Does Family Ownership Moderate the Relationship between Board Diversity and the Financial Performance of Saudi-Listed Firms

Abstract

This paper explores the moderating role of family ownership in the relationship between board diversity and financial performance. The study sampled data of 98 Saudi non-financial companies from 2012 to 2021. The data were analysed using fixed effect regression, while a generalised method of moments (GMM) was employed for a robustness test. The empirical evidence suggests that board gender may not have much relevance in enhancing the financial performance of Saudi firms. In contrast, the research findings emphasised that coupled with stringent monitoring from family ownership, foreign directorship, CEO tenure, and board financial expertise may serve as crucial control mechanisms that can minimise agency costs, leading to higher financial performance. This research modelled how the interaction between family ownership and board diversity attributes may determine financial performance. Hence, the study contributes to the body of knowledge by unveiling a more robust control governance mechanism, particularly in developing economies with ineffective markets for corporate controls.

1. Introduction

The literature documents two major views regarding the function of the board of directors, the resource dependency approach and the agency perspective. The resource dependency view argues that the board of directors carries out an advisory role and links firms to strategic resources (Al-Matari 2022; Pfeffer and Salancik 2003; Zahra and Pearce 1989). On the other hand, the agency literature suggests that corporate boards perform monitoring roles and discipline self-interest managers (Jensen and Meckling 1976; Sani 2021). The board of directors matters a lot in firms’ governance because its decisions directly influence organisational outcomes (Bazhair 2023; Jensen 1993). More importantly, these theories emphasised that the board of directors may be capable of discharging its responsibilities when it is composed of diverse attributes such as gender, nationality, and experienced managers (Alcaide-Ruiz and Bravo-Urquiza 2023; Othuon et al. 2023).

Moreover, the empirical literature tested the predictions of these theories but documented contradictory views. A stream of the literature stated board diversity facilitates extensive debates that can shape decisions and brings new ideas to the boardroom (Abbas and Frihatni 2023; Bazhair 2023; Galbreath 2016; Othuon et al. 2023; Sani 2021), hence enhancing the chances of firms to secure strategic resources that may raise firm value. In contrast, it is argued that a diverse board may be associated with higher inefficiency due to ineffective communication, cognitive conflicts, and lesser boardroom cohesion (Abdullah 2014; Ain et al. 2021; Min and Chizema 2015; Shao 2019; Ujunwa 2012). These instances may constrain decision-making quality, leading to higher agency costs and lower financial performance. These inconsistent findings have put researchers and policymakers in a quandary as to what is really the impact of board diversity on corporate performance. Given this conflicting evidence, this research finds it compelling to explore what may likely account for these divergent views. Therefore, this study exploits family ownership as a moderator variable. This moderator is chosen because of the agency theory argument that ownership structure may complement the monitoring role of the board of directors (Al-Faryan 2021; Jensen and Meckling 1976; Shleifer and Vishny 1997). In particular, family ownership was employed because of its prevalence in the Saudi corporate ownership structure (Al-Bassam et al. 2018; Sulimany 2023). Consequently, the primary goal of this research is to explore the moderating effect of family ownership on the relationship between board diversity and the financial performance of Saudi non-financial listed firms.

In sum, the direct relationship between board diversity attributes and financial performance measures suggests that board gender and CEO tenure negatively affect the firms’ performance. Board financial expertise has a positive impact, whereas foreign directors appear insignificant. The moderation analysis revealed that coupled with stringent monitoring from family ownership, foreign directorship, CEO tenure, and board financial expertise may serve as crucial control mechanisms that can mitigate managerial entrenchment, thereby raising firm value. Thus, this study contributes to the literature in several ways. Firstly, our research considers various diversity attributes and how they may influence financial performance. Hence, the study contributes to the ongoing debates on how board diversity determines organisational outcomes. Secondly, this research expands the literature by modelling how the interaction between family ownership and board diversity may influence financial performance. In this way, we contribute to the body of knowledge by unveiling a more robust control mechanism, particularly in developing economies with ineffective markets for corporate control. Also, the empirical analysis may serve as an impetus that can guide policymakers and regulators for corporate governance code review.

The rest of this article continues as follows. The second segment focuses on Saudi institutional background, followed by a literature review, research methodology, analysis and discussion, robustness check, and finally, the conclusion.

2. Institutional Background

The oil sector is the pillar of the Saudi Arabian economy, and it is projected that the country contributes about 35% to the international oil market supply (Bajaher et al. 2021; Sulimany 2023). Also, the country’s stock market is the biggest and the most liquid among the Middle East and North Africa (MENA) countries (Boshnak 2023; Sarhan et al. 2019). Another exceptional feature of the Saudi corporate sector is that corporate ownership is concentrated among families and royal houses (Al-Bassam et al. 2018; Sulimany 2023). The country officially implemented a corporate governance code (CGC) in 2006 to align with internal best practices. Furthermore, the Saudi corporate sector experienced another CGC amendment in 2017 as a result of the desire of the country to attract more foreign direct investment and enhance capital market performance.

Moreover, the CGC stipulates that Saudi companies should design their boards with a minimum of three and a maximum of eleven directors. Also, the code suggests that companies should employ a considerable number of independent directors to strengthen their internal decision quality. In particular, the corporate governance rule emphasises that independent board members should not be less than two-thirds of the board members. However, the Saudi CGC has no specific recommendations regarding board gender. This absence of legislation on board gender requirements has been attributed to the nation’s cultural and religious background, which restricts the presence of women in the public domain (Al-Bassam et al. 2018; Alregab 2021). Additionally, the nation’s CGC recognises the importance of accounting and finance qualifications in corporate management. Thus, the code emphasises that companies operating in Saudi Arabia should employ at least one director with accounting and finance knowledge for better financial reporting quality.

The Saudi corporate sector is relatively less developed, and it has a higher potential for agency conflicts due to an ineffective market for corporate control (Alzeban 2020; Sulimany 2023). Although the country adopted CGC, studies argued that compliance with these codes has been a major challenge facing the sector (Albassam and Ntim 2017; Sarhan et al. 2019; Tawfik et al. 2022). This non-compliance may constrain corporate board compositions, thus influencing organisational outcomes.

Importantly, the Saudi corporate sector is undergoing reforms to actualise its vision for 2030. This vision 2030 focuses on revenue diversification and attracting more foreign direct investment (Alregab 2021; Sulimany 2023). Also, the reforms are aimed at salvaging the country from heavy dependence on oil revenue. The stock market (Tadawul) is now open to foreign investors. Other essential bodies that support CGC compliance include the capital market authority (CMA), which regulates the Saudi stock market and monitors corporate disclosure. The Saudi Organisation for certified public accountants (SOCPA) also focuses on monitoring firms’ accounting and auditing activities (Boshnak et al. 2023; Sarhan et al. 2019). Therefore, this background suggests the need for studies to focus on exploring a more robust corporate governance mechanism that boost investors’ confidence in the Saudi corporate sector.

3. Literature Review

3.1. Theoretical Review

Three theories serve as the underpinning framework for this study. These are agency theory, upper echelons perspective, and resource dependency theory. The agency theory argues that subsequent to the separation between ownership and control in modern organisations, conflicts of interest between managers and shareholders may emerge (Jensen and Meckling 1976; Sani 2021). According to this perspective, managers as custodians of firm resources may focus on maximising their utilities at the expense of the shareholders’ wealth (Bazhair 2023; Terjesen et al. 2016). Given that, this theory suggests that a board of directors should be put in place to monitor managers’ actions extensively. In this context, studies emphasised that board composition greatly influences organisational performance (Bathala and Rao 1995; Fama and Jensen 1983; Hasan et al. 2022). Additionally, it is argued that corporate boards composed of diverse directors are associated with superior monitoring techniques that can compel managers to align with firm value maximisation objectives (Galbreath 2016; Shehata et al. 2017). Diverse boards engage in extensive debates and bring new ideas into the boardroom deliberations, which can shape board decisions (Bazhair 2023; Harjoto et al. 2019; Sani 2021). Also, boards with a higher ratio of female directors, financial experts, and foreign nationals are more likely to scrutinise management proposals and compel managers to embrace disclosure, thereby mitigating information asymmetry among firm stakeholders (Ararat et al. 2015; Miller and Triana 2009; Zaid et al. 2020). In sum, agency theory is employed because it focuses on how robust monitoring from board diversity may positively influence agency costs, thus enhancing financial performance.

The upper echelon theory suggests that top managers’ educational background, gender, values, and experiences may determine organisational outcomes (Finkelstein and Hambrick 1990; Hambrick and Mason 1984). The underlying assumption of this framework is that since decision-making power is vested in the hands of top executives, their traits may shape firms’ strategic choices (Bassyouny et al. 2020; Hambrick 2007). Therefore, this perspective maintains that managers are crucial human resources that utilise their experience and knowledge in designing policies that maximise firm value (Matemilola et al. 2018; Triana et al. 2019). It is suggested that the board of directors is the highest decision-making organ charged with formulating policies. Given that, the proponents of the upper echelon theory argued that the personal attributes of the board members may influence firms’ strategic decisions and positively impact financial performance (Darmadi 2013a; Sani 2021). It is reported that diverse boards are more inclined towards innovative strategies, have a breath of experience, and possess better strategies in utilising competitive advantage (Matemilola et al. 2018). Also, boardroom diversity facilitates board cohesion and enhances the decision-making capacity of the board due to the diverse expertise and experience of the members (Bassyouny et al. 2020; Triana et al. 2019). Overall, this framework focuses on the relationship between top executives’ personal attributes and corporate outcomes.

Moreover, the resource dependency theory focuses on the resource provision function of the corporate boards. This school of thought suggests that board composition is important for drawing resources, guidance, and advice to achieve organisational objectives (Hillman et al. 2009; Pfeffer 1973). Based on this framework, board members can connect firms with the outside environment to derive recognition, legitimacy, and support to enhance their performance (Al-Matari 2022; Pfeffer and Salancik 2003; Zahra and Pearce 1989). Within this scope, studies reported that diverse boards may be associated with greater social and capital networks, expertise, and breadth of experience that may guide corporate decisions (Duppati et al. 2020; Sani 2021). Thus, one may argue that corporate boards’ advisory and resource provision roles may be more effective when they are composed of diverse members.

3.2. Empirical Literature Review

3.2.1. Board Gender

Policymakers, standard setters, and academia have now focused on the role of women directors on corporate boards. Studies evaluated the aptitudes of female directors in organisational settings because of their peculiar feminine behaviour (Moreno-Gomez et al. 2018). It is argued that they are more kind and interpersonally sensitive, have diverse thinking faculties, and are more focused on decision making (Aksoy and Yilmaz 2023; Rossi et al. 2018). Similarly, studies revealed that female board members may monitor managers extensively because they are more likely to attend board meetings regularly (Adams and Ferreira 2009; Adams and Funk 2012). In addition, it is argued that women are more accommodating and can quickly develop ties with crucial stakeholders for better access to resources (Abbas and Frihatni 2023; Bart and McQueen 2013). In particular, it is reported that a gender-diversified board enhances the chances of getting quality advice, counsel, and opportunities that firms can utilise for growth and development (Othuon et al. 2023; Zaid et al. 2020). Thus, better monitoring, quality decisions, and access to critical resources associated with gender-diversified boards may help minimise agency costs and improve performance. Accordingly, empirical evidence suggested a positive association between board gender and financial performance (Othuon et al. 2023; Sani 2021; Terjesen et al. 2016). On the contrary, it is argued that gender diversity in the boardroom may weaken corporate boards’ effectiveness and decision-making quality. The proponents of this school of thought believed that women are generally risk-averse and have less confidence in decision making (Abdullah 2014; Ain et al. 2021; Ujunwa 2012). In this sense, empirical evidence indicated a negative link between female representation on boards and firms’ performance (Darmadi 2013b; Lim et al. 2019). Based on these conflicting findings, the following hypothesis is designed:

H1. 

Board gender is related to the financial performance of Saudi firms.

3.2.2. Foreign Directors

The literature argued that foreign directors’ presence on boards might enrich corporate governance quality because of their stringent monitoring (Jeon and Ryoo 2013; Khatib et al. 2021). Also, a stream of the literature predicts that foreign board members’ expertise and networking capacity may assist firms in obtaining valuable resources from the external environment (Dobija and Puławska 2022; Harjoto et al. 2019). Accordingly, empirical evidence indicated that foreign directors have better knowledge, skills, and perspectives that can shape firms’ decision-making quality (Estelyi and Nisar 2016; Zaid et al. 2020). Similarly, it is argued that these directors may extensively monitor managers due to their cross-country experience (Iliev and Roth 2018; Sanni et al. 2020). More importantly, the literature argued that firms with substantial numbers of foreign directors on their boards might be associated with high disclosure and lesser information asymmetry (Kent et al. 2020). This improved governance may lower earning management practices and agency costs, enhancing financial performance (Fernandez-Temprano and Tejerina-Gaite 2020; Ujunwa 2012). In contrast, some studies contended that foreign directors might be unlikely to be punctual in board meeting attendance because of the distance from their home countries (Masulis et al. 2012; Min and Chizema 2015). Also, cultural differences and language barriers may impede effective communication between foreign and local directors, leading to lesser cohesion in boardroom discussions (Khatib et al. 2021). These instances may undermine their monitoring capacity, leading to high agency conflicts and eroding firm performance. Given the preceding arguments, the following hypothesis is designed:

H2. 

Foreign directors are related to the performance of Saudi-listed companies.

3.2.3. CEO Tenure

The chief executive officer (CEO) heads the management team and oversees the firm’s daily activities (Orens and Reheul 2013). In consultation with his team, the CEO designs policies and presents them to the board of directors for approval. Therefore, because of the strategic role of the CEO in firm decision making, many studies believe that CEO tenure may impact organisational outcomes (Chu et al. 2023; Naseem et al. 2019; Sani 2020). Drawing from the agency viewpoint, it is argued that CEOs should have a moderate tenure because a longer term may lead to high agency conflicts (Bazhair 2023; Sani et al. 2020). According to this perspective, a longer CEO tenure may facilitate entrenchment, weaken board decision quality, and lower firm performance (Berger et al. 1997; Naseem et al. 2019). In contrast, from the upper echelons and resource dependency perspectives, CEO experience increases as tenure lengthens (Naseem et al. 2019; Ndaki et al. 2018). These theories regard working experience as a strategic resource that can impact firms’ strategic choices (Hambrick 2007; Matemilola et al. 2018). Also, it is emphasised that longer tenure sharpens CEOs’ cognitive powers and enhances their ability to execute complex decisions (Bazhair 2023; Oware et al. 2023). Accordingly, studies found that longer tenure may pave the way for a CEO to gain more experience and knowledge on the job, which may facilitate efficient decision making (Al-Duais et al. 2021; Sani et al. 2020). The CEO’s ability to detect financial misstatements and errors may be higher as his tenure increases (Sani et al. 2020; Tarus and Ayabei 2016). This may lead to lower agency costs and improving financial performance. Turning to the Saudi corporate sector, the country’s corporate governance regulation does not specify the number of years a CEO should serve. However, the framework suggests the importance of hiring an experienced CEO for efficient corporate governance to maximise firm value. Ghardallou (2022) found that Saudi firms with a longer CEO tenure may be associated with higher financial performance. Based on these divergent views, the following hypothesis is stated:

H3. 

CEO tenure is associated with the financial performance of Saudi firms.

3.2.4. Board Financial Expertise

Subsequent to the collapse of many giant companies across the globe, regulatory agencies, standard setters, and investors emphasised the need for more financial experts on corporate boards (Assenga et al. 2017; Guner et al. 2008). Financial experts are needed to occupy board positions and for their potential in enhancing the monitoring and advisory roles of the board of directors (Vitolla et al. 2020). Within the agency framework, it is argued that financial expert directors may be more effective in monitoring managers’ actions due to their educational background and competence in financial matters (Alcaide-Ruiz and Bravo-Urquiza 2023; Baatwah et al. 2015). It is believed that these directors may likely deploy their professional skills in mitigating financial misstatements and earnings management practices (Ali et al. 2022). Also, studies found that companies with more financial experts on their boards may record lower agency conflicts due to a lesser incidence of managerial entrenchment (Adams and Jiang 2017; Gilani et al. 2021). In a different view, it stated that financial expertise directors may serve as a crucial resource capable of offering better financial advice and counsel. This school of thought emphasises that these directors have a basic understanding of capital market operations and financial reporting skills (Adams and Jiang 2017; Bassyouny et al. 2020). Thus, the board advisory role may be enhanced as the ratio of these directors rises on corporate boards. Accordingly, studies indicated that these directors may assist companies in securing finances on favourable terms using their links and connections with financial industry and capital providers (Assenga et al. 2017; Vitolla et al. 2020). Also, drawing from the upper echelon’s perspective, the financial expertise of the directors may be regarded as an essential attribute that can reflect on firms’ strategic choices (Finkelstein and Hambrick 1990; Gilani et al. 2021). This perspective believes that financially experienced directors may use their cognitive powers in designing quality decisions that can enhance firm value (Ali et al. 2022; Matemilola et al. 2018). Thus, prior studies demonstrated a positive link between board financial skills and financial performance (Adams and Jiang 2017; Bassyouny et al. 2020). More importantly, Saudi Arabia has followed the path of many countries, a path that recognises the strategic role of board financial skills in promoting corporate governance best practices (Al-Matari 2022). In particular, the country’s governance code stressed that Saudi firms should employ at least one director with accounting and finance knowledge on their boards to enrich board governance quality. Based on the reviewed empirical evidence, this study predicts the following:

H4. 

Board financial skill is positively related to the financial performance of Saudi companies.

3.2.5. Family Ownership

Family ownership is a form of ownership structure prevalent in developed and emerging economies. The primary goal of these investors is to safeguard their family’s goodwill and prestige and maximise investment value (Tawfik et al. 2022). It is argued that family-controlled firms may be associated with solid governance mechanisms because most of their top management positions are occupied by family members (Bataineh 2021). Also, family ownership may be a strong corporate governance mechanism because these investors have stronger incentives to retain corporate control for long-term survival to preserve their heritage (Bataineh 2021; Manogna 2021). More often, family members secure investment opportunities and cheaper financing sources for their firms from the external environment for value maximisation (AL Nasser 2020). Given that, studies found a positive relationship between family ownership and financial performance (Al-Duais et al. 2021; Tawfik et al. 2022; Wu et al. 2019). In contrast, a segment of the literature suggests that family ownership may be associated with a higher agency conflict (Ha et al. 2022; Setiawan et al. 2016). Infringement of minority shareholders’ rights seems prevalent in family-controlled firms and thus exacerbates agency conflict with minority shareholders (Waris and Haji Din 2023). Studies reported that corporate governance quality may be weaker in family-dominated companies because of favouritism in board appointments. They usually appoint their relatives to key positions, relatives who may not necessarily possess the requisite skills to add value to firm governance (Omri et al. 2014). Hence, these instances may constrain firms’ strategic choices and erode firm performance (Ha et al. 2022; Waris and Haji Din 2023). Given these discussions, the following hypothesis is stated:

H5. 

Family ownership is associated with the firms’ financial performance.

3.2.6. Moderating Role of Family Ownership

Drawing from the agency framework, corporate ownership is a crucial corporate governance mechanism (Jensen and Meckling 1976; Shleifer and Vishny 1997). This theory argues that stringent monitoring from owners may mitigate managers’ opportunistic behaviour, thus lowering agency costs (Baek et al. 2016; Kao et al. 2019). In particular, the literature evaluated the monitoring capacity of family shareholders in firms’ management. Family ownership is reported to influence board composition and decision-making capacity (Tawfik et al. 2022). Family shareholders have the incentive to monitor managers’ actions and usually utilise their voting power to determine board decisions (Bataineh 2021). Importantly, a strand of the literature argued that family ownership contributes to quality governance by ensuring that firms set up a diverse board to enhance monitoring for value maximisation (Al-Faryan 2021; Manogna 2021; Rajverma et al. 2019). Family companies attached greater value to firms with higher ratios of financial experts, women, and foreign directors on their boards (Jaggi et al. 2009; Oba et al. 2014). These investors believed that managerial entrenchment and agency conflicts could be handled effectively when a board of directors is composed of different personalities (Chen 2014). Based on these explanations, the following hypotheses are formulated:

H6a. 

Family ownership moderates the relationship between board gender and the financial performance of Saudi firms.

H6b. 

Family ownership moderates the relationship between foreign directors and the financial performance of Saudi firms.

H6c. 

Family ownership moderates the relationship between CEO tenure and the financial performance of Saudi firms.

H6d. 

Family ownership moderates the relationship between board financial expertise and the financial performance of Saudi firms.

4. Methodology

4.1. Sampling Process and Data Generation

The population of this study covers 197 Saudi-listed firms as of 31st December 2021. The research time frame spanned from the year 2012 to 2021. The justification for choosing this period is that the Saudi stock market experienced several transformations that may impact corporate governance regulations and capital market development (Alregab 2021; Bazhair 2023; Ebaid 2022).

Table 1. Sample selection process.

Description	No. of Companies
Total population of the study	197
Less: financial firms	43
Companies with large missing data	24
Firms listed after 2012 and those that merged within the study period	32
Study sample	98

reveals the sample selection process.

According to Table 1, this research concentrates on the Saudi non-financial listed firms, and its final sample was designed in the following manner. First, 43 financial companies were excluded from the study because of their peculiar regulations and financial reporting framework (Ebaid 2022; Rajan and Zingales 1995). Additionally, 24 firms with large missing data were excluded from the sampling design. Also, companies listed after 2012 and those amalgamated within the time frame were ignored, resulting in the removal of another 32 companies from the sample. Thus,

Table 2. Sample spread.

Sector	Number of Firms	Percentage (%)
Capital goods	7	7.1
Consumer durable	3	3.1
Consumer services	4	4.1
Energy	1	1
Foods and beverages	12	12.3
Food retailing	4	4.1
Health	5	5.1
Life sciences	1	1
Materials	35	35.7
Media	2	2
Real estate	9	9.2
Retailing	4	4.1
Telecom	4	4.1
transport	5	5.1
Utilities	2	2
Total	98	100

exhibits the firms’ sample distribution from 2012 to 2021.

Finally, the study sample covered 980 firms’ observations from 15 sectors. Notably, the research data were gathered from three sources. The corporate governance information was primarily sourced from the companies’ end-of-year reports. The firm-level data were obtained from the Eikon data stream and the Saudi stock exchange website (Tadawul).

4.2. Categorisation of the Study Variables

This segment describes the research variables, categorised into dependent, independent, moderating, and control variables. The definitions of these variables are contained in

Table 3. Measurement of the study variables.

	ACRONYM	Measurement	Source
Dependent variable:
Return on assets	ROA	Operating profits divided by total assets.	(Assenga et al. 2017; Sani 2021).
Return on equity	ROE	Profit after tax to equity	(Boshnak 2023; Kilic and Kuzey 2016).
Independent variables:
Board gender	BG	Number of female directors over total board members	(Sani 2021; Terjesen et al. 2016).
Foreign directors	FD	The number of non-Saudi directors over board size.	(Fernandez-Temprano and Tejerina-Gaite 2020; Ujunwa 2012).
CEO tenure	CEOWE	The number of years the CEO held his position	(Chu et al. 2023; Naseem et al. 2019; Sani 2020).
Board financial expertise	BFE	Number of directors with at least a degree in finance or accounting or work experience as an auditor or financial manager over board size.	(Ali et al. 2022; Baatwah et al. 2015).
Moderating variable:
Family ownership	FO	The number of family shares over total equity shares.	(Bataineh 2021; Manogna 2021).
Control variables:
Firm size	FS	The logarithms of the sampled firms’ total assets.	(Assenga et al. 2017; Sani 2021).
Leverage	LEV	Total debts over total assets	(Chijoke-Mgbame et al. 2019; Darmadi 2013b).
Board size	BS	Total number of board members	(Assenga et al. 2017; Kilic and Kuzey 2016).
Board independence	BI	Number of independent directors to board size	(Sani 2021; Terjesen et al. 2016).
Government ownership	GO	The number of government-owned shares over total equity shares.	(Bataineh 2021; Bazhair and Alshareef 2022).

.

4.2.1. Dependent Variable

The dependent variable in this study is financial performance and measured using two proxies, the return on assets (ROA) and return on equity (ROE). ROA measures firms’ efficiency in managing their assets and investment, while ROE indicates returns on shareholders’ investments (Sani 2021; Ujunwa 2012). They precisely quantify managers’ efforts in utilising firms’ resources for value enhancement (Khan et al. 2019; Kilic and Kuzey 2016). Therefore, these accounting-based performance measures are the most commonly used in the literature to assess firms’ financial performance.

4.2.2. Independent Variable

Board diversity represents the independent variable and is measured using four proxies: board gender, foreign directors, CEO tenure, and board financial expertise. This paper used these attributes because they can be easily identified and computed from the Saudi firms’ annual report and accounts. Likewise, they are the most commonly used proxies by prior studies to measure board diversity and thus permit comparison of our empirical results with previous literature (Dobija and Puławska 2022; Ghardallou 2022; Kilic and Kuzey 2016; Othuon et al. 2023).

4.2.3. Moderating Variable

Family ownership stands as the moderating variable. The justification for selecting this variable stemmed from the predictions of the agency theory that ownership is an essential control mechanism that can shape firms’ governance (Bataineh 2021; Shleifer and Vishny 1997). Specifically, the literature revealed the potential of family ownership in influencing sound corporate governance practices, particularly in countries with ineffective markets for corporate control (Albassam 2015; Alregab 2021).

4.2.4. Control Variables

Consistent with existing literature (Chijoke-Mgbame et al. 2019; Darmadi 2013b; Fernandez-Temprano and Tejerina-Gaite 2020), this research employs some variables to control specification bias to empower its regression model. These variables are firm size, leverage, board size, board independence, and government ownership. Prior studies reported that these variables impact financial performance (Abbas and Frihatni 2023; Assenga et al. 2017; Boshnak 2023; Kilic and Kuzey 2016; Sani 2021). Also, time and industry effects were included in our model specification to control their effects.

4.3. Analytical Framework

The sampling involved data from 98 companies over 10 years; thus, the panel data methodology seems more appropriate to answer the research question. In particular, panel data are about investigating the behaviour of cross-sectional units over many periods (Hsiao 1985). It generates more data points, reduces multicollinearity, and improves the econometric estimations’ efficiency (Pesaran 2015; Wooldridge 2002). Also, the generally used panel data methods include Pooled OLS, fixed and random effects. However, the OLS estimations may be biased and inconsistent because the estimator ignores time effects and cross-sectional differences across firms (Gujarati and Porter 2010). Given this weakness, the study conducted a Hausman test to ascertain the appropriate panel data estimation method for this research apart from OLS. The criterion for this test is that if the p-value of the Hausman test is statistically significant at 5%, then the fixed effects model is more efficient. However, the random effects estimator is more appropriate if the Hausman test is insignificant at that level. The Hausman test results in this study show a significant p-value (prob > chi2 = 0.000). Thus, the result supports the suitability of the fixed effects technique in this study. The general form of the fixed effects model is given as

$${\mathrm{Y}}_{it}=\partial +\beta X_{it}+{\mu }_i+{\epsilon }_{it}$$

(1)

The subscripts i and t capture the cross-sectional and time-series dimensions, respectively. The variable ${\mathrm{Y}}_{it}$ represents the dependent variable, $\partial$is the regression intercept, $X_{it}$ is the vector of the explanatory variables in the model, ${\mu }_{i }$is the firm-fixed effect, and the error term is denoted as ${\epsilon }_{it}$.

Furthermore, to measure the moderating effect, the study employed the standard moderation model developed by Fairchild and Mackinnon (2009), which is given as follows:

$${\mathrm{Y}}_{it}={\beta }_0+{\beta }_1{X}_{it}+{\beta }_2{Z}_{it}+{\beta }_{3}X{Z}_{it}+{\epsilon }_{it}$$

(2)

where Y represents the dependent variable, ${\beta }_0$ stands as the regression intercept, X serves as the independent variable, Z is the moderator variable, XZ represents the interaction of the independent variable and moderator variable, and ${\epsilon }_{it }$is the error term.

Thus, according to Aguinis et al. (2017), the moderation effect arises when the interaction term coefficient is statistically significant.

5. Results and Discussion

This section shows the results generated and starts with the presentation of descriptive analysis in

Table 4. Descriptive analysis.

Variable	Mean	Std. Div.	Min.	Max.	Observations
ROA	0.055	0.095	−0.624	0.750	980
ROE	0.062	0.011	−0.767	0.516	980
BG	0.126	0.332	0.000	1.000	980
FD	0.064	0.039	0.000	0.200	980
CEOWE	4.381	2.871	1.000	12.000	980
BFE	0.095	0.197	0.000	0.600	980
FSIZE	9.37	0.776	7.290	14.041	980
LEV	0.228	0.194	0.000	0.780	980
BS	8.446	1.477	3.000	13.000	980
BI	0.471	0.150	0.000	0.720	980
GO	0.082	0.191	0.000	0.865	980
FO	0.132	0.190	0.000	0.941	980

Note: ROA = return on assets, ROE = return on equity, BG = board gender, FD = foreign directors, CEOWE = CEO tenure, BFE = board financial expertise, FSIZE = firm size, LEV = leverage, BS = board size, BI = board independence, GO = government ownership, and FO = family ownership. See Table 3 for variable definitions.

. The correlation results are demonstrated in

Table 5. Correlation results.

Variable	ROA	ROE	BG	FD	CEOWE	BFE	FSIZE	LEV	BS	BI	GO	FO
ROA	1.000
ROE	0.001	1.000
BG	−0.271 ***	−0.214 **	1.000
FD	0.062 *	0.124 ***	0.142 ***	1.000
CEOWE	−0.112 **	−0.231 ***	−0.035	−0.096 **	1.000
BFE	0. 096 **	0.114 ***	0.039	−0.034	−0.094 ***	1.000
FSIZE	0.335 ***	0.032	−0.027	0.136 ***	0.011	−0.046	1.000
LEV	−0.169 ***	0.072 **	0.029	0.131 ***	−0.036	0.090 ***	0.355 ***	1.000
BS	0.097 ***	0.045	−0.035	0.063 **	−0.046	−0. 057 *	0.350 ***	0.068 **	1.000
BI	0.060 *	0.019	−0.016	−0.066 **	−0.016	0.009	−0.300 ***	−0.062 *	−0.225 ***	1.000
GO	−0.078	0.072 **	−0.018	−0.040	−0.084 ***	−0.055 *	0.580 ***	0.115 ***	0.133 ***	−0.224 ***	1.000
FO	0.071 **	0.017	−0.006	0.121 ***	0.047	0.015	0.095 ***	0.009	0.037	0. 011	0.002	1.000

***, **, and * indicate significance at 1%, 5%, and 10%, respectively. Note: ROA = return on assets, ROE = return on equity, BG = board gender, FD = foreign directors, CEOWE = CEO tenure, BFE = board financial expertise, FSIZE = firm size, LEV = leverage, BS = board size, BI = board independence, GO = government ownership, and FO = family ownership. See Table 3 for variable definitions.

. The regression results for the direct relationship are contained in

Table 6. Regression results (fixed effects).

	Model (1) (ROA)		Model (2) (ROE)
Variables	Coefficient	Prob.	Coefficient	Prob.
Constant	0.0969	(0.015) **	0.0495	(0.031) **
Board gender (BG)	−0.0044	(0.076) *	−0.018	(0.029) **
Foreign directors (FD)	0.0194	(0.654)	0.4626	(0.710)
CEO tenure (CEOWE)	−0.0069	(0.000) ***	−0.0017	(0.006) ***
Board financial expertise (BFE)	0.0080	(0.012) **	0.0072	(0.056) *
Firm size (FSIZE)	0.0251	(0.000) ***	0.0031	(0.047) **
Leverage (LEV)	−0.1163	(0.000) ***	−0.0406	(0.002) ***
Board size (BS)	−0.0021	(0.049) **	−0.0037	(0.089) *
Board independence (BI)	0.0251	(0.245)	0.0076	(0.865)
Government ownership (GO)	0.0276	(0.614)	0.1033	(0.091) *
F- statistics		5.89		3.07
Prob > F		0.000		0.000
R squared		0.3241		0.2311
No. of observations		980		980
Time effects		Yes		Yes
Industry effects		Yes		Yes

***, **, and * indicate significance at 1%, 5%, and 10%, respectively. Note: This Table presents the regression estimates of the direct relationship between board diversity and financial performance using the fixed effects model (robust option). See Table 3 for variable definitions.

, whereas

Table 7. Moderation effect analysis (fixed effects).

	Model (3) (ROA)		Model (4) (ROE)
Variables	Coefficient	Prob.	Coefficient	Prob.
Constant	0.0549	(0.009) ***	0.0403	(0.019) **
Board gender (BG)	−0.0062	(0.057) *	−0.0047	(0.072) *
Foreign directors (FD)	0.0207	(0.609)	0.4953	(0.084) *
CEO tenure (CEOWE)	−0.0057	(0.000) ***	−0.0181	(0.013) **
Board financial expertise (BFE)	0.0079	(0.029) **	0.0104	(0.069) *
Moderator variable:
Family ownership (FO)	0.1996	(0.068) *	0.2038	(0.019) **
Interaction terms:
Board gender (BG) × FO	−0.3394	(0.751)	−0.0829	(0.914)
Foreign directors (FD) × FO	0.1123	(0.021) **	1.8923	(0.063) *
CEO tenure (CEOWE) × FO	0.0391	(0.000) ***	0.0017	(0.082) *
Board financial expertise (BFE) × FO	0.0271	(0.000) ***	0.2179	(0.024) **
Firm size (FSIZE)	0. 0204	(0.327)	0.0015	(0.017) **
Leverage (LEV)	−0.1192	(0.000) ***	−0.0404	(0.000) ***
Board size (BS)	−0.0023	(0.071) *	−0.0035	(0.056) *
Board independence (BI)	0.0224	(0.327)	0.0087	(0.077) *
Government ownership (GO)	0.0235	(0.081) *	0.1061	(0.259)
F- statistics		6.82		4.13
Prob > F		0.000		0.000
R squared		0.3612		0.2161
No. of observations		980		980
Time effects		Yes		Yes
Industry effects		Yes		Yes

***, **, and * indicate significance at 1%, 5%, and 10%, respectively. Note: This Table presents the regression estimates of the indirect relationship between board diversity and financial performance using the fixed effects model (robust option). See Table 3 for variable definitions.

provides the moderation analysis outcome. Finally,

Table 8. Moderation analysis using GMM regression.

	Model (5) (ROA)		Model (6) (ROE)
Variables	Coefficient	Prob.	Coefficient	Prob.
Constant	0.2141	(0.046) **	0.2930	(0.206)
ROAit−1	0.5235	(0.000) ***
ROEit−1	-	-	0.6745	(0.000) ***
Board gender (BG)	−0.0079	(0.060) *	−0.0260	(0.000) ***
Foreign directors (FD)	0.1167	(0.013) **	0.2978	(0.010) ***
CEO tenure (CEOWE)	−0.0019	(0.047) **	−0.097	(0.219)
Board financial expertise (BFE)	0.0323	(0.345)	0.2709	(0.019) **
Moderator variable:
Family ownership (FO)	0.4805	(0.049) **	0.1087	(0.078) *
Interaction terms:
Board gender (BG) × FO	−0.2632	(0.517)	−0.2709	(0.272)
Foreign directors (FD) × FO	1.3840	(0.016) **	0.7762	(0.000) ***
CEO tenure (CEOWE) × FO	0.0158	(0.021) **	0.0023	(0.066) *
Board financial expertise (BFE) × FO	1.3253	(0.045) **	0.1857	(0.014) **
Firm size (FSIZE)	0. 0322	(0.007) ***	0.0015	(0.017) **
Leverage (LEV)	−0.1039	(0.000) ***	−0.0781	(0.061) *
Board size (BS)	−0.0030	(0.199)	−0.0021	(0.901)
Board independence (BI)	0.0395	(0.003) ***	0.0106	(0.114)
Government ownership (GO)	0.0299	(0.081)	0.0361	(0.504)
Hansen test		0.293		0.428
AR1		0.009		0.004
AR2		0.361		0.214
No of groups		98		98
Time effects		Yes		Yes
Industry effects		Yes		Yes

***, **, and * indicate significance at 1%, 5%, and 10%, respectively. Note: This Table presents the regression estimates of the indirect relationship between board diversity and financial performance using the GMM approach (robust option). See Table 3 for variable definitions.

displays a robustness check analysis.

5.1. Descriptive Results

Table 4 presents the descriptive analysis of the research variables. The statistics reveal that the firms’ profitability measured by return on assets (ROA) and return on equity (ROE) indicated an average of 5.5% and 9.5%, respectively. Gender (BG) demonstrated a mean of 0.126, which implies that women represent 12.6% of the total number of directors. The foreign directors’ ratio (FD) suggests that 6.4% of the firms’ board members represent non-Saudi nationals serving on the board of directors. The average CEO tenure across the sampled firm is approximately 4.4 years, with a wide margin. Board financial expertise (BFE) demonstrated that 9.5% of the firms’ directors are financial experts, and this variable has a maximum ratio of 60%. The variable firm size (FS) has a minimum and maximum percentage of 7.290 and 14.041, respectively. Leverage (LEV) suggests a mean of 0.228 on average, implying that 22.8% of the firms’ capital represents borrowings. The size of the board of directors (BS) indicates an average of approximately eight (8) persons, with a maximum and minimum of thirteen (13) and three (3) members, respectively. Concerning the number of independent board members (BI), the statistics indicate that 47.1% of the total board members represent independent directors. Government ownership (GO) records a maximum value of 86.5% with little deviation among the sampled companies, while family ownership (FO) registers a mean of 13.2% with a maximum ratio of 94.1%.

5.2. Correlation Analysis

The correlation results are presented in Table 5. This analysis was carried out to examine the link between the explanatory variables, thus testing whether a multicollinearity problem exists in the model specification. According to Gujarati and Porter (2010), multicollinearity arises when the link between explanatory variables is above 80 percent. So, the evidence from Table 5 illustrates that the specified variables are not highly related. The results show that the highest correlation among the explanatory variables is 58% between government ownership (GO) and firm size (FS). Hence, the result suggests the absence of multicollinearity in the specified model.

5.3. Regression Results

Some diagnostics tests were conducted before running the primary regression to obtain a more robust and reliable regression outcome. First, the multicollinearity among the variables was tested using the variance inflation factor (VIF). The VIF values in this study ranged from 1.07 to 2.34, signifying the non-existence of multicollinearity among the research variables (Gujarati and Porter 2010). Further, this study employed a Breusch–Pagan/Cook–Weisberg test to examine whether heteroscedasticity exists in the specified model. The p-value of this test exhibits significant results (Prob > chi2 = 0.000), suggesting the presence of heteroscedasticity in the research model (Baltagi 2005; White 1980). Also, this research applied a Wooldridge Lagrange-Multiplier (LM) test to detect whether the research model suffers from a serial correlation problem. The p-value of this test appears significant (Prob. > f = 0.004), showing the existence of serial correlation in the model (Drukker 2003; Hoechle 2007). Consequently, this study applied robust regression to address these statistical issues.

Table 6 presents regression estimates of the direct relationship between board diversity attributes and financial performance measures, classified into model (1) for ROA and model (2) for ROE. According to the estimates, board gender in both models displays a significant negative coefficient. This evidence implies that Saudi firms’ performance may decline as the ratio of female directors rises. This result supports prior studies who argued that women have less confidence in decision making, which may exacerbate agency conflict, leading to lower performance (Abdullah 2014; Ain et al. 2021; Lim et al. 2019; Ujunwa 2012). The result seems to align with the realities in the Saudi environment, which restricts women’s participation in the public domain (Al-Bassam et al. 2018; Alregab 2021). Hence, gender-diversified firms may suffer less patronage, resulting in lower performance. Foreign directors appear insignificant in determining Saudi firms’ performance. One possible reason is that local directors may likely dominate foreign directors in boardroom discussions, owing to their limited number on the Saudi boards. However, CEO tenure indicates a strong negative impact in both models. This finding is consistent with the agency literature that higher tenure makes the CEO highly entrenched, which may affect firm performance negatively (Berger et al. 1997; Naseem et al. 2019). The Saudi corporate sector is associated with high agency conflicts due to an ineffective market for corporate control. Given that, Saudi CEOs may utilise this chance to pursue policies that maximise their utility, thus eroding firm performance. The implication of this evidence is that policymakers in Saudi Arabia should design a moderate CEO tenure to minimise managerial entrenchment and reduce agency costs. In contrast, board financial expertise positively and significantly affects both performance measures. This suggests that Saudi companies may achieve higher financial performance as the proportion of financial experts on their board of directors rises. This result aligns with the resource dependency and upper echelons perspective that financial expert directors are strategic resources for value enhancement (Alcaide-Ruiz and Bravo-Urquiza 2023; Baatwah et al. 2015). The expertise of these directors may be capable of shaping board monitoring and advisory functions, which in turn enhances firms’ strategic choices (Finkelstein and Hambrick 1990; Gilani et al. 2021).

Also, the finding implies that Saudi companies should attach greater importance to hiring financial experts on their boards for more robust monitoring to raise financial performance.

Furthermore, some of the control variables appear robust in predicting the firms’ performance. Accordingly, firm size indicated a positive coefficient. This outcome suggests that larger firms may enjoy lower costs due to economies of scale advantage, leading to higher performance. (Abbas and Frihatni 2023; Assenga et al. 2017). Leverage shows a negative effect on both ROA and ROE at a 1% significance level. This result supports the argument that companies with higher performance may be associated with lower debt (Boshnak et al. 2023; Sani 2021). Likewise, board size exhibits a significant negative relation with ROA and ROE. Reaching a consensus in larger boards may be difficult due to poor coordination, which may impede effective decision making (Fernandez-Temprano and Tejerina-Gaite 2020; Kilic and Kuzey 2016). This evidence implies that larger board size may weaken sound corporate governance due to poor coordination, leading to lower financial performance. Board independence and government ownership appear insignificant in the specified models.

Table 7 demonstrates the moderation analysis where the moderator variable and interaction terms were inserted into the specified models. The goal is to find out whether the coefficients of the interaction will be significant or not. Model (3) is based on ROA, whereas model (4) is based on ROE. According to the moderation analysis, the interaction between board gender and family ownership (BG × FO) appears insignificant, thus indicating the absence of a moderating effect and rejecting H6a. However, the impact of family ownership on the relationship between foreign directors and performance shows a positive and significant coefficient (FD × FO). Thus, moderation occurs and is consistent with H6b. This evidence implies that family ownership may strengthen the impact of foreign directors on the financial performance of the firms. The finding shows that family shareholding coupled with stringent monitoring from foreign directors may serve as crucial control mechanisms that can lower agency costs, leading to higher performance (Al-Faryan 2021; Tawfik et al. 2022). Also, the interaction between CEO tenure and family ownership (CEOWE × FO) shows a strong coefficient in both models, signifying a moderation effect and therefore agreeing with H6c. The evidence suggests that longer CEO tenure could enhance performance when an active monitor is present. This finding provides further insight into the resource dependency and upper echelons perspectives that the longer term may impact the CEO’s experience (Kao et al. 2019; Manogna 2021). Similarly, the results strongly show that the effect of board financial expertise on performance may be more robust as family ownership rises and is consistent with H6d. Since family shareholders aim to maximise their investment value, they may use their resources to support financial experts in designing better policies for value enhancement (Chen 2014; Omri et al. 2014). Therefore, the interaction may yield a positive impact on performance. Overall, the policy implication of the moderating results is that Saudi firms are more likely to benefit from board diversity as family ownership rises. Thus, the companies should embrace family ownership for greater monitoring and resource provision to improve their financial performance.

6. Robustness Analysis

Some studies raised concerns that the corporate governance–performance relationship is strictly endogenous. Hence, static estimators may be inconsistent and biased due to the endogeneity issue. We estimated our interaction model using a superior analytical framework to address this concern. Table 8 provides this additional evidence using the generalised method of moments (GMM). The GMM framework deals with the possible bias and inconsistency of the static estimators, corrects endogeneity, and addresses reverse causality between variables (Arellano and Bond 1991; Ozkan 2001). This additional analysis employs the two-step system GMM because the technique applies the first-step errors to build more reliable standard errors that can mitigate serial correlation and heteroskedasticity (Blundell and Bond 1998). The GMM regression results in this study look robust because the lagged dependent variables in both models are significant and positive at the 1% level. Most importantly, the estimates meet the underlying assumptions of GMM regression. Accordingly, the p-values of the Sargan test and AR2 are insignificant. This evidence indicates that the GMM instruments used are valid, and the second-order serial correlation is not present in the specified models.

Further, the coefficients of the interaction terms are consistent with that of the fixed effect results in Table 7. This alternative estimate using GMM reveals that family ownership moderates the effect of foreign directors, CEO tenure, and board financial expertise on the financial performance of the firms. Overall, the empirical evidence using fixed effects and GMM regression methods appears robust.

7. Conclusions

This research examines the moderating effect of family ownership on the relationship between board diversity and the financial performance of Saudi non-financial firms. The study sampled data of 98 companies from 2012 to 2021 and analysed these data using the fixed effect regression approach, while GMM regression was used as an additional analysis for robust checking. The direct relationship between board diversity attributes and financial performance measures suggests that board gender and CEO tenure may negatively affect the firms’ performance. Board financial expertise has a positive impact, whereas foreign directors appear insignificant. On the other hand, the moderation analysis indicates that family ownership significantly moderates the impact of foreign directors, CEO tenure, and board financial expertise on the financial performance of the firms.

Moreover, the research outcome may have implications for corporate performance determinants. In particular, the study seems to suggest that board gender may not have much relevance in minimising agency conflicts in the Saudi context, perhaps because of the country’s institutional system. In contrast, the result implies that Saudi companies should attach greater importance to hiring financial experts on their boards for more robust monitoring to raise financial performance. Importantly, the moderation analysis emphasised that coupled with stringent monitoring from family ownership, foreign directorship, CEO tenure, and board financial expertise may be more robust in mitigating managerial entrenchment. Thus, the evidence underscores the relevance of family ownership in promoting sound corporate governance practices. The outcome showcased that the prepositions of resource dependency, agency, and upper echelons theories may be applicable in the Saudi corporate sector. Overall, the policy implication of the moderating results is that Saudi firms are more likely to benefit from board diversity as family ownership rises. Therefore, the companies should embrace family shareholding for greater monitoring and resource provision to improve their financial performance.

Nevertheless, as applies to many studies, this research may have some limitations. Firstly, the paper focuses on non-financial companies. Therefore, upcoming studies should concentrate on financial firms to ascertain whether similar results can be obtained. We employed family ownership as a moderator variable, and future studies should model institutional or government ownership as an intervening variable to determine how they may influence the board diversity–financial performance nexus. Also, this research is on the Saudi corporate sector, and a similar study can be conducted on other developing economies to confirm our findings. Finally, the study relies on accounting performance measures, and future studies may exploit market performance for comparison purposes.