2030 states that meeting waste reduction and energy efficiency targets lowers operating expenses and worker diversity, while community involvement boosts consumer loyalty and business reputation [33].

Understanding that sustainability is necessary for long-term growth and foreign investments, the Saudi government has implemented several laws and programs within the Vision 2030 framework to encourage ESG practices among businesses [24]. A foundational framework for ESG disclosure is established by Saudi Vision 2030, which encourages companies to maintain their operations through ESG activities. This vision emphasizes governance changes, social responsibility, and environmental sustainability. Saudi Arabia created a strategic business tool-based ESG reporting system to promote resilience and operational success in the cutthroat global marketplace [34]. Additionally, initiatives for ethical leadership and board diversity within governance reforms promote better risk management and higher-quality decisions, which improve corporate performance. The link between Vision 2030 objectives and ESG disclosure has attracted domestic and foreign investors looking for sustainable companies [35].

To streamline the qualifying conditions for foreign investors, the Saudi Capital Market Authority enhanced the regulations controlling investment in 2018. The Saudi Stock Exchange (Tadawul) is worth around USD 564 billion and makes access simple for international investors [36]. In Saudi Arabia, corporate ownership is concentrated in the hands of the state or families. About 30% of the listed companies are under the ownership of the government, while over 70% are family-owned [37]. Alsultan [38] claims that Saudi families controlled the boards of 68 of the 168 firms listed at the time, holding over 41% of the executive board posts. Additionally, 17% of families controlled the boards of the other listed Saudi companies.

3. Literature Review

3.1. ESG Disclosures

ESG disclosures have become essential instruments for improving business sustainability, accountability, and transparency. Businesses employ ESG disclosure to make information about their governance frameworks, corporate social responsibility (CSR) initiatives, and sustainability practices publicly available [38]. Businesses that demonstrate commitment to sustainability and transparent ESG policies build stronger bonds with their workforce, clients, and government agencies. Therefore, increased stakeholder engagement promotes long-term value creation by improving the company’s brand and bolstering employee and customer satisfaction [39].

These disclosures allow businesses to update stakeholders, such as investors, regulators, and the public, on their performance and initiatives, initial responsibility, environmental stewardship, and governance practices [40]. According to recent studies, ESG disclosure is crucial for businesses to show their ethical convictions, lowering reputational risks and increasing stakeholder trust [41]. Discovered how important ESG disclosures are for building confidence and trust among stakeholders, especially considering the growing global sustainability issues. Abdalla et al. [28] discovered that companies with strong ESG disclosures typically do better than their counterparts regarding client loyalty and market reputation.

As a result, several stakeholders, including communities, employees, investors, regulators, and customers, want more corporate transparency on ESG practices [42]. Since sustainability risks impact a company’s financial results and the performance of its investments, institutional investors are at the forefront of calls for greater ESG disclosure [43].

Although there are many benefits to ESG disclosure, there are also many challenges. The absence of standardized reporting frameworks is a significant problem, leading to variations in data and comparability of ESG data [44]. Additionally, the fact that many ESG reporting obligations are optional results in selective disclosure practices that reduce the accuracy and comparability of the data given to stakeholders [45]. This lack of standardization confuses investors and other stakeholders, making it more challenging to evaluate and contrast companies’ ESG performance [46].

Especially for SMEs, which do not have the funds to invest in strong systems for ESG reporting, these expenses can be a major deterrent [47], according to [48]. The problem is made worse by the lack of stringent verification procedures and third-party audits, which erode stakeholder confidence and reduce the legitimacy of ESG disclosure. To help businesses, especially those in emerging economies, improve their ESG reporting procedures, these issues highlight the pressing requirement for more regulatory monitoring, creating widely recognized ESG reporting guidelines, and developing capacity programs [49]. According to research by [48]. Discrepancies frequently lead to selective reporting, when businesses highlight the good elements of ESG parts as opposed to those that can cast them in a negative light. A recurring issue that undermines the legitimacy and dependability of ESG disclosures is greenwashing [50]. On the other hand, the adoption of comprehensive ESG disclosures is hampered in underdeveloped nations by issues such as resource limitations and weak regulatory frameworks [51].

Saudi Arabia has implemented programs like the Tadawul ESG Guidelines, which encourage businesses to align their activities with sustainability principles and set a standard for the performance of businesses with robust ESG practices [52]. The Vision 2030, which prioritizes social development, environmental responsibility, and economic diversification, is strongly related to these initiatives [53]. Saudi-listed companies are progressively incorporating ESG information into their business strategy in response to regulatory reforms and rising stakeholder expectations, according to a recent report by [54]. Creating frameworks and rules adapted to regional circumstances further supports this transition by empowering businesses to tackle issues like social inequity, resource efficiency, and climate change [55].

3.2. Board Directors

A group of people chosen or appointed to supervise an organization’s operations and strategic direction, usually a company, is known as the Board of Directors. The board ensures that the company is run in the best interests of its stakeholders by acting on their behalf. By monitoring the company’s activities and offering directions for its decision-making, the board of directors, which forms the foundation of the corporate governance system, is responsible for protecting the interests of the company’s shareholders. In addition, they decide on corporate strategy, guarantee business success and return on shareholder investments, and worry about the adverse effects of global warming and the related health risks [56]. Globally, there has been a growing focus on thinking about the diverse qualities of the board to guarantee the board’s impartial makeup and effective board operations in corporate management, especially since the 2000s, when social shifts brought about by globalization advanced quickly [57].

Diversity in the board’s membership is essential to these efforts. Stakeholder Theory states that businesses should give other stakeholders’ viewpoints more weight than just shareholder interests. In this situation, a diverse board can help address the various viewpoints of stakeholders, which could result in better business performance [58]. Addressing agency concerns is directly impacted by the board’s size. Agents are more likely to take advantage of information gaps when a company expands and covers more ground since viewing every piece of data is impossible. Consequently, by expanding the number of directors, the board serves as a tool to narrow the gap in knowledge by offering a more intimate view of the company, allowing for agency control, and enhancing performance. [59].

3.3. Theoretical Foundation

3.3.1. Stakeholder Theory

The amount of ESG disclosure research has grown dramatically in recent years, and several theoretical frameworks support it. In this sense, Freeman’s (1984) initial formulation of Stakeholder Theory offers a thorough work of comprehending the ever-changing relationships between businesses and their stakeholders [60]. According to this theory, companies that actively interact with their stakeholders and resolve their issues have a higher chance of gaining their confidence, legitimacy, and goodwill, eventually leading to improved performance [61]. Also, a company’s capacity to meet the needs of important stakeholder groups—such as communities, employees, investors, and customers—determines its success. Stronger relationships with stakeholders and financial gains are the results of ESG disclosure [62].

Stakeholders are pressing companies to make comprehensive ESG disclosures and are calling for increased responsibility and transparency in business operations [63]. ESG disclosure boosts brand equity and consumer loyalty, which affects profitability. Consumers value services from companies that exhibit great governance, ethical labor standards, and environmental responsibilities [64].

The effect of stakeholder pressure on ESG disclosure has been the subject of numerous studies. For example, Kachouri and Jarboui [65] contended that companies in highly environmentally impactful sectors, including manufacturing and energy, are subject to intense scrutiny from authorities and environmental activists, which leads to more thorough ESG reporting. More transparent businesses tend to be more transparent, drawing in clients and investors, improving employee happiness, and reducing risks. Research continuously shows that companies that provide thorough ESG disclosures have better financial results [66].

Because ESG efforts align with environmental, social, or ethical goals, some stakeholders may support them; others may reject them, especially if the initiatives disrupt current operations or come with significant expenses. To ensure that the company’s goals are long-term, equitable, and sustainable, this tension emphasizes how important it is for the board to balance stakeholder interests while making choices about ESG [67].

3.3.2. Agency Theory

This idea, which defines the issue of separating ownership from business governance, was published by Jensen and Meckling in 1976. To act in the principal’s best interest, the principal (owner) typically assigns management and control of resources to the management (agent) [68]. For management (agents) to act in the principal’s best interests, the principals (owners) usually provide them with management and control of resources. Due to conflicts of interest, agents are required to disclose information that may not be in the principal’s best interests, especially when evaluating the agents’ performance. The agent’s motivations, which are frequently impacted by immediate opportunities and financial gain, lead to this conflict of interest [69].

Strong corporate governance may guarantee that management puts shareholders’ interests first regarding ESG disclosure, including sharing about sustainable ESG policies [70]. According to Agency Theory, diversity on the board is crucial for successfully lowering monitoring and information imbalance. This increased oversight is crucial for businesses to disclose accurate and transparent ESG information [71]. Agency Theory states that since independent directors can render more impartial assessments of management performance, they help monitor board procedures. This happens because these managers decreased involvement in the business’s operations and, consequently, their decreased reliance on the chief executive officer’s authority [72]. In addition to being more concerned with social and environmental issues, female directors are more interested in maintaining openness in CG procedures. They can impact the board’s choices and help improve ESG practices and policies, which will raise the disclosure level [73].

3.3.3. Resource Dependence Theory (RDT)

RDT is an organizational theory that describes how organizations’ strategies, power dynamics, and interactions with other entities are shaped by their reliance on external resources for survival and operation. It was mainly created in 1978 by Gerald Salancik and Jeffrey Pfeffer. RDT highlights that to obtain essential resources, organizations must engage with their surroundings because they are not self-sufficient [74]. Numerous resources are available to organizations that can improve performance outcomes. This collection of cooperative resources from businesses shows the significance of social networks as a tool for enhancing organizational resilience in dynamic situations [75].

Organizations also need to understand how complex their interactions are inside the supply chain. As demonstrated by Malatesta et al. [76], integrating sustainable practices while ensuring the sufficiency of resources requires assessing the demands of interested parties and their effects on performance. To foster innovation, sustainability, and competitive positioning, businesses must engage in an ongoing assessment of their strategic alternatives for resource reliance. Resource management requires greater flexibility in times of crisis, like the COVID-19 epidemic, which disrupted global supply lines. According to Uzunkaya [77], companies that leveraged their networks of external resources were more resilient to these disruptions. This demonstrates the value of RDT in crisis management and clarifies how businesses can foster partnerships that provide adaptability and resource reallocation during ambiguous situations. According to Frynas and Stephens [74], businesses that are committed to CSR frequently do so to foster relationships with key stakeholders and secure important resources like funding and market access. In addition to stabilizing resource flows, companies can enhance their reputation, which is a crucial component of competitive advantage in the modern market, by matching their CSR policies with the expectations of interested parties.

3.4. Hypothesis Development

3.4.1. Board Size and ESG Disclosure

One of the primary factors influencing the effectiveness and performance of a board is its size, which is the sum of the directors serving on the company’s board [78]. There is no clear legislation dictating the ideal number of participants for a board; the ideal number varies from 5 to 16 members, depending on the organization’s size, industry, and character. According to the corporate governance requirements of the Tadawul Authority, a board of directors should include three to eleven members [79]. Board size can be viewed as a corporate governance tool that may affect voluntary corporate disclosure, including environmental disclosure, since larger boards provide more experience variety and better management supervision. A bigger board could lead to more corporate environmental openness if more directors have accounting or financial backgrounds [80]. By enhancing the board’s ability to monitor management’s actions and activities, a larger board will increase the transparency of revealed information [81].

According to Drempetic et al. [66], size directly impacts decision-making efficiency. Larger boards may delay important decisions about ESG activities in order to reach an agreement and coordinate. A larger board could, therefore, result in bureaucracy that impedes prompt decision-making. However, smaller boards can make conversations easier and resolve quickly, which could result in better ESG performance [82]. Another key factor that is entangled with size is the board’s responsibility. Due to their more cohesive structure, board members at smaller councils are more likely to feel accountable for their choices and actions on the ESG issue [83]. A border with a balanced composition produces more useful ESG strategies, suggesting that size is a critical factor in the influence of various inputs [84]. Compared to bigger managers, smaller groups can better benefit from the diversity of viewpoints required to address ESG issues [85].

Additionally, Aladwey and Alsudays [86] the size of their boards positively impacted Malaysian corporate social responsibility disclosures. Similarly, Klettner et al. [87] discovered that board size significantly and favorably impacted Italian businesses’ governance transparency. Accordingly, the overall findings show that board size has a clear effect on ESG disclosure [61]. In a similar study, their study on banks found a positive correlation between size and ESG performance. On the contrary, some studies showed that it has no discernible impact on ESG disclosure, including [9,52]. Consequently, the following theory is put forth:

(H1).

Board size is positively related to the ESG disclosure of Saudi-listed firms.

3.4.2. Background and Skill Member and ESG Disclosure

Boards that have people with functional competence, financial literacy, and relevant business experience are better able to draw in talent, collaborations, and investments [88]. Board members’ educational backgrounds provide a range of viewpoints and attitudes about the company’s long-term objectives, which can significantly impact its performance and mission. Due to differences in educational programs, educational backgrounds provide complex insights into a person’s values and preferences [89]. They can evaluate opportunities, establish credibility with external stakeholders, and successfully manage intricate resource dependencies because of their experience. They can access vital resources that propel business expansion and competitiveness by utilizing their networks and expertise [90]. By electing a company’s board of directors, investors want to accomplish several goals. They seek to improve corporate governance, protect shareholders’ rights and interests, and expect the board to provide knowledge to strengthen the board’s ability to make decisions. Better financial performance was shown by companies with financially knowledgeable boards, indicating that access to capital could be advantageous [91].

With the help of their varied backgrounds and experiences, council members can prioritize and identify various goals, allowing for more ESG strategies that consider the complexity of modern business environments [92]. Cheng and Courtenay [93] emphasized that successful boards with diverse skill sets may sail more effectively in stakeholders’ interests and generate shareholder value. This stakeholder viewpoint is crucial for businesses looking to gain a competitive edge and show concern for ESG issues. The need for practical ESG to promote diversity in business process management depends on the ability of the Council’s knowledgeable and varied members to make a difference, which depends on an inclusive experience and skills [94]. Consequently, the following theory is put forth:

(H2).

Background and skill members are positively related to the ESG disclosure of Saudi-listed firms.

3.4.3. Female Representation and ESG Disclosure

In part, because the UN urged all UN member states to accomplish sustainable development and target gender equality, the need for gender diversity in businesses has spread throughout the world in recent years [95]. The representation of individuals of various genders on a company’s board is a standard definition of board gender diversity. According to earlier research, the proportion of female directors to board members is typically used to gauge this diversity [96]. In addition to being harder and more active monitors, female directors ask more questions than their male counterparts. Furthermore, having more female directors on the board could help the board learn about initiatives and introduce perspectives [97]. A diverse board with more female directors is more likely to be held to ethical standards and to consider the concerns of a broad spectrum of stakeholders and society [21].

Women’s presence on corporate boards is a new and developing issue in Saudi Arabia that reflects larger social and economic changes. By focusing on women’s empowerment and gender equality, according to Saudi Vision 2030 [98]. Furthermore, according to [99]. The percentage of women in leadership jobs, including those on boards, has steadily risen because of shifting societal norms and legal requirements. For example, Tadawul strongly emphasizes that CG codes support diversity to improve board effectiveness and accountability.

Previous research has shown that a company’s sustainability performance and related disclosures, like ESG disclosures, are favorably correlated with the number of female board members, such as ESG disclosures, in the study of [58]. It seeks to evaluate the effects of female directors on ESG in banks in Europe and the USA [2], which seeks to examine the impact of gender diversity on boards on ESG disclosures in Malaysia [22], and aims to investigate the effect of board composition on ESG reporting in the Gulf countries. Khatib et al. [100] aimed to test the effect of females in top management on ESG performance in French-listed non-financial companies, and Nasta et al. [101] aimed to determine the impact of women directors on ESG disclosure in Indonesian companies.

On the other hand, some research has indicated a negative correlation between ESG disclosures and female board members, such as [9], which examines the influence of females and ESG in Italian banks [10], with a sample of firms listed in KSA; and Lee et al. [102], which investigated how experience affects ESG performance in Chinese companies. Consequently, the following theory is put forth:

(H3).

Female representation is positively related to the ESG disclosure of Saudi-listed firms.

3.4.4. Independence Directors and ESG Disclosure

A sizable number of independent directors indicates that management will have less influence over the board. Independent directors would act as a controlling mechanism to reduce agency conflicts and information asymmetry, as the board of directors would not have any direct or indirect ties to the company that could influence their actions [103]. By guiding management choices toward successful and long-lasting operations, independent directors contribute to the rise in the market value of their business’s stock. They enhance the caliber of disclosures and motivate insiders to work effectively and efficiently [104]. Additionally, independent members tend to be more concerned with environmental issues, have a broad background, and are employee-oriented [99]. Effective board observation and aligning the company’s strategic directives to the expectations and interests of stakeholders are seen to depend on the independence of the board directors. Furthermore, an independent director’s pay is unrelated to immediate financial performance, in contrast to that of inside directors. Therefore, more independent boards should be better at monitoring [105]. Independent directors allow companies to disclose social and environmental initiatives to safeguard their reputations. This lets the market know that the company prioritizes social welfare in addition to improving financial performance. This voluntary disclosure enhances the company’s social profile and transparency, drawing in domestic and foreign investment [106].

Higher percentages of independent directors on the board promote more voluntary disclosure and make it easier for people to participate in ESG activities [107]. Independence encourages improved supervision and lessens conflicts of interest, which improves sustainability performance [88]. Furthermore, Dass et al. [78] contended that the Council’s independence clearly affects business performance and the disclosure of ESG practices. Also, businesses with independent boards were more likely to use ESG data, which enhanced their standing and financial results. Paolone et al. [88] discovered a positive relationship between the board’s independence and the banking industry’s ESG performance, indicating that an independent composition enhances the board’s ability to concentrate on sustainability initiatives and the efficacy of ESG performance. A notion was upheld by [108], who looked at board diversity and discovered that in some situations, independent board members improved the sustainability of businesses. According to comparative research, the independent administrators in Thai boards have resulted in more thorough ESG disclosure than their counterparts in less independent organizations [109]. Consequently, the following theory is put forth:

(H4).

Board independence is positively related to the ESG disclosure of Saudi-listed firms.

3.4.5. Compensation and ESG Disclosure

The term “compensation” describes the monetary and non-monetary benefits given to board members of a firm in exchange for their duties and contributions [110]. The goal of the remuneration is to attract, retain, and inspire competent people to supervise the company’s management and ensure it operates in the best interests of stakeholders and shareholders [110]. The pay components for the board of directors include several components intended to draw in and keep qualified directors while balancing their interests with those of shareholders [111]. These elements are meeting fees, equity-based pay, committee fees, and expense reimbursements [21].

Incorporating ESG considerations into compensation may change the company’s focus from boosting profits to achieving more important societal objectives. By linking financial incentives to ESG measurements, companies can encourage CEOs to prioritize long-term sustainability above short-term revenue [112]. The dual role of management incentives in promoting ESG activities is similarly examined by [113], who note that compensation and ESG concerns are directly and indirectly correlated, especially in the financial services industry [114]. CEOs whose compensation performance is good in terms of the environment should be compensated more because, on the one hand, they are increasing the likelihood that their companies will survive, and on the other hand, they will be less inclined to take part in environmental initiatives that have questionable financial returns.

Although compensation linked to ESE performance can have a positive effect, ill-defined metrics can result in a lack of genuine commitment to sustainability rather than merely cosmetic fulfillment [115]. Compared to executives’ incentives to increase the value of shares resulting from outright ownership of explicit, nondiscretionary ESG incentives, shares and unvested or unexercised equity-based compensation are all economically insignificant [116]. The increasing demands from investors and authorities for compensation that includes ESG performance criteria are the wrong approach. Although it is admirable to want to tie the compensation to ESG, his research reveals that implementation is frequently lax, which raises doubts about the sustainability results [45].

(H5).

The board compensation is positively related to the ESG disclosure of Saudi-listed firms.

4. Methodology

4.1. Sample Selection and Data Collection

This research examined the relationship between the board characteristics and ESG aspects of Saudi firms listed in all study years from 2021 to 2023. The study community consists of 90 Saudi joint-stock companies. The study sample comprises seventy-eight listed firms that regularly disclose ESG data in annual reports. The data collection is from the Refinitiv Eikon Database. This period reflects the quickening pace of changes, especially those about CG and women’s empowerment, which gathered steam in the years after the Vision 2030 declaration [2].

The initial sample for this study includes. The details of the study sample are shown in

Table 1. Composition sample.

Sample Selection	Number	Observations
The number of firms listed on 31 December 2023	90	270
Firms with incomplete data	12	36
Final sample	78	234

.

4.2. Data Analysis Procedures

A statistical description of the data was used for data analysis in the current investigation. The correlation matrix, which looks at the relationships between every variable in the model, is next investigated. Multiple regression analysis was performed on the model to ascertain the direction and strength of the correlations after a general introduction to the validity of the data. This was followed by a series of robust tests intended to confirm the findings’ robustness.

4.3. Dependent Variable: Quantifying the ESG Disclosures

The terms “quality” and “disclosure level” are vague claims [90]. The development of proxies for such concepts is constrained by the lack of a theoretical foundation. Therefore, prior studies have employed techniques to evaluate quality and disclosure levels, presuming that the evaluation accurately reflects quality or disclosure level [55]. Through many global and Saudi ESG reports and rules, as well as well-researched literature, we developed an ESG disclosure checklist to collect our dependent variable [117]. A vast and limitless list of things needs to be revealed [41]. Therefore, content analysis of annual reports was used in this study. This was accomplished by carefully choosing components that were suggested by various international and Saudi frameworks and guidelines. This result is consistent with [44]’s findings. As a result, our index is more inclusive and comparatively wider than those suggested by [51,53].

Additionally, we sought to guarantee inter-observer reliability and lessen prejudice in evaluating the applicability of the study tool employed. Before taking any action, the corporate annual reports are analyzed; second, a pilot is carried out to ensure that all disclosure items from different firms receive the same level of consideration and care [109]. As a result, a pilot test of the index, which consists of 65 items, was conducted. The index did not include three items that were not selected by companies reporting in the three years before the survey. Consequently, there were 62 disclosure elements in the final ESG disclosure index. Furthermore, as there is no preference given to a particular index item or user type, the current study employs the unweighted technique to measure the index items [110]. The scores reached the checkmarks for every item on the list. Each firm received a score of one if an item was reported and zero otherwise. The total number of ESG elements that firms revealed was used to measure the amount of ESG disclosure. This supports the claim created by Abdalla et al. (2024) [28].

4.4. Independent Variables

This study defines the following characteristics of the board:

Board Size: In this study, the term “board size” describes how many directors are on the company’s board. This number involves all board members, regardless of their duties or independence, and indicates the overall size of the board [78]. Referring to the earlier debate concerning the effects of board size on decision-making quality [79]. The board size, whether large or small, strongly determines the board’s efficacy. As a result, rising research studies have tested the influence of board size on board overall performance and firm disclosure, including non-financial disclosures [80]. Therefore, in line with previous studies by [81]. This study used the total number of board directors to measure the board size.

Background and skill member: In this study, board members’ background and skills refer to the proportion of board members who possess relevant experience and competencies relative to the total number of board directors [88]. This variable captures the board’s collective expertise and its potential to contribute to effective oversight and strategic decision-making. Prior research suggests that a board with diverse skills and professional backgrounds enhances governance quality and improves firm disclosures, especially in the context of non-financial reporting (e.g., financial expertise and sustainability knowledge) [89]. Accordingly, this is consistent with previous studies [90]. This study measures board background and skills as the percentage of members with demonstrated experience and relevant competence out of the total board composition.

Female representation: The term “female representation” refers to the percentage of females among board members of firms. This represents the percentage of female board members who approve of a measure of gender diversity within the board’s composition [95]. Board gender is considered one of the most critical CG mechanisms that affect board monitoring of corporate sustainability and environmental reports [96]. Like board independence, board gender has received significant attention from researchers over time, as reflected in the many studies investigating this topic [97]. Thus, this study used the ratio of female directors out of all directors to measure board gender. This is in line with [98].

Independent directors: “Board independence” refers to the proportion of non-executive directors serving on corporate boards [47]. Members of the board who do not have substantial ties with the firm constitute this percentage. Aimed at mitigating conflicts of interest, the inclusion of independent directors on boards is regarded as a crucial element in CG [84]. As a result, board independence has received significant attention from scholars because of its great effect on board performance and firms’ disclosure practices [93]. Thus, in this study, the percentage of independent directors on a firm’s board measures its independence, which is in line with Abdelrahman et al. [84], who used the same method to measure board independence in their study.

Compensation: In this study, board compensation encompasses various financial elements provided to board members in exchange for their service. These components typically include meeting fees, equity-based remuneration, committee fees, and expense reimbursements. Compensation plays a critical role in influencing directors’ motivation, commitment, and alignment with shareholders’ interests [103]. Prior literature suggests that well-structured compensation packages can enhance board effectiveness and positively influence corporate transparency, including environmental, social, and governance (ESG) disclosures [104]. In line with previous studies, this study considers the overall structure of board compensation by incorporating these key elements to capture the financial incentives provided to board members.

4.5. Control Variables

Many control variables identified in prior research are related to ESG disclosure. The control variables used in this study are total assets (TASS), return on assets (ROA), return on equity (ROE), revenue per share (REV), market capitalization (MAR) and CRS committee (CCRS) (see

Table 2. Definition of variables.

Variable	Acronym	Measurement
Dependent Variable
ESG Disclosures	ESG	A minimum of 0 items and a maximum of 62 items make up the checklist
Independent Variable
Board Size	SIZE	Number of directors sitting on the board
Background and Skill Member	BCK	The percentage of members with experience and competence of the total number of council members
Female Representation	FAM	The number of female directors out of the total number of board members
Independence of the Board	IND	The quantity of independent directors on the board
Compensation	CPMP	salaries and annual bonuses, and stock options
Control Variables
Total Assets	TASS	The total assets logarithm
Return on Assets	ROA	The ratio of net income to total assets
Return on Equity	ROE	The ratio of net income to total equity
Revenue per Share	REV	Net profit divided by the number of shares
Market Capitalization	MAR	Market value of outstanding shares
CRS Committee	CRS	The dummy variable is equal to 0 if a company does not have a CSR committee and 1 if it does

Note: The numbers are in thousands of dollars.

). This outcome aligns with the results of Al-Shaer et al. [21], Cordazzo et al. [112], and Ho and Park [113]. The model used in this study is as follows:

ESGit = β0 + β₁ BSEit t + β₂ INDit + β₃ BAKit + β₄ FAMit + β₅COMPit + β₆TAS_it + β₇MAR_it + β₈ROA_it + β₉ROE_it + β₁₀REV_it + β₁₁CRS_it + εit.

5. Empirical Results

5.1. Descriptive Analysis

Table 3. Descriptive statistics.

Variables	Mean	S.D.	Min	Max
ESG	29.443	16.395	4.59	68.22
SIZE	9.256	1.881	5	19
BCK	51.985	4.293	50	65.63
Female	3.605	5.892	0	22.22
IND	44.072	10.406	21.43	75
CPMP	920.0914	665.989	0	3219.244
TASS	2.20	6.73	1.32	5.28
ROA	0.0541	0.0644	−0.1285	0.234
ROE	0.102	0.1591	−0.780	0.569
REV	5.259	5.645	0.068	26.63
MAR	3.31	2.06	9.31	1.83
CRS	33.429	39.124	0	81.74

presents the descriptive statistics for the sample, which consists of 78 firms spanning three years of observations. These data contained the mean, minimum (MIN), and maximum (MAX) values and standard deviations (SD) for all variables relevant to this study. The descriptive statistics for the ESG variable are displayed in Table 3, where the lower and upper limits are 4.59% and 68.2%, respectively, with an average value of 29.4%. This suggests that Saudi Arabia’s ESG is still comparatively low. The percentage of female directors, or female representation, varied from 0% to 22%, with a mean of 36%. This demonstrates unequivocally that there are still not enough women on Saudi companies’ boards and that men predominate. Table 3 shows that, in terms of control factors, SIZE, as determined by the number of board directors, ranged from 5 to 19, with an average of 9.3%. Meanwhile, BCK varied from a min of 50% to a max of 65.6%, with a mean of 52%, showing nearly 21.4% of the sample. Regarding IND, the descriptive results showed that IND varied from a min of 21.4% to a max of 75%, with a mean of 44%, showing nearly, on average, that board independence. Meanwhile, COMP varied from 0 to 3219, with a mean of 92.

5.2. Correlation Matrix

Important connections between the variables under study were uncovered by correlation analysis. The correlation coefficients between the main variables used in the analysis are shown in the

Table 4. Correlation matrix.

	ESG	SIZE	BCK	FAM	IND	COMP	TASS	ROA	ROE	REV	MAR	CRS
ESG	1.0000
SIZE	0.2.56	1.0000
BCK	0.2266	0.1776	1.0000
FAM	0.1101	0.0373	0.0498	1.0000
IND	−0.111	0.0012	0.0847	−0.109	1.0000
CPMP	0.2510	0.3652	0.1619	0.0317	0.0598	1.0000
TASS	0.4810	0.2284	0.0488	0.0488	−0.131	0.2581	1.0000
ROA	0.2694	0.2052	0.1440	0.1316	−0.060	0.6135	0.0960	1.0000
ROE	0.0512	0.0138	−0.122	0.2023	−0.039	0.0507	0.1418	0.7101	1.0000
REV	0.0730	0.1860	−0.003	0.1791	−0.276	0.1895	−0.149	0.2325	01881	1.0000
MAR	0.15261	−0.009	−0.250	0.0419	−0.065	−0.124	0.8848	0.2274	01708	−0.081	1.0000
CRS	01649	0.1311	−0.027	0.1217	−0.008	0.4176	0.2903	0.0569	0.1256	0.1064	0.1625	1.000

. These coefficients show the magnitude and direction of the linear correlations between the variables. ESG disclosure, the dependent variable, and board size, the independent variable, show a weak connection (0.2065). It is not much different from the other variables: background (0.2266), female (0.2228), and compensation (0.2510). On the other hand, independence showed a negative correlation value (−0.1105). Among the control variables, the CRS committee showed a moderate positive correlation with ESG disclosure (0.4810), followed by total assets (TASS) with a less positive correlation (0.2694), market capitalization (0.1649), revenue per share (0.1526), ROE (0.0730), and ROA (0.0512). These results demonstrate the various levels of impact and potential effects of these variables on ESG disclosure in the studied dataset.

5.3. Diagnostic Tests

There is a chance that the dependent and independent variables are causally related according to the kind of data used in this investigation. As a result, applying ordinary least squares (OLS) to certain problems might not be suitable. The Hausman test was used to decide between fixed and random effects regression models. Chijoke et al. [114] have already employed this modeling approach in other investigations. The Hausman test was used to decide between fixed and random effects regression models. Other studies have already used this modeling technique. Consequently, according to the Hausman test results, a random effects regression is suitable (see

Table 5. Random effect regression results.

Variables	Coefficients	t-Sat	p Value
SIZE	0.5622	1.24	0.213
BCK	0.7323	3.03	0.220
Female	0.4694	3.00	0.003
IND	−0.1348	−1.50	0.133
CPMP	2.5706	1.86	0.062
TASS	2.7611	0.98	0.329
ROA	43.5706	1.88	0.060
ROE	−22.9396	−3.48	0.001
REV	0.5087	3.75	0.000
MAR	−4.2312	−0.50	0.614
CRS	0.1614	6.61	0.000 ***
Constant		−20.5018
R2			0.356
Number of obs		234
Prob > chi2		0.0000
Hausman Test		Prob > chi2 > 0.05

*** p < 0.01.

). Diagnostic tests for linearity, multicollinearity, outlier presence, heteroscedasticity, and autocorrelation were performed on the model to ensure the results were not deceptive [100]. As a result, the scatter plot test showed a linear relationship between the independent and dependent variables in the research model. Since none of the study variables had a correlation coefficient greater than 0.80, Table 4 demonstrates their low multicollinearity. A variance inflation factor (VIF) test was used to check for multicollinearity. Abdelrahman et al. [84] states that a high degree of multicollinearity is implied because the value is greater than 10. Consequently, the VIF values in Table 4 guarantee that the study is free of multicollinearity. The Wooldridge test was used to assess autocorrelation in panel data, while the Breusch–Pagan/Cook–Weisberg test of heteroscedasticity was used to assess heteroscedasticity. The results of both tests show that these issues exist. To correct the predicted ESGD model, the proper standard errors were computed and clustered at the company level.

5.4. Regression Results and Discussion

The model’s random effect estimation is displayed in Table 5. A p-value of less than 0.01 indicates that Model 1’s F-statistic is statistically significant, proving the model’s statistical validity. The model’s adjusted R-squared value was 35.6%, meaning that the independent variables accounted for a certain percentage of the variance in the dependent variable. This R-squared value is comparable to those found in earlier research and is regarded as falling within an acceptable range for evaluating the effect of board director factors on ESG disclosure [56,59].

Table 5 showed a positive and strongly significant association between background and ESG (t = 3.03, p < 0.002). The results are consistent with the studies of [88,89,90], who found that the diverse backgrounds and skills of board members help companies make better decisions about the environment, society, and governance.

The analysis showed a positive relationship between females and ESG (t = 3.00, p < 0.003). This implies that the presence of background, skilled directors, and women’s participation in the board of directors are essential factors of ESG. Ismail, Latiff and Fang and Huang [95,96,97] support this finding by examining a positive and substantial link between the degree of ESG disclosure and the percentage of female directors. As a result, this research’s results align with those found in the previous literature. More ESG disclosures may result from their participation in decision-making, which could lead to stricter supervision of ESG considerations [98]. According to our research, including women on corporate boards can be seen as a reaction to the needs of many stakeholders, who call on businesses to be more transparent, socially conscious, and sustainable. Thus, businesses can demonstrate their dedication to more general social ideals like equality and environmental care by encouraging gender diversity. The diverse viewpoints of female directors may improve the board’s ability to supervise management and raise the standard of CG [99].

The analysis showed a positive relationship between compensation directors and ESG (t = 1.86, p < 0.062). This implies changing the company’s focus from profits to achieving more ESG objectives and improving its reputation, according to [110,111]. This aligns with the findings of the current study. On the other hand, the results of the study differ from those [2]. This argues that linkage leads to only a formal commitment and the absence of a real commitment to sustainability, which leads to doubts about sustainability results.

The study revealed a negative and non-significant effect between independent directors and ESG (t = −1.50, p < 0.133). This result is different from previous studies that supported the idea that independence significantly impacts the effectiveness of ESG practices [10,103,104,106]. Whoever reached independence encourages improved supervision and lessens conflicts of interest, which improves performance.

The analysis showed a negative and non-important effect between board size and ESG (t = 1.24, p < 0.213). The results are consistent with the study of [78,80,81,82]. Those who have reached the difficulty of coordination between members in large councils, which hinders decision-making in ESG issues. While Abdalla et al. [84] stated that councils with balanced sizes are best, they did not specify how to determine the appropriate size. The results of this study differ from those [85,86,87]. Discovered that board size had a significant effect on ESG.

5.5. Additional Analysis

Six control variables were included in the study model for the ESG analysis, as indicated in Table 5. The following are the regression findings for these variables:

This study proved the statistically significant, strong positive impact of the CRS committee on ESG. This indicates that Saudi companies have a committee interested in disclosing ESG information.

This finding showed a statistically significant, strong positive influence of revenue per share (rev) and return on assets (ROA) on ESG. This indicates that the Saudi companies with high profits that distribute returns to shareholders are the ones that care about disclosure and provide more ESG-related information.

The results indicated a negative and significant influence of ROA on ESG. However, the influence of total assets and market value for Saudi companies on ESG was statistically insignificant. This result implies that ESGD is the same for all KSA-listed firm sizes.

6. Conclusions, Implications, Limitations, and Future Research

This study assessed the effect of board characteristics (size, background, gender, independence, compensation) on ESG disclosure provided by Saudi-listed firms. The study included 78 firms that regularly disclose ESG data in annual reports. The data collection is from the Refinitiv Eikon Database for five years, from 2019 to 2023. The results found a positive relationship between females, compensation, and ESG disclosure. On the other hand, the analysis showed no important effect between board size, independent directors, and ESG disclosure. Therefore, it fills a gap in the knowledge regarding how board composition influences ESG disclosure. This study highlights the pivotal role of board directors in forming business sustainability initiatives. This contribution is especially pertinent when considering Saudi Arabia. These results offer several practical and theoretical implications. From a policy perspective, the findings suggest that regulators such as the Saudi Capital Market Authority (CMA) should prioritize policies that promote gender diversity, incentivize board expertise, and tie director compensation to ESG performance. Given Saudi Arabia’s ongoing economic transformation under Vision 2030, enhancing the capacity of boards through targeted reforms can serve as a key mechanism for improving corporate sustainability. For corporate practitioners, the study underscores the value of recruiting directors with diverse skills and fostering inclusive board environments to strengthen non-financial reporting. Companies seeking to attract socially responsible investment and build public trust should consider board composition as a strategic asset in achieving ESG goals. From an academic standpoint, this study contributes to the under-researched domain of ESG disclosure in emerging markets, especially within the Gulf Cooperation Council (GCC) context. This research provides a multidimensional explanation for how internal governance structures influence sustainability practices by applying Agency Theory, Stakeholder Theory, and Resource Dependence Theory.

Despite its contributions, this study is not without limitations. First, it focuses solely on Saudi-listed companies, but it can restrict how broadly the results can be used in different situations, especially in countries with different institutional, cultural, or regulatory environments. Second, the study uses a relatively small sample size of 78 firms, which may not fully capture the diversity of board structures across the Saudi market. Third, although comprehensive, the content analysis-based ESG index may still be subject to subjective interpretation and potential information asymmetry in disclosure practices. Lastly, the study focuses on board-level characteristics and does not explore other internal or external governance mechanisms that might influence ESG disclosure. Future studies can build on these findings by expanding the sample to include firms from other Gulf Cooperation Council (GCC) countries or emerging markets to enable cross-country comparisons. Longitudinal studies could also provide deeper insights into how board reforms and ESG practices evolve. Moreover, future studies could include qualitative methods, such as interviews with board members or sustainability officers, to better understand how ESG decisions are made. Additionally, researchers may examine the moderating role of external factors such as regulatory pressure, institutional ownership, or stakeholder activism on the relationship between board characteristics and ESG disclosure. Last, one key limitation of this study is the lack of robustness checks and controls for potential endogeneity issues, such as reverse causality and omitted variable bias. This decision was due to limitations in the available data, particularly the absence of suitable instrumental variables and insufficient data structure to apply advanced econometric techniques such as Two-Stage Least Squares (2SLS). As a result, the relationships identified between board characteristics and ESG disclosure should be interpreted as associations rather than definitive causal effects. We acknowledge that this limits the internal validity of the findings, and future research with access to more comprehensive datasets is encouraged to apply robustness testing and endogeneity controls to validate and extend the current results.