The Role of Corporate Governance in Shaping Sustainable Practices and Economic Outcomes in Small- and Medium-Sized Farms

Abstract

To integrate rapidly growing environmental, social, and governance (ESG) investments into agribusiness, it is essential to understand the decision-making mechanisms behind sustainable practices in small- and medium-sized farms. This study examines the role of corporate governance in promoting sustainable practices using structural equation modeling on survey data from 1111 Japanese farms. The results reveal that internal social sustainability practices, such as improving the work environment and employee well-being, are positively associated with corporate governance and, in turn, significantly enhance sales growth, cash flow, and succession prospects. In contrast, external social sustainability practices show a negative correlation with governance, reflecting the influence of socioemotional wealth and reputation-driven decision-making. Environmental sustainability practices correlate only with sustainable corporate governance, suggesting a lack of strategic integration. These findings underscore the importance of corporate governance as a factor in linking sustainable initiatives to economic outcome. Strengthening internal social sustainability through robust corporate governance is therefore critical for farmers aiming to improve performance through sustainability. Moreover, given that family management preferences shape sustainability choices, policymakers must consider both governance and socioemotional factors to effectively support agricultural sustainability.

1. Introduction

Environmental, social, and governance (ESG) investments have been rapidly expanding as a framework for evaluating firms’ sustainability efforts and guiding responsible capital allocation. As of 2022, ESG-related assets under management reached $30.3 trillion across major global markets, reflecting a 32.8% increase since 2016 [1].

This surge in ESG interest holds particular relevance for agribusinesses, which operate in close connection with natural ecosystems and rural communities. Within this sector, family businesses comprising the majority of small- and medium-sized enterprise (SME) farms are notably proactive in implementing sustainable practices [2,3,4]. Strengthening ESG engagement among these farms is therefore anticipated to enhance both their economic resilience and the broader growth of the agribusiness sector.

However, the three pillars of ESG contribute to corporate value in different ways. Corporate governance (CG), in particular, refers to “the design of institutions that induce or force management to internalize the welfare of stakeholders” [5]. This encompasses mechanisms such as securing shareholder rights, engaging with broader stakeholders, monitoring executives, and managing risks. CG not only compels firms to integrate environmental and social concerns into their decision-making but also ensures accountability for those efforts. Empirical studies focusing on large firms have confirmed CG’s role in advancing corporate social responsibility (CSR) [6,7].

In contrast, most SME farms, which include family-run, micro, and small enterprises, engage in CG only passively, despite demonstrating stakeholder-oriented behavior [8,9]. Consequently, the sustainable practices adopted by these farms may or may not be CG-driven. If only CG-based practices are positively associated with firm performance, then passive engagement with CG could limit the value-enhancing effects of sustainability initiatives. This suggests that ESG investments may be discouraged if SME farms pursue sustainability in ways that do not align with improved corporate value.

One influential motivator behind SME farms’ sustainability efforts is corporate reputation. CSR initiatives are known to improve reputation broadly [10,11], and this also applies within the agribusiness domain [12,13]. For family businesses, the preservation of socioemotional wealth (SEW) that is emotional attachment to the business often shapes decision-making [14], and CSR is used as a vehicle to maintain or enhance reputation. As a result, these firms tend to prioritize issues visible to external stakeholders, sometimes at the expense of internal considerations such as employee well-being [15,16].

Moreover, research indicates that, among CSR disclosure themes, internal dimensions like “human resources” are more closely linked with CG and economic performance, whereas externally oriented themes like “community” have weaker associations [17]. These findings suggest that internal social sustainability, when supported by CG, is more likely to lead to economic benefits than externally focused efforts.

In summary, for SME farms, CG-driven practices addressing internal stakeholders are more strongly associated with improved performance than SEW-driven, externally oriented practices. Understanding how governance mechanisms intersect with sustainability priorities reveals that value-enhancing practices, such as improving work conditions and investing in human capital, are underpinned by CG. Furthermore, if practices related to corporate reputation, such as community involvement or environmental actions, do not contribute meaningfully to corporate value, then CG must play a complementary role in shaping these decisions. This insight reinforces the need to promote governance capacity and training among SME farms.

This study aims to elucidate the impact of corporate governance on the adoption of sustainability practices in SME farms and to explore the relationship between these practices and economic viability. Demonstrating that CG–based decision-making is critical to advancing agricultural sustainability could offer new managerial guidance for farmers striving for environmentally and socially sustainable agriculture. For policymakers, the findings may also provide evidence to support an innovative policy approach that enhances the CG of SME farms to promote sustainability in the agricultural sector.

2. Formulation of Hypotheses

2.1. Corporate Governance and Sustainable Practices

At small- and medium-sized family businesses, the degree to which corporate governance (CG) positively correlates with sustainable practices is likely to vary depending on the type of practice. This variation arises because decision-making in family businesses is often guided by socioemotional wealth (SEW), defined as the stock of affect-related value that a family derives from its ownership position within a business [14,18,19]. Empirical studies show a negative correlation between the degree of emphasis placed on SEW and the implementation of CG [8]. Furthermore, the greater the financial flexibility of a family business, the more likely it is to prioritize SEW at the expense of formal CG mechanisms [20]. In short, most practices that enhance SEW tend to conflict with the principles of CG.

SEW comprises structural elements such as identity, binding social ties, and emotional attachment, all of which shape how managers prioritize internal versus external considerations when making sustainability-related decisions [21,22]. Notably, because corporate reputation reflects binding social ties, family businesses tend to place greater emphasis on external stakeholders. For instance, businesses actively engaged in their local communities are more inclined to avoid environmental pollution due to reputational concerns [15,23]. Similarly, in countries with weaker CG systems, sustainability reporting is used as a tool to reduce information asymmetry with external stakeholders [24]. Consequently, firms that receive greater media attention often place greater emphasis on corporate social responsibility (CSR) [25]. These tendencies result in family-influenced firms being more likely to exhibit strong reputational capital [26]. However, one study found that such firms often neglect internal stakeholders, such as employees, precisely because SEW tends to emphasize external visibility over internal well-being [16].

This tension implies a potential trade-off between SEW and CG. Firms that are more effective at implementing CG are expected to align their sustainability practices more closely with strategic management objectives. Yet, most previous research has focused narrowly on specific CSR activities or general CSR scores, without examining the differential effects of CG on various sustainability domains at the SME level. Given that smaller SMEs tend to prioritize social value over profit [9] and exhibit weaker alignment between CSR and strategy [27], it is critical to identify which types of sustainable practices are driven by strong CG. Doing so will help clarify the synergies and trade-offs among economic, social, and environmental dimensions of sustainability in SMEs.

To that end, some scholars have proposed categorizing sustainability beyond the economic dimension into three subdomains: internal social sustainability, external social sustainability, and environmental sustainability [28,29,30]. According to a study of the sustainability index in agriculture, internal social sustainability refers to employees’ work environment, education, and other forms of employee well-being, whereas external social sustainability refers to social values and concerns, such as community revitalization and job creation [28]. Therefore, when family businesses prioritize immediate feedback from consumers and local communities over CG considerations, they are more likely to engage in external social sustainability initiatives. Conversely, practices targeting internal social sustainability, owing to their lower visibility, tend to have weaker ties to SEW but stronger associations with CG. Environmental sustainability, although potentially linked to broader stakeholder expectations (e.g., regulatory agencies, NGOs, and international institutions), is hypothesized to have a weaker relationship with CG than internal social sustainability. These distinctions are supported by previous studies showing that, among CSR themes, CG has the strongest correlation with “human resources,” followed by “environment,” and no significant link with “community” [17].

Based on this theoretical and empirical foundation, we propose the following hypothesis:

H1. 

The positive overall effect of general corporate governance on sustainable practices at SME farms is strongest for internal social sustainability, followed by environmental and external social sustainability, in that order.

This hypothesis represents a methodological and conceptual advancement over prior studies in several ways. First, it draws on original survey data that identify the specific presence or absence of CG and sustainability practices at the firm level, enabling an independent and context-specific analysis. Given the limited research on CG within SME farms, this approach helps bridge a critical gap. Second, by distinguishing between general CG and sustainable CG, we can separately estimate the direct and indirect effects of general CG on sustainability performance. ESG investment frameworks, such as those proposed by the Task Force on Climate-Related Financial Disclosures (TCFD) [31] and the Japan Exchange Group & Tokyo Stock Exchange [32], highlight different practices, including the identification of environmental and social risks, strategic positioning of these issues, and top-level commitment and oversight. These practices are characteristic of sustainable CG. Since activities such as materiality assessments, which are central to sustainable CG, are shaped by the quality of general CG [33], assessing the effect of general CG on sustainable CG is essential for understanding its full impact on sustainability outcomes.

2.2. Sustainable Practices and Economic Performance

A substantial body of empirical research has demonstrated that sustainable practices can enhance firms’ economic performance [34,35,36]. However, the magnitude and direction of this effect are mediated by industry-specific factors. For instance, the benefits of CSR are amplified in industries where product differentiation is difficult [34] or where market growth is rapid [35]. Since agricultural products are often undifferentiated commodities, the potential for CSR to improve performance in this sector is particularly high.

In addition to industry structure, CSR is known to create valuable business resources, such as enhanced corporate reputation [10,37,38], which in turn is positively associated with economic performance [11]. Furthermore, CSR initiatives have been shown to improve employee satisfaction and other human resource outcomes [38,39]. For SME farms facing increased labor demands, CSR’s influence on internal motivation and employee retention may represent a critical pathway to improved performance.

However, to determine whether CSR activities yield a sustained competitive advantage, their characteristics must be evaluated through the lens of strategic theory. According to Barney’s resource-based view (RBV), only resources that are valuable, rare, inimitable, and well-organized (VRIO) can confer long-term competitive advantages [40]. CSR initiatives that are not grounded in CG are unlikely to meet these criteria. Without integration into long-term strategy or executive-level decision-making, such initiatives are easily replicated by competitors, failing the tests of rarity and inimitability. Furthermore, without CG-based monitoring and organizational alignment, firms lack the capacity to deploy these resources effectively. This concern is echoed in research showing that, among ESG components, only governance is positively associated with market performance [41], underscoring the “organization” component of the VRIO model. Moreover, CSR initiatives driven solely by financial flexibility rather than strategic planning may be disconnected from performance outcomes [42,43].

From the perspective of creating shared value (CSV), which integrates social responsibility into the core of corporate strategy [44], the role of CG is equally essential. Unlike traditional CSR, CSV frames sustainability as a strategic goal rather than a philanthropic add-on [45]. Achieving CSV requires not only a strategic mindset but also visionary leadership, which is a function closely associated with effective CG in SMEs.

Despite its importance, only a small fraction (6.8%) of CSR studies in SMEs apply strategic frameworks, such as RBV [46]. Some studies have found positive links between CSR and SME performance [47] but emphasize that these benefits are contingent upon the alignment between CSR initiatives and core business strategies. Workforce and community-related CSR activities are particularly beneficial when they are integrated with strategic goals [46]. While these findings highlight the relevance of CG, few studies have explicitly investigated the relationship between CG, sustainability practices, and performance in the SME context.

In light of these considerations, and given that SEW-based initiatives such as community engagement are not necessarily grounded in CG, it is essential to examine the role of internal social sustainability. If CG is the primary driver of sustainable performance, then internal social sustainability practices should mediate the relationship between CG and firm performance.

Therefore, we propose the following hypothesis:

H2. 

For SME farms, internal social sustainability practices are expected to have the strongest positive relationship with economic performance.

This hypothesis contributes to the literature by empirically disentangling the relationships between CG, different types of sustainable practices, and economic outcomes. It highlights both the synergistic and conflicting dynamics between social/environmental objectives and firm performance. The study’s conceptual framework is summarized in Figure 1.

3. Analytical Methodology

3.1. Analysis Procedure

Our analytical framework proceeds in four stages. First, we apply exploratory factor analysis to derive latent factors representing general corporate governance (CG) and sustainable practices. Second, we use structural equation modeling to examine the relationships between CG and each category of sustainable practice. We also expect general CG to have an indirect effect on sustainable practices through its influence on sustainable CG. Third, we estimate and compare the total effects of general CG on each type of sustainable practice. Finally, we assess the extent to which CG-based sustainable practices are linked to economic performance, thereby confirming their relative effectiveness.

To construct the general CG index, we coded the presence or absence of 13 governance-related items, referencing the SAFA Guidelines [48], the Global Reporting Initiative (GRI) standards [49], and SME-specific governance guidelines [50]. According to these SME-specific governance guidelines, a typical list of CG elements is primarily intended for publicly listed companies that have clearly defined decision-making bodies, namely shareholders, a board of directors, and an executive management team. It provides principles for directing and controlling such organizations. However, in the case of SMEs, the roles of ownership and management are often ambiguous, and decision-making processes tend to be informal. These issues tend to become more apparent as the organization grows. Therefore, for SMEs, it is necessary to focus on CG as a practical solution that aligns with the stages of organizational growth. Accordingly, instead of modifying governance codes intended for listed companies, this study applies SME-specific guidelines that reflect the distinct developmental stages of SMEs [50]. To enhance contextual relevance, theme selection was also informed by reports issued by Japan’s Small and Medium Enterprise Agency [51]. These items span six thematic areas: management philosophy and planning (3 items), executive oversight (3 items), compliance (2 items), risk management (2 items), executive incentives (2 items), and disclosure (1 item).

In collecting data on the sustainability of agricultural management, this study draws on the following two points from the SAFA Guidelines [48]. We adopted a practice-based approach to assess sustainability, consistent with prior studies. This decision was motivated by two key considerations. First, SME farms often lack quantifiable output records related to sustainability, making data collection prohibitively costly. Second, since this study seeks to examine the relationship between sustainable practices and CG, the practice-based approach allows for broader, more flexible data capture.

Next, the SAFA Guidelines recommend selecting sub-themes that align with the scope and context of the survey target. Comparative studies of sustainability assessment tools, including SAFA, indicate that each tool reflects the values of its developers and the country of origin, resulting in variations in the range of sustainability themes addressed [52]. To capture the sustainability of diverse farm types in a manner consistent with the realities of Japanese agriculture, we adopted a broad set of sub-themes. Rather than applying a single sustainability assessment method, we compiled an original list of sustainable practices by drawing on multiple approaches. Therefore, following previous studies in the agricultural sector [28,29,30], we categorized social sustainability into internal (e.g., employee-related practices) and external dimensions (e.g., community engagement, landscape conservation, food safety, education, and animal welfare). In addition to those studies, we referred to international frameworks, such as the SAFA Guidelines [48] and SASB Standards [53], to classify 59 specific practices across 18 subcategories spanning environmental and social sustainability domains.

For both general CG and sustainable practices that are measured using ordinal scales, we estimated polychoric correlation matrices, which infer underlying continuous variables from ordinal data [54]. In the case of binary variables of general CG, this polychoric correlation is referred to as a tetrachoric correlation, and it has been shown that, even for ordinal variables, appropriate factor analysis can be conducted using polychoric/tetrachoric correlations [54]. Practical examples of factor analysis using polychoric/tetrachoric correlations have also been reported (e.g., [55,56]). We then conducted factor analysis based on these matrices. The number of retained factors was determined using parallel analysis, which compares eigenvalues from real data to those derived from randomly simulated datasets of the same size and dimensionality [57]. For interpretability, we retained only variables with factor loadings greater than 0.4, as recommended for large samples [58].

To construct the sustainable CG index, we drew from ESG disclosure guidelines developed by the Japan Exchange Group [32]. These guidelines articulate the role of ESG in enhancing corporate value and identify five procedural stages: identifying key sustainability issues (materiality assessment), incorporating them into strategic planning, clarifying executive leadership roles, facilitating organizational implementation, and ensuring evaluation and feedback mechanisms. Notably, the extent of sustainable CG is often described as ESG maturity. We captured these elements using 13 items across five categories: issue identification and analysis (2 items), strategic integration (3 items), executive commitment (3 items), employee understanding and participation (3 items), and performance evaluation and feedback (2 items). The sum of these responses constituted the sustainable CG score.

We then applied structural equation modeling using the CG and sustainability factors extracted earlier. Model fit was assessed using chi-square/df, the comparative fit index (CFI), Goodness-of-Fit Index (GFI), Tucker–Lewis Index (TLI), the root mean square error of approximation (RMSEA), and the Standardized Root Mean Square Residual (SRMR). In the structural model, we estimated both the direct effects of general CG on each sustainable practice and the indirect effects mediated through sustainable CG. To test the statistical significance of these effects, we conducted Monte Carlo simulations. Additional determinants of sustainable practices, such as farm type, geographic location, business scale, diversification status, and the likelihood of succession by a non-family member, were included as control variables.

To evaluate the relationship between sustainability and economic performance, we linked each sustainability factor to both short- and long-term performance indicators. For short-term outcomes, we used the self-reported sales growth rate over the past year (lower, unchanged, higher) and changes in cash flow over the past five years, measured on a 5-point Likert scale (1 = “much worsened” to 5 = “much improved”). For long-term outcomes, we assessed whether farms had a confirmed successor (successor secured, undecided, no successor), a key determinant of farm continuity. Previous research in SMEs links successful succession to improved financial outcomes [59], and studies in Japanese agriculture similarly associate succession with low debt ratios, strong cash reserves, and profitability [60]. We employed multiple comparisons (t-tests using the Bonferroni method) to compare the mean factor scores across different levels of economic performance.

3.2. Data

The data were obtained from a nationwide questionnaire administered by the Japan Agricultural Corporations Association. The survey was distributed by mail in October 2022 to 2068 SME farms across Japan and returned by March 2023. Respondents were top managers of their respective farms. The participating farms are relatively large organizational farms by Japanese standards. From the 1412 responses received, we excluded observations with missing values or extreme outliers, specifically firms with annual sales exceeding 5 billion yen or 150 or more employees. This procedure yielded a final analytical sample of 1111 SME farms (effective response rate: 53.7%).

The sample characteristics confirm its relevance to our research focus. Most farms reported annual sales between 100 and 300 million yen, consistent with SME status. Furthermore, only 10.1% of farms indicated an intention to appoint a non-family member as successor, suggesting that the sample predominantly comprises family businesses. The average number of employees and executives were 19.25 and 3.04, respectively, indicating an organizational scale at which formal CG practices are expected. Thus, the sample aligns well with our definition of small and medium-sized family businesses, making it suitable for examining the role of CG.

Regarding representativeness, the sample includes a wide range of farm types and covers all nine major regions of Japan, providing a geographically balanced dataset.

Table 1. Descriptive statistics.

Variables		Mean	Standard	Remarks
			Deviation
Number of employees		19.25	20.25	(persons) includes those working who are full-time part-time employees
Years in operation		23.19	13.76	(years) calculated from the year of establishment as a corporation
Population density		0.85	1.38	(1000 persons/km2)
Business diversification		2.06	1.65	Number of businesses related to agriculture
Sustainable corporate governance		4.37	3.12	Total of the following 13 items
Break down	Top managers
	Identifies social and environmental issues	0.38		1 = Firm adopts this practice.
	Analyzes and understands the effects	0.46
	Includes sustainable practices in management philosophy	0.36
	Includes sustainable practices in the business strategy and planning	0.41
	Sets specific goals for sustainable practices	0.25
	Emphasizes the firm’s social responsibility	0.49
	Takes the lead in implementing sustainable practices	0.43
	Clarifies responsibilities and authority vis-a-vis sustainable practices	0.21
	Evaluates the track record of sustainable practices	0.19
	Revises future plans and policies based on track record	0.37
	Employees
	Understands the purposes and effects of sustainable practices	0.33
	Proactively partakes in sustainable practices	0.23
	Proactively proposes approaches to improve sustainable practices	0.28
Expected successor not a family member		0.10		1 = Successor is nominated outside family
Farm type	Paddy farming	0.35		1 = Firm adopts this farm type.
	Outdoor vegetable growing	0.18
	Greenhouse vegetable growing	0.18
	Fruit growing	0.09
	Cattle or cow raising	0.08
	Pig or poultry raising	0.12

presents descriptive statistics, including sustainable CG scores. The percentage of respondents selecting each sustainable CG item ranged from 20% to 40%, indicating that such practices are not yet widespread. The highest proportion was observed for the item “emphasizes the firm’s social responsibility” (48.8%), whereas items related to monitoring (e.g., “evaluates the track record of sustainable practices”) and executive commitment (e.g., “clearly sets responsibilities with respect to sustainable practices”) received lower endorsement. These results point to a persistent gap between sustainability principles and their implementation in practice.

4. Results

4.1. Factor Analysis

Table 2. Factor analysis of sustainable practices.

Sustainable Practices	Items	Mean	Factor Loading
			Internal Social	External Social	Environmental
Response to climate change	(1) Installation of energy-saving facilities/machinery/smart devices, (2) reduction of methane emissions, (3) use of renewable energy, and (4) carbon retention in farmland	0.79	0.12	0.11	0.55
Water and soil conservation	(1) Installation of water-saving technologies, (2) soil maintenance through crop rotation, (3) efforts to reduce the use of farm chemicals and chemical fertilizers, (4) prevention of soil runoff, and (5) use of manure	1.44	0.06	−0.19	0.90
Local ecosystem conservation	(1) Protection of plant and animal habitats, (2) organic farming, (3) securing new plant and animal habitats, and (4) integrated pest and weed management	0.57	−0.06	0.28	0.57
Resource recycling agriculture	(1) Implementation of crop–livestock integration and (2) use of crop residue	0.64	0.11	0.16	0.46
Rural landscape conservation	(1) Beautification of the rural landscape, (2) introduction of ornamental/landscape crops, and (3) solving farmland abandon	0.77	−0.02	0.28	0.49
Efficient use of local resources	(1) Development of businesses that uses local products and (2) development of businesses through agriculture-commerce-industry collaboration	0.46	−0.08	0.76	0.07
Product safety	(1) Supervision of production using Good Agricultural Practice (GAP), (2) traceability assurance, and (3) supervision of agricultural product processing	0.96	0.30	0.20	0.33
Care farming	(1) Hiring of persons with disabilities, (2) employment and social rehabilitation assistance, and (3) hiring of persons who require care	0.38	0.13	0.54	−0.01
Promotion of food education	(1) Supply of agricultural products to school lunches, (2) participation in food education-related events, (3) agricultural experience farms, and (4) lectures related to food education	0.93	−0.01	0.62	0.15
Consideration for animal welfare	(1) Consultations with veterinarians, (2) implementation of pasturage and open-space breeding, (3) health management of livestock barns, (4) observation and alleviation of stress behaviors, and 5) assurance of adequate breeding space in livestock barns	0.59	0.24	0.28	-0.35
Development of the community and food culture	(1) Production of traditional agricultural products, (2) participating in traditional events related to farming and food, and (3) initiatives regarding traditional farming methods	0.27	−0.22	0.82	0.15
Food poverty and access to food	(1) Participation in food banks, (2) participation in children’s cafeterias, and (3) programs and support for mobile sales and home delivery businesses	0.28	−0.03	0.69	−0.01
Workplace safety	(1) Participation in training on accident prevention and (2) development of an accident prevention manual	0.62	0.56	0.04	0.23
Improved treatment of employees	(1) Regular salary raises, (2) enhancement of employee benefits, and (3) improvement of the annual paid leave system	1.61	0.89	−0.23	0.05
Improved health conditions for employees	(1) Periodic health examinations and (2) measures addressing mental health considerations	0.92	0.93	−0.18	0.02
Employee participation in management	(1) Notification of the management strategy/plan, (2) participation in important decision-making events, (3) disclosure of management and financial data, and (4) implementation of an evaluation system aligned with business plans	1.07	0.64	0.01	0.13
Human resource investment	(1) Regular training implementation, (2) support for participation in external training, and (3) assignment of mentors	0.64	0.68	0.05	0.04
Hiring of diverse employees	Regular employment of (1) women, (2) foreign nationals, (3) people with disabilities, and (4) promotion of these people to managerial positions	0.83	0.58	0.11	−0.04
Cumulative proportion of variance explained			0.19	0.35	0.50

Note: Bold values indicate factor loadings of 0.4 or greater.

presents the mean values for each dummy variable related to sustainable practices, along with the results of the factor analysis. Based on parallel analysis, a three-factor model was retained. When focusing on items with factor loadings greater than 0.4, which is a commonly accepted minimal threshold for interpreting factor structures of large samples (n > 200) [58] and [61] (p. 115), the three extracted factors correspond to internal and external social sustainability and environmental sustainability.

Table 3. Factor analysis of general corporate governance (GCG).

General Corporate Governance (GCG)	Selection Percentage	Factor Loading
		GCG_ Broad	GCG_ Vision	GCG_ Executives
My farm
Determines a management philosophy	55.3	−0.10	0.72	0.09
Determines policies and principles when acting in accordance with the management philosophy	25.0	−0.06	1.13	−0.18
Formulates a long-term management plan and presents it to executives and employees	23.6	0.18	0.48	0.03
Holds regular meetings of executives	29.3	0.06	−0.03	0.77
Promotes non-family members to executive positions	22.1	−0.17	−0.05	0.87
Sets clear responsibilities for executives	22.6	0.14	0.05	0.51
Gathers information on the legal system with regard to environmental protection and social issues	13.9	0.44	0.19	−0.02
Understands and observes laws related to employment and the firm’s operations	33.2	0.64	0.02	0.04
Investigates the risks affecting business continuity	25.5	0.88	−0.12	−0.11
Sets financial goals other than sales	14.0	0.49	0.19	0.14
Presents financial data to related stakeholders other than financial institutions	19.4	0.54	−0.02	0.19
Ties executive compensation to economic performance	17.1	0.58	−0.04	0.03
Has formulated and is executing plans for management succession	9.4	0.59	−0.01	−0.10
Cumulative proportion of variance explained		0.21	0.36	0.49

Note: Bold values indicate factor loadings of 0.4 or greater.

then displays the percentages of respondents selecting items related to general CG, as well as the outcomes of the corresponding factor analysis. The most frequently implemented practice was “determines a management philosophy” (55.3%). In contrast, the second most adopted item was selected by only around 30% of respondents. This pattern indicates that general CG practices are not widely adopted among SME farms. Nonetheless, it also suggests that a subset of farms proactively engaged in general CG may be positioned to gain a competitive advantage.

Parallel analysis revealed three distinct factors underlying general CG. The first factor, labeled GCG_Broad, comprises items related to compliance, risk management, stakeholder engagement, and incentive structures. The second factor, GCG_Vision, includes items related to the formulation of a management philosophy and strategic planning. The third factor, GCG_Executives, reflects items concerning the diversification of board membership. These results indicate that, beyond broad governance functions, strategic vision and executive structure constitute core dimensions of CG at SME farms.

4.2. Structural Equation Modeling

Figure 2 summarizes the structural equation modeling results, and

Table 4. Estimation results of structural equation modeling.

Explanatory Variables		Explained Variables
		Sustainable CG		Environmental Sustainability		Internal Social Sustainability		External Social Sustainability
		Coef.	p-Value	Coef.	p-Value	Coef.	p-Value	Coef.	p-Value
CG	GCG_Broad	0.848 (0.039)	<0.001 ***	−0.001 (0.057)	0.990	0.560 (0.048)	<0.001 ***	−0.247 (0.061)	<0.001 ***
	GCG_Vision	0.926 (0.040)	<0.001 ***	−0.008 (0.062)	0.902	0.581 (0.051)	<0.001 ***	−0.221 (0.067)	0.001 **
	GCG_Executives	0.595 (0.035)	<0.001 ***	0.003 (0.046)	0.948	0.395 (0.041)	<0.001 ***	−0.141 (0.050)	0.004 **
Sustainable CG				0.252 (0.033)	<0.001 ***	0.097 (0.033)	0.003 **	0.053 (0.039)	0.169
covariates	Log (no. of executives and employees)	0.008 (0.028)	0.774	−0.120 (0.028)	<0.001 ***	0.224 (0.032)	<0.001 ***	−0.043 (0.036)	0.242
	No. of years in operation	−0.066 (0.025)	0.009 **	−0.071 (0.027)	0.009 **	0.037 (0.026)	0.163	−0.008 (0.029)	0.777
	Outdoor vegetable growing	−0.007 (0.029)	0.818	0.027 (0.032)	0.379	0.011 (0.031)	0.723	−0.011 (0.039)	0.738
	Greenhouse vegetable growing	−0.065 (0.029)	0.027 *	−0.077 (0.034)	0.014 *	−0.053 (0.034)	0.118	0.089 (0.029)	0.025 *
	Fruit farming	0.007 (0.028)	0.790	−0.077 (0.026)	0.005 **	0.022 (0.023)	0.338	0.037 (0.030)	0.200
	Cattle or cow raising	−0.018 (0.025)	0.484	−0.166 (0.025)	<0.001 ***	0.052 (0.028)	0.061	0.090 (0.036)	0.002 **
	Pig or poultry raising	0.011 (0.029)	0.707	−0.339 (0.028)	0.000 ***	0.012 (0.031)	0.695	0.221 (0.034)	<0.001 ***
	Expected successor not a family member			−0.027 (0.025)	0.266	−0.009 (0.029)	0.751	0.059 (0.033)	0.068
	Business diversification			0.095 (0.029)	0.001 **	−0.130 (0.029)	<0.001 ***	0.242 (0.033)	<0.001 ***
	Population density			−0.084 (0.037)	0.025 *	−0.011 (0.038)	0.768	0.101 (0.044)	0.022 *
	Population density 2			0.058 (0.023)	0.012 **	0.017 (0.026)	0.508	−0.080 (0.028)	0.005 **
chi-square/df = 3.640; CFI = 0.995; GFI = 0.995; TLI = 0.930; RMSEA = 0.049; SRMR = 0.007

Note: * p < 0.05; ** p < 0.01; *** p < 0.001. The estimation method is maximum likelihood, and values in parentheses are Huber–White robust standard errors. GCG: General Corporate Governance; Sustainable CG: Sustainable Corporate Governance.

provides the detailed estimation outcomes. The model demonstrated a strong fit (chi-square/df = 3.640; CFI = 0.995; GFI = 0.995; TLI = 0.930; RMSEA = 0.049; SRMR = 0.007), suggesting robustness in the measurement and structural components. Although the chi-square/df value slightly exceeds the conventional threshold (<3), it is well recognized that this index is sensitive to large sample sizes (n > 200), often leading to inflated values even when overall model fit is adequate. In this context, the sufficient values of the other fit indices provide stronger evidence of satisfactory model performance.

In terms of direct effects, all three general CG factors were significantly and positively associated with internal social sustainability. In contrast, general CG exhibited significant negative associations with external social sustainability and no significant associations with environmental sustainability. This suggests that CG-oriented decision-making primarily fosters systems that enhance employee welfare and managerial participation, while organizations with stronger CG may be less inclined to engage in activities benefiting local communities and consumers.

Additionally, general CG had a significant positive effect on sustainable CG, which in turn showed significant positive associations with both environmental and internal social sustainability. These results indicate that general CG influences sustainable practices not only directly but also indirectly through its effect on sustainable CG. In other words, CG-oriented decision-making is crucial for identifying sustainability materiality and implementing concrete plans and actions, thereby enhancing organizational sustainability. Nevertheless, even well-developed sustainable CG does not appear to strengthen initiatives targeting local communities and consumers, implying that external social sustainability is shaped by motivations and decision-making processes distinct from those driving the other two sustainability dimensions.

Table 5. Direct, indirect, and total effect of general corporate governance.

	Direct Effect			Indirect Effect			Total Effect
	Environmental	Internal Social	External Social	Environmental	Internal Social	External Social	Environmental	Internal Social	External Social
	(Sustainability)			(Sustainability)			(Sustainability)
GCG_ Broad	−0.001	0.560 ***	−0.247 ***	0.214 ***	0.083 **	0.045	0.213 ***	0.643 ***	−0.202 ***
GCG_ Vision	−0.008	0.581 ***	−0.221 ***	0.234 ***	0.090 **	0.049	0.226 ***	0.671 ***	−0.172 **
GCG_ Executives	0.003	0.395 ***	−0.141 **	0.150 ***	0.058 **	0.032	0.153 ***	0.452 ***	−0.110 *

Note: * p < 0.05; ** p < 0.01; *** p < 0.001. Monte Carlo simulations were used to estimate standard errors of indirect effects and total effects. Total effects of each corporate governance factor were significantly different among sustainability practices (p-value < 0.001). GCG: General Corporate Governance.

presents the hypothesis test results for H1 by disaggregating the direct, indirect, and total effects of general CG on each category of sustainable practice. Among the three types of sustainable practices, the total effect of general corporate governance was most strongly positive for internal social sustainability. For environmental sustainability, the indirect effect of general CG (via sustainable CG) was significant and positive, while the direct effect was not. In the case of external social sustainability, the direct effect was significantly negative, the indirect effect was not statistically significant, and the total effect was also negative.

Moreover, all differences among the total effects between three sustainability dimensions were statistically significant (p < 0.001). These findings confirm that general CG is most positively associated with internal social sustainability, followed by environmental sustainability, and least associated with external social sustainability. This pattern provides empirical support for Hypothesis 1. Notably, the negative relationship between general CG and external social sustainability suggests that such practices are more prevalent among firms with weaker CG systems. This pattern aligns with earlier studies indicating that SEW, particularly the desire to maintain corporate reputation, can drive externally focused sustainability efforts in the absence of formal governance structures.

4.3. Relationship Between Sustainable Practices and Economic Performance

The final stage of analysis examined the relationship between sustainable practices and economic performance. Figure 3 presents the mean scores for environmental sustainability, internal social sustainability, and external social sustainability across various categories of short-term and long-term economic performance.

Results from multiple comparison tests indicate that internal social sustainability was the only dimension for which mean scores differed significantly across performance categories. Specifically, farms in the “higher revenue” category showed significantly higher internal social sustainability scores compared to other groups. Similarly, for the cashflow measure, farms reporting “no change or worsen” had significantly lower internal social sustainability scores than other groups. Regarding succession, farms without a designated successor also had significantly lower scores for internal social sustainability.

Taken together, these findings suggest that stronger internal social sustainability practices are associated with both improved short-term financial outcomes (growth rate of sales and cashflow improvement) and greater long-term continuity (assuring a successor), thus providing support for Hypothesis 2. The results highlight the strategic role of CG-aligned sustainability practices, particularly those targeting internal stakeholders, in enhancing economic performance of SME farms.

5. Discussion

5.1. Contrasting Sustainability–Governance Links

The findings of this study reveal that, when SME farms adopt externally oriented social sustainability practices, their decisions are often guided by criteria that run counter to the principles of general corporate governance (CG). This tendency appears to stem from a preference for socioemotional wealth (SEW), particularly the desire to maintain the family business’s social reputation. As noted in prior research, such preferences tend to emphasize relationships with direct external stakeholders, such as local communities and consumers [22].

Importantly, the study also finds that these externally oriented sustainability practices are not significantly correlated with sustainable CG. In other words, such initiatives are typically not the result of executives and employees systematically identifying and responding to future social challenges through structured organizational processes. Rather, they appear to reflect ad hoc or reputation-driven decision-making.

When accounting for control variables, both geographic location and business structure were found to reinforce the relationship between SEW preferences and externally oriented sustainability practices. First, such practices were more prevalent in areas with higher population density. This may be attributed to greater public interest in social issues such as food security, cultural diversity, and education among urban residents, as well as the increased visibility and evaluability of sustainability practices in urban settings. Second, SME farms engaged in greater business diversification were also more likely to implement externally focused social practices. This trend likely reflects two reinforcing mechanisms: diversified firms are more exposed to a wider array of social issues, and diversification in agriculture is often itself driven by reputational SEW considerations [62]. Hence, SEW-driven preferences may indirectly promote external social sustainability by influencing structural choices such as diversification.

In contrast, internal social sustainability practices were found to be strongly and positively associated with general CG, suggesting that such practices are chosen based on strategic governance rather than SEW-related motivations. This finding is especially noteworthy given that family firms are often characterized by neglect of internal social dimensions, such as employee welfare [16]. The evidence presented here implies that the diffusion of CG among SME farms may serve as an effective mechanism to overcome such tendencies.

Furthermore, by disaggregating CG into its constituent dimensions, this study identifies key areas of governance that are particularly important for SME farms, namely articulating a management philosophy, demonstrating executive leadership, and implementing risk management. The positive correlation between CG and internal social sustainability aligns with the logic of creating shared value (CSV), which emphasizes the simultaneous pursuit of economic and social goals [45]. Accordingly, only internal social sustainability was found to be positively associated with economic performance. Prior studies have shown that employee consideration enhances SME outcomes such as retention and growth [63]; this study contributes to the literature by demonstrating that CG plays a central role in fostering the employee well-being. This insight is novel in that it extends the empirically observed tendency, in which only sustainable practices most strongly linked to CG are associated with economic outcomes [17], to the specific context of SME farms.

The study’s finding that internal and external social sustainability practices exhibit contrasting relationships with CG supports earlier arguments that CG is vital for reconciling sustainability objectives with financial performance in the triple-bottom-line framework [64].

Regarding environmental sustainability, results show a strong positive correlation with sustainable CG, but not with general CG. This suggests that such practices arise from an internalized recognition by executives and employees of the importance of environmental issues, even if these concerns are not fully embedded in broader governance systems or strategic planning processes. The absence of alignment with general CG implies a lack of integration into formal management strategy or assessment criteria.

Additionally, the observed positive correlation between diversification and environmental sustainability implies that SEW may also influence environmentally sustainable decision-making. This finding suggests that adopting international management frameworks to address environmental challenges [31] may offer a viable path for SME farms seeking to improve environmental performance. However, in contrast to studies arguing that the alignment of CSR with general CG is essential for translating sustainability into economic gains [46], the present results imply that environmental sustainability efforts in SME farms currently lack this alignment. Future research should therefore investigate how environmental sustainability can be better integrated into management strategies, drawing on theories such as the resource-based view (RBV) and CSV, in order to balance ecological responsibility with economic viability.

5.2. Practical Implication

The findings highlight several actionable insights for SME farm managers and policymakers. First, externally social sustainability practices, such as community engagement and consumer-oriented initiatives, are often driven by SEW motives, particularly reputational concerns, rather than being embedded within general CG systems. For farm managers, to enhance their long-term effectiveness, such practices should be strategically integrated into formal governance structures. Policy interventions and industry support programs can play a role by providing training and frameworks that help SME farms, especially those located in high-density areas or pursuing diversified business models, align external social practices with structured governance processes. Through such efforts by farm managers and public authorities, if externally oriented social initiatives become more economically effective, they can also contribute to the business development of the SME farms.

Second, the strong linkage between internal social sustainability practices (e.g., employee welfare and workplace improvements) and general CG underscores the importance of cultivating governance capabilities as a means of enhancing economic performance. Farm managers should leverage governance elements such as articulated management philosophy, executive leadership, and risk management to systematically embed internal social initiatives into their strategic objectives. Regarding environmental sustainability, its current association with sustainable CG but not general CG suggests a need for greater integration into overall management strategies. SME farms may benefit from adopting international management frameworks, such as SAFA or GRI standards, to strengthen accountability and align environmental goals with overall farm objectives.

5.3. Limitation

One limitation of this study is that it does not examine how sustainability practices might reshape the CG of SME farms over time. Literature on CSR in SMEs suggests that sustained engagement in CSR can transform organizational culture by enhancing accountability and communication, particularly in areas such as transparency in decision-making and the articulation of corporate policies [65]. If this is the case, then even externally oriented practices initially driven by SEW may eventually contribute to strengthening CG. However, given the cross-sectional nature of the dataset, this study does not capture such dynamic feedback mechanisms. Addressing this limitation represents a promising direction for future research.

6. Conclusions

This study employed a statistical analysis of survey data collected from SME farms to investigate how corporate governance (CG) influences the adoption of sustainable practices. The findings provide several important insights.

First, the overall effect of general CG on externally oriented social sustainability practices was negative. This appears to reflect the influence of socioemotional wealth (SEW), specifically the emphasis on corporate reputation that is characteristic of family-owned businesses. Second, general CG exerted a positive total effect on internal social sustainability practices. In other words, when SME farms engage in internal social sustainability, such practices are typically embedded in the firm’s management philosophy and strategic direction, supported by executive commitment, risk management, and compliance mechanisms. These internally driven practices were also the only category of sustainability found to be positively correlated with economic performance. Third, environmental sustainability practices were positively correlated only with sustainable CG, suggesting that although farms may recognize the importance of environmental issues, they often fail to fully integrate them into their core management systems. This study also suggests that sustainable practices are largely determined by contextual factors, including farm location, business type, and organizational structure.

Collectively, these findings highlight the critical role CG plays in balancing the three pillars of sustainability—social, environmental, and economic—within the SME farm context. This contribution advances the understanding of sustainability governance in agricultural economics.

Building on these findings, we propose two strategic management approaches for SME farms aiming to achieve economic performance through external social and environmental sustainability initiatives.

First, while corporate reputation gained through these sustainability practices can become a valuable managerial resource, it currently lacks the inimitability required to create a sustainable competitive advantage under the VRIO framework. Achieving inimitability often depends on the development of complex and opaque causal relationships between various organizational resources, including accumulated capabilities, technical expertise, leadership networks, and locational advantages. SME farms that strategically align their sustainable practices with these unique organizational attributes will be better positioned to earn reputational capital that competitors cannot easily replicate. Over time, this differentiation can translate into sustained market advantage and customer loyalty. Importantly, this approach necessitates embedding sustainability practices within the farm’s strategic vision and planning processes.

Second, to maintain and leverage this advantage, SME farms must address the “Organization” component of the VRIO model. That is, even if a firm achieves reputational differentiation, it must establish internal systems to effectively manage and capitalize on this resource. Such systems include clearly defined roles and responsibilities for executives, mechanisms for monitoring the effectiveness of resource utilization, and performance-linked compensation structures. These elements are core functions of CG. Therefore, strengthening CG is essential not only for accountability and oversight but also for translating SEW-driven reputation into tangible economic outcomes. From this perspective, CG and SEW should not be viewed as opposing forces. Rather, their coexistence has the potential to enhance both the economic and social sustainability of family-run agricultural enterprises.

Finally, we identify several promising directions for future research. First, further studies should explore the factors that facilitate the diffusion of CG practices among SME farms. Although the sample in this study comprised relatively advanced agricultural corporations, CG implementation remained limited beyond the establishment of a management philosophy. Enhancing long-term corporate value will likely require policy support, including targeted government interventions and executive training programs. Second, future research should aim to clarify the conditions under which SEW and CG can form a complementary relationship. While SEW often leads family businesses to resist formal CG structures, CG could nonetheless serve as an effective tool for achieving core family business objectives, such as continuity and reputational enhancement. However, concerns about external pressure and loss of autonomy may cause reluctance, particularly among family businesses characterized by strong stewardship identities [66].

Addressing these challenges will require identifying CG models that are culturally and organizationally acceptable to family businesses, as well as understanding the mechanisms through which CG can be effectively integrated into their operations. Such research is critical to advancing the sustainability of agriculture, as it will illuminate how to harness the strengths of family-owned SME farms and align sustainable practices with enhanced corporate value.