Board Capabilities and the Mediating Roles of Absorptive Capacity on Environmental Social and Governance (ESG) Practices

Abstract

Public listed companies in Malaysia have been pressured tremendously to accept the engagement of Environment, Social and Governance (ESG), but the engagement is still low based on previous studies. ESG will enhance company financial performance, image as well as the ability to attract and retain the workplace which contributes to the market value in the economy. This shows that ESG engagement improve company brand image and reputation, increase customer loyalty and sales as well as productivity. Corporate governance is seen to be the key role to ensure that companies engage with ESG practices since it can enhance the value creation and improve financial performance. Even the present investors are bound to look for non-financial performance elements like corporate governance and environmental, social and governance (ESG) practices that the company engaged since it is an evidence of effective corporate governance. Based on today’s global and innovation-driven economy which also include social and environmental matters consisting of welfare distribution and growth, it is said that countries need to be more efficient in finding new ways to enhance the environmental policy promoting greater change and dynamics. Thus, they must find new ways to develop an innovation policy to emphasise the knowledge-driven economy on the capacity to adapt and adopt best practices, create, diffuse and transform innovation and knowledge. The absorptive capacity will recognise the ability of the individual and company in adopting the innovation which play an essential part in determining the characteristics of good corporate governance to ensure best ESG practices in the company. This paper examines the relationship between board capabilities and ESG practices through the mediating role of absorptive capacity. Board size, board diversity and board independent are the board capabilities that the paper investigates. Collection of information and data was from company's listed in FTSE4Good Bursa Malaysia from the year 2012 to 2016. The results from the regression analysis show that ESG practices have a significant relationship with board size, board diversity, board independence and absorptive capacity. On top of that, absorptive capacity is perceived to have influence on board diversity and board independence towards ESG practices. The results provide empirical evidence and guidance in identifying areas of problems in the current policy and amend it for a better policy in promoting sustainability.

The Influence of GCG on Disclosure of ESG Scores of Companies Listed on the IDX

“…These results are similar to research (Birindelli et al, 2018) and (Ismail et al, 2019) where the presence of an independent director of a company can increase the value of the ESG score because it adds social and economic credibility to the company so that corporate image also gets better (Romano et al, 2020). Independent directors tend to pay more attention to the welfare and environmental activities and usually have a broader perspective than the interests of shareholders.…”

“…Board independence tends to produce better results in decision-making, resulting in improved corporate governance and oversight (Ismail et al, 2019). Consequently, the independence of the board of directors can improve the performance and value of the enterprise in implementing its sustainability.…”

Bibliometric analysis into a decade of academic research on innovation, value creation, and sustainability (2013-2023)

“…This framework acknowledges that businesses should not be evaluated solely on economic indicators but also on their impact on the environment, society, and their governance practices (Eccles et al, 2020). The origins of ESG can be traced back to earlier concepts such as Socially governance (Ismail et al, 2019). Two studies (Chouaibi & Chouaibi, 2021;Sandberg et al, 2023) examine the relationship between ESG factors and financial performance across different industries.…”

Corporate Environmental Information Disclosure in India: Role of Board Characteristics

“…Aliyu (2019), in his study, indicated a significant positive relationship between board independence, board meetings, and corporate environmental reporting. Also, Ismail et al (2019) argue that the current global and innovative economy considers social and environmental issues comprising income distribution and growth. The board plays a crucial role in ensuring that companies engage with environmental and social governance practices that can enhance value addition and financial p e r f o r m a n c e .…”