Board Composition and ESG Disclosure in Saudi Arabia: The Moderating Role of Corporate Governance Reforms

Abstract

There is an evolving trend of pursuing the transfer to sustainable development. Owing to this trend, and alongside the increasing monitoring by society, companies are progressively considering this new position in the capital market. Corporate governance mechanisms and environmental, social, and governance (ESG) activities have received extensive consideration. Using a sample of Saudi listed companies, this study examines the association between board composition (size, independence, and gender diversity) and ESG disclosure moderated by corporate governance reforms. Our reported results confirm that the size of a board and its level of independence have positive and significant impacts on ESG disclosure. Moreover, board gender diversity is found to be positively but insignificantly related with ESG disclosure. When the individual dimensions of ESG are considered, the results verify the significant role of board size and board independence and the insignificant impact of board gender diversity in environmental and social disclosures. Interestingly, all measures of board composition have a positive and significant impact on the governance disclosure score. The results also show that reforms of Saudi corporate governance positively and significantly moderate the board size and board independence–ESG relationship. Our results demonstrate that the enhancement of companies’ corporate governance will increase their ESG disclosures. This study offers perceptions from the outlook of a developing economy, Saudi Arabia, and presents theoretical and managerial implications for policymakers and investors.

1. Introduction

The perception of sustainability is mentioned in the environmental, social, and governance (ESG) activities and practices of companies. The consideration of ESG concerns aids companies in preserving and enhancing their aptitude to generate value over the long term [1]. Motivated by the growing demand for socially responsible investment, ESG investing has become prevalent in international stock markets [2]. In line with the directions of the United Nations, as well as other organizations and agencies (i.e., Organization for Economic Cooperation and Development, European Union, Thomson Reuters Corporate Responsibility Ratings, Morgan Stanley Capital International, and Bloomberg), ESG factors are emerging and increasing rapidly on a worldwide scale. Together, governments and supervisory bodies around the world are gradually concentrating on ESG activities to safeguard customers and to develop better sustainable conducts through investors and corporations. Tan and Zhu [3] employed ESG rankings, which are important for enhancing green improvement and environment, to show that companies may be moving from focusing on financial returns to focusing on sustainable development. Increasing returns related to the financial performance of companies are boosted by ESG practices owing to the intensifying interests of the shareholders participating in these practices [4]. ESG disclosure is needed by socially responsible investors in order to check the ability of the company to fulfill their social benefits [5].

Currently, information on ESG is widely reported and attracts considerable investigation; however, studies are still in their infancy phase and the reported empirical results are mixed [6]. Remarkable research gaps with reference to ESG associations remain unanswered. Birindelli et al., [7] showed that studies investigating the connection between the mechanisms of corporate governance and ESG practices and disclosures are limited. Suttipun [8] also indicated that the connection between the mechanisms of corporate governance and ESG is still argumentative, making it a matter for additional examination. Specifically, the results of preceding studies related to the board composition–voluntary disclosure link are mixed and inconsistent (i.e., [9,10,11,12]). Despite the conducted literature on the board composition–ESG disclosure association, few works are existing in developing economies. Nevertheless, considerable consideration has mostly been directed toward developed markets [13]. For instance, Arayssi et al., [14] indicated that the research and debate on the influence of board composition on ESG disclosure in the Gulf Cooperation Council, where Saudi Arabia is a member state, are relatively low. Consequently, this debate still exists, particularly as the majority of stock exchanges worldwide are starting to provide investors alternative indexes related to sustainability. At the end of 2021, the Saudi Arabian Stock Exchange launched its first guidelines for ESG disclosures. Thus, the purpose of our study is to bridge the gaps in the literature between board composition and ESG in the Saudi capital market.

Well-established corporate governance has the ability to influence a company’s decision making related to strategies of ESG practices and disclosure [15]. Ying et al., [16] indicated that ESG issues are considered a responsibility of corporate governance. As an important corporate governance structure, the board of directors is recognized to control and observe management decisions and activities that engage society and provide direct and indirect advantages to all stakeholders. The board of directors is the most important internal mechanism of corporate governance, as it makes strategic guidelines, safeguards the benefits of all stakeholders, including the shareholders [17], and responds to community pressure to obtain its acceptance [14]. It is the tool mainly accountable for the success or failure of a company [7] and plays an essential role in constructing sustainable strategies and monitoring their implementation [18]. Thus, the link between board structure and management strategies (i.e., ESG) is presently an imperative subject of investigation [19]. To this end, the first question that we seek in this study to answer is as follows: does board composition (measured by board size, board independence, and board gender diversity) affect the ESG disclosure score?

Corporate governance reforms have been launched by various developed and developing markets to reinforce the protection of investors [20]. These reforms via national supervisory bodies are considered thoughtful involvements in the corporate governance practices of a company [21]. During the last years, reforms to the board of directors have been carried out to build up the instruments by which investors can certify their investments’ return. Liao et al., [22] indicated that most conducted reforms were concentrated on the practices related to the board of directors. Fauver et al., [23] showed that the main reforms to the board of directors employed in several countries in the last two decades have improved the wealth of shareholders, indicating the significance and efficiency of such reforms.

Starting in 2000, the regulations of Saudi corporate governance have made an indispensable improvement by issuing internal control guidelines. Later, in 2006, the Saudi Capital Market Authority issued the first code of corporate governance. This code was voluntary until 2010, when it moved to be mandatory. The last reforms to the Saudi code of corporate governance were implemented in 2017. These reforms focused on many issues, such as (a) the relationship between companies’ board of directors, shareholders, and management; (b) rights of shareholders; (c) requirements related to board composition and its associated committees; (d) requirements concerning internal control and external auditors; (e) comprehensive provisions that oblige boards of directors to disclose all needed information to shareholders and those who deal with the company to enable them to build their investment strategy or their dealings with the company.

In Articles 87 and 88 of the new 2017 code, social responsibility and social initiatives received some emphasis. However, ESG practices refer to wide-ranging concerns that are mainly associated with stakeholders rather than with shareholders. Accordingly, on a theoretical level, it is not expected that these 2017 reforms—which mainly deal with board issues—will directly influence the ESG practices and disclosure of companies. Thus, these debates propose that the eventual outcome of corporate governance reforms on ESG is still an open practical question. Furthermore, since the reforms of corporate governance are usually carried out to diminish agency conflicts among company insiders and external shareholders [22], the perception of agency cost concerning ESG would lead to a reduction in ESG activities and disclosures after reforms. That is, the reforms will constrain the management from ESG practices that would boost their position with the main stakeholders at the expense of the company’s shareholders [24,25]. Nevertheless, if it is possible for ESG activities to increase shareholder value as advocated by the standpoint of “doing good leads to doing well” [26], then ESG practices and reporting should be increased after reforms. Inspired by these conflicting prospects, the second question this study empirically investigates is as follows: do 2017 corporate governance reforms have a moderating role on the board composition/ESG disclosure relationship?

The motivations for conducting this study in the context of Saudi Arabia are as follows: First, corporate governance in Saudi Arabia has undergone considerable improvement since the first code was issued in 2006. Second, the board of directors of Saudi Arabian companies is controlled by families, governments, and royal family members, who may provide access to an extensive network for the companies and enhance their financial outcomes; nevertheless, Arayssi et al., [14] indicated that these boards will likely have deficiency to support social strategies and release their social accomplishments. Third, Saudi Arabia is one of the G20 countries and considered one of the leading oil exporters worldwide. Fourth, in line with Saudi Vision 2030, the capital market in Saudi Arabia is observing a fast improvement and the government is carrying out significant efforts to entice foreign investments and move from an oil economy to a well-diversified one. Indeed, sustainable concern is positioned at the heart of Vision 2030. This was the incentive for the Saudi Exchange to enhance ESG practices and disclosure within the Saudi capital market, specifically after issuing the ESG disclosure guidelines at the end of 2021 [27]. These mentioned motivations make the Saudi market attractive for researchers, principally regarding issues related to corporate governance and sustainability. Therefore, our study may provide unique and different outcomes from those that have been reported thus far in other countries.

To this end, by utilizing a sample of 38 Saudi companies (241 company year observations) covering the period from 2015 to 2021, we find that both board size and board independence are significantly and positively associated with ESG disclosure. By contrast, board composition related to board gender diversity has a positive but insignificant effect on ESG disclosure. Concerning the influence of board composition on the separate factors of ESG, the findings confirm the substantial role of board size and board independence and the insignificant outcome of board gender diversity in environmental and social disclosures. Remarkably, all items of board composition have a positive and significant impact on the governance disclosure score. Finally, the significant and positive moderating influence of corporate governance reforms on the board composition (board size and board independence)–ESG association is confirmed.

This study contributes to the present literature in many areas. First, it adds to and enriches the narrow but increasing literature related to corporate governance and ESG disclosure in an emerging market, namely Saudi Arabia, by empirically examining the connection between board composition and ESG disclosure. Mixed and ambiguous results regarding this connection have been obtained [22,28,29]. This deficiency of stability in the previous outcomes calls for additional examination to aid in better recognizing this connection. Second, the outcomes of our work provide support to the underpinning theories for this study (i.e., agency theory, resource dependence theory, institutional theory). Third, this study adds to the prevailing evidence on the link between national bodies and companies’ board structures and ESG. Specifically, it examines the ways in which the Saudi Capital Market Authority boosts or confines the ESG practices and disclosures. To date, there is no reported evidence concerning the moderating impact of corporate governance reforms on the association between board composition and ESG disclosure. Accordingly, this study evaluates the 2017 corporate governance regulations. Fourth, most prior studies on corporate governance and ESG focused on developed markets associated with well-structured corporate governance and advanced ESG practices and disclosure. However, insufficient evidence has been reported in emerging countries such as Saudi Arabia. This insufficiency of empirical work can be attributed to the inadequate disclosure of ESG. Thus, this study contributes to filling the abovementioned gaps in the current literature in an emerging ground concerning social sustainability. Finally, the outcomes of this work provide various implications to regulators, policymakers, management of listed companies, and investors.

The rest of this paper proceeds as follows: The review of the literature and the development of the hypotheses of this study are presented in Section 2. The study’s methodology, including sample, data, measurements, and models, are illustrated in Section 3. Descriptive analysis, Pearson’s correlation, results of regression analysis, additional analysis, and robustness analysis are presented and discussed in Section 4. The discussion related to the found results is illustrated in Section 5. Lastly, we conclude the study and show the theoretical and practical implications as well as the limitations and propositions for future works in Section 6.

2. The Literature Review and Hypothesis Development

2.1. Board Size and ESG Disclosure

Board size represents the total of all directors working on the company’s board of directors, and it is considered one of the main attributes that impacts board performance and efficiency. The resource dependency theory is commonly employed in works related to the board of directors and is better in recognizing the board [30]. The theory postulates that the presence of many members working on the board of directors will empower companies to reach wide-ranging and indispensable resources in their boards, thus permitting them to make more sound and operative decisions when they come across challenges in the globalized economics [31]. The increasing number of directors on the board likewise offers better proficiency and external networks for the board [32].

Much empirical evidence has found that board size is positively related to ESG disclosure [8,18,33,34]. The results were attributed to the ability of a larger board size to enhance the quality and quantity of reported financial and non-financial information [35]. Furthermore, in their study on banks, Birindelli et al., [7] reported a favorable link between the board size and ESG performance. In the same vein, Esa and Gzahali [36] reported a positive outcome for the board size of Malaysian companies on their disclosures of corporate social responsibility. Likewise, Allegrini and Greco [37] found a strong and positive influence for board size on the governance disclosure of Italian companies. Thus, the general results reveal that board composition (board size) has a substantial task related to ESG disclosure.

A larger board size will raise the transparency of disclosed non-financial information by increasing the capability of the board to observe the actions and activities of management [38]. The increasing number of board members can offer a wide-ranging impersonation of ownership and make them more inclined to report information concerning strategic goals, aside from all other information that can be valuable for stakeholders [39,40]. In agreement with the resource dependence theory and the above empirical evidence, we assume that more board members will positively impact the level of ESG disclosure. Thus, the following hypothesis is presented:

Hypothesis 1 (H1).

The size of the board of directors is positively associated with the ESG disclosure scores of Saudi listed companies.

2.2. Board Independence and ESG Disclosure

The independent members sitting on boards of directors are anticipated to influence the efficiency of the boards [41]. The core foundation of the agency theory is that the non-executive directors on the boards are supposed to supervise and control the actions of the executive directors because of the latter’s expected opportunistic conduct [42,43]. More independent members on boards will motivate and encourage management toward the direction of advanced disclosures and transparency to safeguard the interests of stakeholders [44]. Independent directors can guide the decisions of company management to sustainable activities with higher financial returns, thus increasing the company stock value. More independent directors will also lead to sound decisions and motivate the management for greater disclosures of ESG [45].

Empirically, several studies have shown the positive connection between board independence and ESG disclosures [33,34,46]. Another set of evidence reported a positive connection between independent directors on boards and companies’ social responsibility disclosures [47,48], environmental disclosure [49], and disclosure about corporate governance practices [50,51].

More board independence simplifies the communication of the constructive appearance of the company by enlightening its social responsibility as well as balancing between its financial objectives and its social responsibilities [14]. Karamanou and Vafeas [52] and Cheng and Courtenay [53] reasoned that enhanced corporate governance results in more and improved qualities of non-financial disclosures. Corresponding to the agency theory and the preceding literature, it is expected that more independent directors will tend to facilitate the ESG disclosure to send the signal that the company is considering social interests and is not focusing only on financial outcomes. Thus, we state the next hypothesis:

Hypothesis 2 (H2).

The independence of the board of directors is positively associated with the ESG disclosure scores of Saudi listed companies.

2.3. Board Gender Diversity and ESG Disclosure

Diversity on a company’s board of directors represents the potential dissimilarities among the board members and the way in which this diversity may impact the decision-making process in the company [54], including decisions on ESG activities [15]. As an important feature of board composition, gender diversity is frequently claimed to have a favorable influence on the quality of a company’s strategic decision [55]. In the 2030 Agenda of the United Nations, gender equality is the fifth goal of sustainable development, which considers comprising an equivalent existence in management positions [19].

The viewpoint of the resource dependence theory as designated by Hillman et al., [56] is that, since the board of directors manages the correlated responsibilities between the company and its outside environment, greater diversity on the boards (i.e., a higher fraction of women directors) will enable further selections of opportunities and networks for the company. Women directors enable boards to have innovative experiences that offer new notions and propositions [56]. Ammer and Ahmad-Zaluki [57] revealed that the presence of females on boards will enhance the attendance of the board. Furthermore, a board diversified with women directors has an increased obligation toward ethics and a stronger inclination to consider the interests of a wider range of stakeholders and societies [58]. Female directors appear to retain a positive outlook concerning sustainability [7].

On the empirical front, including women on the board of directors is found to be positively related with ESG disclosure [19,34,46,59,60], carbon information disclosure [61], and environmental disclosure [39,49]. This evidence proved that women directors advance the disclosure of companies through enhanced monitoring, in addition to the constructive inspirations of the companies’ socially responsible manners. The ability of a company to attain the essential resources to undertake its social and environmental responsibility is also higher with gender diversity [19]. Thus, we assume that the higher commitment and skills of female directors enhance the ESG disclosure of the company while realizing profitability. Thus, consistent with the resource dependence theory and the prior literature, we state this hypothesis:

Hypothesis 3 (H3).

The gender diversity of the board of directors is positively associated with the ESG disclosure scores of Saudi listed companies.

2.4. Corporate Governance Reforms and the Board Composition–ESG Disclosure Relationship

Corporate governance reforms represent the intentional interferences in the code of corporate governance by the governments or stock exchange commissions. The particulars of corporate governance reforms differ between countries, but increasing transparency is the essential aim of these reforms [62], aside from protecting investors [21]. Developed and developing markets have faced various governance problems (e.g., the Asian financial crisis in developing markets) and scandals (e.g., Enron and WorldCom insolvencies in developed markets), which emphasized the need for corporate governance reforms [21].

On the empirical front related to corporate governance reforms, [22] found that global reforms for corporate boards boosted corporate social responsibility, specifically the items related to the environment and social activities. They further reported that board reforms may enhance the probability of incorporating the practices of corporate social responsibility in executive compensation. In India, Abraham et al., [63] found that companies increased their disclosure after modifications to Clause 49. Additionally, Liao et al., [20] documented that there are higher expectations for companies in countries that applied corporate governance reforms to cross-list in other countries that have robust protection for investors and well-established markets. In their study, Bae et al., [21] found that the reforms of corporate governance resulted in companies paying greater dividends. They hypothesized that the corporate board reforms reinforce the observing task of the board and authorize outside investors to ask management to disgorge dividends.

Orazalin and Mahmood [64] also demonstrated that the quality of country governance (calculated by the effectiveness of government, monitoring quality, and guidelines of law) has a positive influence on environmental practices. Ortas et al., [65] reported that national organizations have a robust effect on the ESG performance of companies. Furthermore, many earlier works indicated that corporate governance reforms can influence the values and decision making of companies (i.e., [21,23]). By contrast, Ahmed [62] found that the quality of earnings was not influenced by the 2002 corporate governance reforms in Russia.

In Saudi Arabia, there are few regulatory reforms dedicated to corporate governance since its code was issued in 2006. However, after launching Saudi Vision 2030 in 2016, the Saudi Capital Market Authority launched its governance reforms in 2017 to enhance the role of listed companies in the national economy. As mentioned in the Introduction, these reforms concentrated on matters such as rights of shareholders, board structure and its sub-committees, internal control and external auditors, and disclosures. For sustainability issues, Article 87 of the 2017 Saudi code of corporate governance, titled “Social Responsibility”, indicates that “The Ordinary General Assembly, based on the Board recommendation, shall establish a policy that guarantees a balance between its objectives and those of the community for purposes of developing the social and economic conditions of the community.” Additionally, Article 88, which is titled “Social Initiatives”, indicates that “The Board shall establish programmes and determine the necessary methods for proposing social initiatives by the Company…” [66].

In line with the assumption of Liao et al., [22], the positive estimation of ESG proposes that improved corporate governance following conducted reforms will inspire companies to raise their ESG to increase the value of its shareholders. Along with this estimation, it is reported that companies with well-established governance and low agency problems participate in more corporate social responsibility activities [67,68]. Healthier corporate governance could also reinforce the effect of independent directors to prompt more investing in ESG practices as these appreciate the social impact of the company. Shareholders actually require an operative mechanism of corporate governance to have better controlling rights and to enhance the environmental sustainability of the company [69]. Based on the institutional theory, companies increase and safeguard their legality [70] through compliance with the anticipations of authorities and stakeholders. Meyer and Rowan [71] showed that the companies follow the prescriptions of authorities by aligning the values of the corporation and the community.

According to the above discussions and prior studies, we assume that corporate governance reforms have a positive effect on the board composition–ESG disclosure relationship. We thus formulate the following hypotheses:

Hypothesis 4a (H4a).

The board size–ESG disclosure association is positively moderated by corporate governance reforms.

Hypothesis 4b (H4b).

The board independence–ESG disclosure association is positively moderated by corporate governance reforms.

Hypothesis 4c (H4c).

The board gender diversity–ESG disclosure association is positively moderated by corporate governance reforms.

3. Methodology

3.1. Sample and Data

To investigate whether Saudi companies’ disclosure of sustainability issues (i.e., ESG) is influenced by the composition of their boards, we utilized a sample of Saudi companies listed on the main market of Saudi Stock Exchange (Tadawul). Our sample period covered the years 2015–2021. We selected this period for several reasons. First, by 2015, the Bloomberg database had covered 11,300 listed companies that disclose ESG information in 69 countries, including Saudi Arabia. Second, given that we examined the moderating role of Saudi corporate governance reforms adopted in 2017, taking the two years before these reforms were activated allowed us to test their effectiveness on the board structure and ESG disclosures. The end of the study period is 2021, the last year for which data were obtainable for us, giving us five years after the current Saudi Code for Corporate Governance was issued in 2017 and six years after the introduction of Saudi Vision 2030 that takes into account the issues of sustainability. By the end of 2021, there were 206 companies listed on the Saudi Stock Exchange. However, we removed the outlier values and companies with no or insufficient data on the variables of our study, leaving us with a final sample of 38 companies (241 company-year observations).

To collect data, we used the platform database of Bloomberg to extract the data of ESG disclosure scores, environmental disclosure scores, social disclosure scores, governance disclosure scores, and company characteristics (control variables). We did this following many previous studies (i.e., [72,73,74,75,76,77]). In fact, Bloomberg is a foremost worldwide ESG database that is broadly employed by researchers, investors, and other practitioners. The framework of ESG scoring by Bloomberg is similar to global guidelines, including the United Nations and the Global Responsible Initiative [78]. Another advantage for Bloomberg is that it collects the ESG information from different sources, such as the companies’ published sustainability and annual reports and press releases, in addition to a specific Bloomberg survey. Thus, the Bloomberg ESG scores are suitable to be used. Finally, for the data related to the structure of the board of directors (size, independence, gender diversity), we manually collected data from annual reports accessible on the websites of the companies.

3.2. Measurement

First, in agreement with several earlier studies (i.e., [73,76,77,79]), the ESG variable (dependent variable) represents the ESG score from Bloomberg for the sample companies. This scoring method ranges from 0% (companies that did not disclose any ESG data) to 100% (companies that disclosed all ESG data documented by Bloomberg). Specifically, a higher score designates more disclosed information. These scores are according to a company’s ESG index calculated by Bloomberg analysts. The data points were all weighted based on their significance and relevance for the precise industry sector.

Second, we measured our explanatory variable as follows: board size was calculated as the overall number of directors sitting on the board of directors [8,18,46] and board independence was measured as the number of independent directors sitting on the board [80]. Regarding gender diversity on the board, it was calculated as a dummy variable that takes “1” if there is at least one woman on the board and “0” otherwise [81].

For the moderating variable, corporate governance reforms (CGR), we employed a dummy variable that takes “0” for the periods before issuance of the updated regulations for Saudi corporate governance in 2017 (pre-reform) and “1” for the periods after activation of these regulations (post-reform). This measurement is in line with [21,22,62].

Finally, to diminish the influence of the confounding effects of particular company features that may impact ESG practices, we followed some preceding studies and considered a set of control variables in the models [82], specially, company size (SIZE) was incorporated because larger companies have a tendency to include ESG issues as one of its key management priorities. In this study, the natural logarithm of all assets was utilized to measure the size of the company. For companies of dissimilar sizes, their inclination to direct ESG activities and the economic outcomes could be considerably different [83]. Financial leverage (LEV) was likewise incorporated as a control variable because greatly indebted companies are expected to have improved sustainability practices [84]; moreover, companies that use varied financial leverage usually have different management methods of their ESG practices as well [83]. LEV was computed as total debts in relation to total assets. Profitability, return on assets (ROA), was computed by dividing company net profits on its total assets. For a control variable, we employed beta as a factor for company risk (RISK) to define its impact on ESG disclosure through the regression models. RISK was calculated by the beta of the company. Finally, company age (AGE) was estimated to have a favorable impact on ESG transparency [76]. AGE was measured as the natural logarithm of the number of years since the establishment of the company.

3.3. Models of the Study

In our study, we aimed to investigate the estimated connections between board composition (size, independence, gender diversity) and ESG disclosure, in addition to the moderating outcome of corporate governance reforms on this interaction. The conceptual framework is presented in Figure 1. Two regression equations were established to test our developed hypotheses. First, to examine the direct relationship between board composition and ESG disclosure, we constructed the following model:

ESG_i,t = β₀ + β₁ BOARD_i,t + β₂ SIZE_i,t + β₃ LEV _i,t + β₄ ROA _i,t + β₅ RISK _i,t + β₆ AGE_i,t, + Industry dummies + Year dummies + ε

(1)

Second, to test the indirect relationship related to the moderating role of corporate governance reforms on the board composition–ESG disclosure associations, we developed the following model:

ESG_i,t = β₀ + β₁ CGR_i,t + β ₂ CGR_i,t × BOARD_i,t + β₃ BOARD_i,t + β₄ SIZE_i,t + β₅ LEV _i,t + β₆ ROA _i,t + β₇ RISK_i,t + β₈ AGE_i,t, + Industry dummies + Year dummies + ε

(2)

where the expression Industry dummies alludes to industry unobserved fixed effects and the expression Year dummies denotes time-specific influences that are time-variant and communal to all sample companies. The definitions of all variables are presented in Section 2.2.

4. Analysis and Results

4.1. Descriptive Analysis

The outcomes of the descriptive analysis of data are reported in

Table 1. Descriptive statistics.

Variables	N	Mean	STD	5th Percentile	25th Percentile	Median	75th Percentile	95th Percentile
ESG	241	21.40	12.03	5.18	12.72	17.54	28.31	46.92
ENV	211	12.08	15.74	0	0	3.57	24.03	44.38
SOC	232	15.41	13.32	0	6.57	11.67	22.81	42.11
GOV	238	48.60	17.90	14.29	42.86	44.64	58.93	76.10
BSIZE	241	9.73	1.85	7	9	9	11	13
BINDEP	241	4.04	1.31	2.5	3	4	5	6
BGENDER	241	0.16	0.40	0	0	0	0	1
SIZE	241	10.72	0.65	9.58	10.3	10.7	11.2	11.7
LEV	241	23.84	20.06	0	5.79	17.34	39.46	58.55
ROA	241	2.73	6.11	−5.13	0.66	1.77	3.72	12.03
RISK	241	0.92	0.31	0.10	0.81	0.99	1.13	1.28
AGE	241	1.47	0.29	0.95	1.23	1.58	1.63	1.83

NOTE: The values related to the descriptive statistics of the variables used in this study are demonstrated in this table. Throughout the period of 2015–2021, our final sample included 38 companies (241 company-year observations). ESG, the dependent variable, is the collective environmental, social, and governance score of Bloomberg, ranging between 0 (no disclosure) to 100 (complete disclosure); ENV is the company’s environmental reporting score; SOC is the company’s social reporting score; GOV is the company’s governance reporting score. Independent variables include BSIZE (board size), the overall number of directors sitting on the board of directors; BINDEP (board independence), the number of independent directors sitting on the board of directors; BGENDER (gender diversity), a dummy variable that takes “1” if there is at least one woman on the board and 0 otherwise. Control variables comprise SIZE (size of company), computed by taking the natural logarithm of all assets; LEV (financial leverage), the total debt of the company to its total assets; ROA (return in assets), the company’s profit divided by its total assets; RISK (the risk of the company), the beta factor for the company; AGE (age of the company), the natural log of its age.

. The average value of ESG is noted to be 21.40 (out of a potential 100), with a median of 17.54. This average reveals that only a few companies in the Saudi Stock Exchange market have disclosed sustainability information. This result is comparable to the 17.08 average of Ammer et al., [85] and 14.62 of Bamahros et al., [75], who documented that Saudi companies still put moderate stress on ESG disclosure practices. The ESG standard deviation is 12.03, representing that there are notable differences in the ESG disclosed information among the sample companies of this study. The average values for individual factors of ESG are 12.08 for environmental (ENV), 15.41 for social (SOC), and 48.60 for governance (GOV). GOV has the highest average, indicating that Saudi companies are well governed by the Saudi code of corporate governance, thereby leading to high compliance among these companies to the code. The results of board composition display that the average values are 9.73 for board size, 4.04 for independent directors, and 0.16 for women on the board. Our results are close to those of Abdalkrim [86]. The descriptive values for other variables are as follows: 10.72 for company size, 23.84 for financial leverage, 2.73 for the return on assets, 0.92 for company risk, and 1.47 for company age.

4.2. Pearson’s Correlation

The Pearson’s correlation analysis is reported in

Table 2. Pearson correlation coefficients.

Variables	ESG	BSIZE	BINDEP	BGENDER	SIZE	LEV	ROA	RISK	AGE
ESG	1
BSIZE	0.256 ***	1
BINDEP	0.145 **	0.621 ***	1
BGENDER	0.189 ***	0.160 **	0.076	1
SIZE	0.224 ***	0.111 *	−0.087	0.054	1
LEV	0.138 **	−0.019	0.014	0.089	−0.251 ***	1
ROA	0.073	0.065	0.020	0.015	−0.179 ***	−0.228 ***	1
RISK	0.048	0.095	0.168 ***	−0.041	−0.008	0.193 ***	−0.110 *	1
AGE	0.067	0.117 *	0.053	0.099	0.173 ***	−0.308 ***	0.193 ***	−0.134 **	1

NOTE: Pearson correlation coefficients of all variables employed in this study are presented in this table. For the definitions of variables, please refer to Table 1. * denotes the significance level at 10%. ** denotes the significance level at 5%. *** denotes the significance level at 1%.

. Interestingly, the correlation between board composition (BSIZE, BINDEP, and BGENDER) and ESG score is found to be positive and significant, providing initial support to our hypotheses H1, H2, and H3. These results imply that ESG is expected to be more established in companies with higher numbers of members, independent directors, and women directors on the board of directors. Additionally, ESG score has significant associations with some control variables (i.e., size and financial leverage of the company). The multicollinearity assumption was likewise tested prior to running the regression analysis. The correlation analysis in Table 2 shows that multicollinearity is not a problem in our analysis because the correlation values of all variables are below the threshold point of 0.70 as established by Hair et al., [87]. We next conducted the variance inflation factors (not reported here) and found that the values are lower than the critical threshold of 10, indicating that there is no concern for multicollinearity.

4.3. Results of Regression Analysis

The regression results of the board composition on ESG disclosures are presented in

Table 3. Effect of board composition on ESG disclosures.

Variables	Expected Sign	(1)	(2)	(3)
INTERCEPT	+	−57.011 (−4.22)	−58.764 (−4.25)	−48.255 *** (−3.54)
BSIZE	+	1.387 *** (3.51)
BINDEP	+		1.517 *** (2.68)
BGENDER	+			4.336 (1.3)
SIZE	+	5.366 *** (4.47)	6.167 *** (5.09)	5.622 (4.64)
LEV	−/+	0.159 *** (3.96)	0.166 *** (4.11)	0.150 (3.65)
ROA	+	0.322 *** (2.54)	0.359 *** (2.81)	0.348 (2.72)
RISK	−/+	0.116 (0.05)	−0.131 (−0.05)	1.326 (0.55)
AGE	+	1.789 (0.66)	2.123 (0.78)	2.008 (0.73)
Industry dummies		Yes	Yes	Yes
Year dummies		Yes	Yes	Yes
Company fixed effect		Yes	Yes	Yes
Sample size		241	241	241
F_statistic		8.05 ***	7.06 ***	6.75 ***
Adjusted R²		0.1498	0.1316	0.1257

NOTE: Estimation findings related to the effect of board composition (board size, BSIZE; board independence, BINDEP; gender diversity on board, BGENDER) (independent variables) on ESG disclosures (dependent variable) are demonstrated in this table. For the definitions of variables, please refer to Table 1. *** denotes the significance level at 1%.

. To control for the bias of neglected/ignored variables, we employed a fixed effects regression in our models since it is found to be the suitable technique, as confirmed by the findings of the Hausman test. To consider the deficiency of independence of observations within a particular company through time, the robust standard errors of the estimated coefficients were clustered at the company level as suggested by Petersen [88].

From Model (1) in Table 3, it is observed that the predicted coefficient of BSIZE is statistically positive and significant, ratifying our first hypothesis (H1). This regression finding is in accordance with the correlation results presented in Table 2. Thus, companies with more members on the board of directors are more inclined to disclose ESG activities. This positive impact is generally compatible with the results achieved by preceding studies for both financial and non-financial companies (i.e., [82,89,90,91,92]). In effect, having a larger board of directors will make the comparison of diverse points of view easier, promote a wide-ranging perception on the long-term goals of the company, and motivate management to enhance non-financial performance. Additionally, directors with various skill sets and perceptions are highly estimated to serve on a larger board of directors and have a resilient inclination for a sustainable culture in companies [7].

Model (2) in Table 3 displays the estimation results concerning the effect of board independence (BINDEP) on the ESG disclosures of the company. As can be seen, BINDEP is documented to be positively and significantly connected with the company score of ESG disclosures, therefore validating our second theoretical hypothesis (H2). These results lend support to the findings of [14] that independent directors on boards enhance companies to achieve a better balance between their financial goals and social commitments. If companies have many independent directors on their board, this will allow insiders who have better knowledge, skills, and a respectable reputation to support the company toward better sustainability. Consequently, a greater number of independent members on the board will enable companies to address the environmental and social requirements. It may also result in the social activities of the company to be more recognized, thus enhancing its social profile that allows it to appear like a good citizen [90]. Furthermore, Model (3) in Table 3 presents the regression results regarding the impact of a board’s gender diversity on ESG disclosure scores. The result is found to be positive but statistically insignificant. Therefore, H3 is not supported, which is in line with the findings of [82,93]. It is observed that Saudi listed companies are classified by a low number of women serving on their boards.

Finally, the results of the included control variables in the regression analysis show that, in both Models (1) and (2) in Table 3, the size, financial leverage, and return on assets of the company are positively and significantly linked with its ESG disclosure score. This result confirms the perception that larger companies manage their ESG issues more efficiently and have better methods to manage sustainability [94]. The result likewise specifies that greatly indebted companies are expected to spend more on ESG activities and will thus have better ESG disclosure scores. Singh et al., [76] indicated that companies with higher leverage report more ESG information in order to sustain their legitimacy in society’s eyes, since this will enable them to easily obtain debt. For the return on assets, it is found to be positively and significantly linked with ESG disclosure, which is in line with [14]. On the other hand, both the risk and age of the company are found to be insignificantly related with its ESG disclosure score.

Table 4. Moderating influence of corporate governance reforms on the association between board composition and ESG disclosure scores.

Variables	Expected Sign	(1)	(2)	(3)
INTERCEPT	+	−7.849 *** (−5.34)	−6.801 *** (−4.55)	−5.837 *** (−4.03)
CGR	+	6.289 *** (3.55)	9.347 *** (2.04)	2.853 *** (1.9)
BSIZE × CGR	+	1.898 *** (2.53)
BINDEP × CGR	+		0.363 *** (4.3)
BGENDER × CGR	+			1.186 (0.93)
BSIZE	+	2.504 *** (4.17)
BINDEP	+		1.598 * (1.83)
BGENDER	+			1.935 (1.08)
SIZE	+	5.629 *** (5.05)	6.224 *** (5.42)	5.799 *** (5.07)
LEV	−/+	0.164 *** (4.40)	0.162 *** (4.27)	0.155 *** (4.01)
ROA	+	0.404 *** (3.42)	0.430 *** (3.56)	0.427 *** (3.51)
RISK	−/+	−0.197 (−0.09)	−0.572 (−0.25)	0.400 (0.18)
AGE	+	0 191 (0.08)	0.665 (0.26)	0.734 (0.28)
Industry and year dummies		Yes	Yes	Yes
Company fixed effect		Yes	Yes	Yes
Sample Size		241	241	241
F_statistic		12.03 ***	10.02 ***	9.66 ***
Adjusted R²		0.2688	0.2311	0.2239

NOTE: Estimation findings related to the moderating influence of corporate governance reforms (CGR) on the relationship of board composition (board size, BSIZE; board independence, BINDEP; gender diversity on board, BGENDER) (independent variables) on ESG disclosures (dependent variable) are demonstrated in this table. CGR is calculated as a dummy variable that takes “0” for the periods before issuing the updated regulations for Saudi corporate governance in 2017 (pre-reform) and “1” for the periods after activating these regulations (post-reform). For the definitions of variables, please refer to Table 1. * denotes the significance level at 10%. *** denotes the significance level at 1%.

displays the findings of the regression analysis carried out to identify whether or not corporate governance reforms have a moderating influence on the board composition–ESG disclosure relationship. In the regression results of Models (1) and (2), we found that Saudi corporate governance reforms issued in 2017 positively and significantly moderate the relationships between both board size and board independence and the ESG disclosure score of companies. That is, board size and board independence represent the essential criteria of board composition to improve ESG disclosures. These results confirm that companies within a regulatory country (i.e., corporate governance regulations) take into account sustainability matters during their decision-making processes, hence boosting their ESG disclosure scores with the intention of meeting regulatory recommendations. Based on these reported results, H4a and H4b cannot be rejected. In Model (3), the interaction term between corporate governance reforms and board gender diversity has a positive value; nonetheless, this value is not statistically significant. Specifically, the Saudi reforms on corporate governance regulations in 2017 have no impact on the connection between the presence of female members on board and the ESG disclosure score. Thus, H4c did not find support. This is attributable to the fact that these reforms do not necessitate a precise quota of female representation on the board of directors or top management and do not even obligate the recruitment process of the companies to warrant that “women candidates” be incorporated in their boards or top management [95].

4.3.1. Additional Analysis

Studies such as Alareeni and Hamdan [96] and Rahi et al., [97] reported that the ESG dimensions (ENV, environmental; SOC, social; GOV, governance) are interrelated and that integrating them reinforces the practice of company management. However, Duuren et al., [98] indicated that there is a perception that investors allocate varying degrees of significance to the ratings of the ESG components. Accordingly, we carried out an additional investigation to test the ways in which the board composition (i.e., board size, board independence, and gender diversity on board) might affect the separate components of ESG, namely ENV, SOC, and GOV. The findings of this investigation that employed the fixed effects regressions are revealed in

Table 5. Effect of board composition on environmental disclosures, social disclosures, and governance disclosures.

Variables	ENV		SOC			GOV
	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)
INTERCEPT	−60.862 ** (−3.02)	−63.098 (−3.11)	−14.751 ** (−2.25)	−28.994 * (−1.83)	−24.627 *** (−2.63)	−32.519 ** (−2.06)	−42.761 ** (−2.07)	6.453 (0.27)	17.846 (0.74)
BSIZE	0.494 *** (2.58)			0.556 *** (2.1)			2.335 *** (3.85)
BINDEP		0.987 *** (1.9)			−0.849 ** (−2.02)			1.803 ** (2.15)
BGENDER			0.401 (0.16)			1.456 (0.69)			7.175 *** (2.64)
SIZE	7.174 *** (3.94)	7.477 *** (4.14)	7.356 *** (4.06)	3.480 ** (2.50)	4.532 *** (2.72)	3.369 ** (2.42)	5.817 *** (3.17)	3.497 (1.53)	3.369 ** (2.42)
LEV	0.222 *** (3.94)	0.224 *** (4.00)	0.225 *** (3.96)	0.189 *** (4.02)	−0.051 *** (−0.76)	0.191 *** (4.02)	−0.005 (−0.08)	−0.303 *** (−3.30)	3.073 *** (2.64)
ROA	0.233 (1.07)	0.252 (1.15)	0.234 (1.06)	0.249 * (1.69)	−0.315 ** (−1.97)	0.239 (1.62)	0.428 ** (2.22)	−0.106 (−0.48)	−0.309 *** (−3.38)
RISK	−3.433 (−1.04)	−3.868 (−1.16)	−3.178 (−0.96)	3.276 (1.19)	0.982 (0.40)	2.819 (1.02)	3.819 (1.06)	3.774 (1.11)	−0.116 (−0.53)
AGE	−8.207 (−2.12)	−8.107 (−2.10) **	−7.953 ** (−2.05)	2.989 (0.92)	−2.251 (−0.71)	2.927 (0.90)	1.092 (0.26)	6.448 (1.45)	5.337 (1.59)
Sample Size	211	211	211	232	232	232	238	238	238
F_statistic	4.98 ***	5.13 ***	4.85 ***	3.67 ***	8.05 ***	3.50 ***	6.08 ***	7.00 ***	7.22 ***
Adjusted R²	0.3816	0.1055	0.0991	0.0649	0.3139	0.0609	0.1140	0.2751	0.2826

NOTE: Results from fixed effects regressions of board composition (board size, BSIZE; board independence, BINDEP; gender diversity on board, BGENDER) (independent variables) on every component of ESG; ENV, environmental reporting score; SOC, social reporting score; GOV, governance reporting score (dependent variables) are illustrated in this table. For the definitions of variables, please refer to Table 1. * denotes the significance level at 10%. ** denotes the significance level at 5%. *** denotes the significance level at 1%.

. The reported results show that board size and board independence in Models (1) and (2) have a positive and significant influence on environmental disclosure score, representing that the larger board with many independent directors on the board result in better disclosure of environmental information. Comparable findings were reported in some previous studies (i.e., [99]). In Models (4) and (5), it is clear that board size and board independence are significantly and positively connected to the social disclosure score, which is in accordance with the findings of [100]. In Models (3) and (6), the findings indicated a positive but insignificant influence of gender diversity on the board on both environmental and social disclosure scores. Lastly, the interesting results in Models (7), (8), and (9) showed that all board compositions (i.e., size, independence, and gender diversity) have a positive and significant effect on governance disclosure score.

The significant and positive impact of board size on ENV disclosure, SOC disclosure, and GOV disclosure ratifies the productive responsibility of board size toward ESG practices and reporting. Companies with larger boards are operated by directors who have diverse abilities and attitudes, together with directors categorized by a robust inclination toward a culture of sustainability. That is, board size is an important part of the capacity of boards to efficiently monitor management performance and support non-financial performance and disclosures such as ESG. The significant and positive relationship between board independence and disclosure scores of ENV, SOC, and GOV can be attributed to the fact that independent directors sitting on the boards provide a vital task toward the effectiveness of the whole board and are more inclined toward corporate social responsibility. Furthermore, the existence of those independent directors could influence the excellence of the directors’ information in the decision-making process, which may promote sustainable activities and disclosure. Independent directors also have the ability to provide influential monitoring on the activities of management.

4.3.2. Robustness

Although we employed fixed effects regressions with clustered standard errors in our main analysis, there is the likelihood of an endogeneity issue in the association between board composition and ESG disclosure. That is, neglected features of companies that could be either steady or fluctuating through time will possibly have an influence on board size, board independence, board gender diversity, and ESG disclosure score. This finding proposes the probability of a reverse causation. Thus, to evaluate the robustness of our key regression results in Table 3, we employed the generalized method of moments (GMM) panel data procedures with ordinary least squares to find a solution to the endogeneity issue. These methodologies enclose dummy variables of temporal fixed effect.

Table 6. Models of robustness analysis to address endogeneity: GMM technique.

Variables	(1)	(2)	(3)
INTERCEPT	−28.466 ** (−1.92)	−71.474 *** (−3.68)	−73.895 *** (−3.72)
LAGESG	0.931 *** (46.70)	0.858 *** (46.38)	0.859 *** (39.24)
BSIZE	0.087 *** (2.62)
BINDEP		0.153 *** (4.94)
BGENDER			1.405 (0.98)
SIZE	3.222 *** (2.56)	6.506 *** (3.88)	6.860 *** (4.35)
LEV	−0.222 (−0.75)	0.096 *** (5.30)	0.123 *** (4.33)
ROA	−0.010 (−0.76)	−0.186 *** (−6.37)	−0.079 ** (−2.50)
RISK	0.065 (1.12)	0.211 (0.31)	−0.079 (1.1)
AGE	−2.160 (−0.99)	2.722 (1.32)	0.951 (0.24)
Year dummies	Yes	Yes	Yes
Industry dummies	Yes	Yes	Yes
Sample Size	204	204	204
F_statistic	499.98 ***	766.50 ***	745.43 ***
AR(1) test (p-value)	−2.25 **	−2.35 ***	−2.36 **
AR(2) test (p-value)	0.42	0.44	0.54
Hansen J-test of over-identification (p-value)	26.53	28.94	20.42
Adjusted R²	0.387	0.544	0.491

NOTE: Results for the robustness analysis to address endogeneity concern using the GMM technique is presented in this table. Board composition (board size, BSIZE; board independence, BINDEP; gender diversity on board, BGENDER) are the independent variables. ESG disclosure score is the dependent variable. For the definition of variables, please refer to Table 1. ** denotes the significance level at 5%. *** denotes the significance level at 1%.

displays the findings obtained by employing the dynamic panel GMM technique. A positive and considerable connection is found between ESG disclosure score and the coefficient for the lag of the explained variable (p < 0.01). Essentially, our estimated models offer qualitatively alike findings that support the initial findings in Table 3. In particular, we still have a positive and significant connection between board size and board independence with the ESG disclosure score. Furthermore, we continue to have an insignificant positive association between a board that is diversified with women and the ESG disclosure score. Generally, the reported results from a GMM estimation technique show that our key empirical results continue to be robust after controlling for potential problems of endogeneity in our analysis.

We altered the estimation process to account for serial dependency and cross-sectional data in light of [88,101].

Table 7. Effect of board composition on ESG disclosures using alternative estimation methods.

Variables	GLM			Fama–Macbeth			Quantile			Newey–West
	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)
INTERCEPT	−57.011 *** (−4.22)	−58.764 *** (−4.25)	−48.255 *** (−3.54)	−46.321 (−2.94)	−47.653 (−3.19)	−37.101 (1.88)	−62.905 *** (−3.77)	−53.231 *** (−3.42)	−64.689 *** (−3.61)	−57.011 *** (−3.67)	−58.764 *** (−3.75)	−48.255 *** (−2.78)
BSIZE	1.387 *** (3.51)			1.491 ** (2.20)			1.193 ** (2.45)			1.387 ** (2.40)
BINDEP		1.517 *** (2.68)			1.402 *** (4.31)			5.851 * (2.78)			1.517 * (1.95)
BGENDER			4.336 (1.36)			3.995 (1.85)			1.029 (1.40)			5.622 (1.16)
Controls	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year dummy	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Industry dummy	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Sample size	241	241	241	241	241	241	241	241	241	241	241	241
Adjusted R²	0.3461	0.3176	0.2987	0.2074	0.1351	0.1021	0.1290	0.1275	0.1102	0.2349	0.2198	0.2518

NOTE: Estimation findings related to the effect of board composition (board size, BSIZE; board independence, BINDEP; gender diversity on board, BGENDER) (independent variables) on ESG disclosures (dependent variable) using alternative estimation methods (White, Fama–MacBeth, Newey–West, Quantile, and GLM) are demonstrated in this table. For the definitions of variables, please refer to Table 1. * denotes the significance level at 10%. ** denotes the significance level at 5%. *** denotes the significance level at 1%.

and

Table 8. Moderating influence of corporate governance reforms on the association between board composition and ESG disclosure scores using alternative estimation methods.

Variables	GLM			Fama–Macbeth			Quantile			Newey–West
	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)	(9)	(10)	(11)	(12)
INTERCEPT	−49.986 *** (−3.84)	−53.454 *** (−4.01)	−47.508 *** (−3.61)	−44.084 (−2.56)	−42.543 * (−2.31)	−41.313 * (−2.51)	−55.963 *** (−4.07)	−59.853 *** (−4.46)	−52.028 *** (−3.59)	−49.896 *** (−3.13)	−47.508 *** (−2.78)	−53.454 *** (−3.36)
CGR	2.906 ** (2.55)	1.553 ** (2.32)	5.365 *** (3.54)	2.237 (1.24)	5.110 (1.24)	3.550 (1.21)	3.518 (1.57)	1.008 ** (2.19)	1.455 ** (2.19)	2.906 ** (2.23)	5.365 *** (3.20)	1.553 ** (2.05)
BSIZE	0.950 ** (2.15)			1.491 * (2.20)			0.616 (1.32)			0.950 (1.55)
CGR × BSIZE	1.423 * (1.71)			1.438 *** (3.34)			0.770 ** (2.87)			1.423 * (1.8)
BINDEP		1.172 * (1.83)			1.402 *** (4.31)			0.230 ** (2.36)			2.541 *** (3.14)
CGR × BINDEP		1.081 ** (2.20)			1.084 ** (2.34)			1.056 * (1.89)			2.141 * (1.84)
BGENDER			2.541 (1.41)			2.994 (1.87)			2.937 (1.48)			1.172 (1.29)
CGR × BGENDER			2.141 (0.92)			0.733 (1.27)			1.140 (1.03)			1.081 (0.77)
Controls	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year dummy	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Industry dummy	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Sample size	241	241	241	241	241	241	241	241	241	241	241	241
Adjusted R²	0.3626	0.3144	0.3074	0.1474	0.0695	0.0750	0.1740	0.1637	0.1729	0.2632	0.2096	0.2499

NOTE: Estimation findings related to the moderating influence of corporate governance reforms (CGR) on the relationship of board composition (board size, BSIZE; board independence, BINDEP; gender diversity on board, BGENDER) (independent variables) on ESG disclosures (dependent variable) using alternative estimation methods (White, Fama–MacBeth, Newey–West, Quantile, and GLM) are demonstrated in this table. For the definitions of variables, please refer to Table 1. * denotes the significance level at 10%. ** denotes the significance level at 5%. *** denotes the significance level at 1%.

present the findings from other estimation methods. For instance, in Models (1), (2), and (3) we used a generalized linear model (GLM) estimation. We then employed the Fama–Macbeth technique for Models (4), (5), and (6). In Models (7), (8), and (9), we utilized the quantile regression technique. Lastly, the Newey–West (1987) [102] procedure was employed for Models (10), (11), and (12). The reported results in Table 7 show that board size and board independence are positively and significantly related to the ESG disclosure score. There is also still a small but favorable correlation between board gender diversity and a high ESG disclosure score. Additionally, in Table 8 it is presented that corporate governance reforms have a moderating effect on the association between board composition (board size and board independence) and ESG disclosure scores. Thus, our main empirical findings hold up, even when we accounted for the serial dependency and cross-sectional problems.

5. Discussion

The average ESG disclosure score for Saudi listed companies is found to be 21.40 (out of 100) for the period spanning 2015 to 2021. This average indicates that the ESG score for this study period is low, which could be attributable to the fact that ESG disclosure is still voluntary in Saudi Arabia. The emphasis on ESG in Saudi Arabia through the introduction of the updated corporate governance code in 2017 in Articles 86 and 87 is still just a guide and not mandatory. Furthermore, the ESG Disclosure Guidelines of Saudi Exchange were just introduced at the end of 2021, and thus their impact will emerge in the coming years. Our study consequently calls for more effort by responsible authorities through operational and lawful reforms that can raise investors’ confidence in companies that participate in ESG practices.

The results display that board size has a positive and significant relationship with ESG. This evidence is in accordance with the perception that a higher number of board directors results in an increased reporting of ESG practices. This finding is attributed to the capability of a board with many directors to improve the quality and quantity of disclosed financial and non-financial information [35]. The number of directors working on the board is an essential factor toward enhancing the effectiveness of the board. Board size is considered an indicator of its role in observing and counseling, both of which might boost its vision into management performance. That is, increasing the number of the board members will result in an increase in the monitoring capacity of the board. A company with a larger board has an opportunity to contain directors who are more inclined to raise voluntary disclosure and to reinforce the observation of management, leading to more improvement for company legitimacy. The results likewise confirm that increased board size will offer the company an improved pool of proficiency, capitals, financial expertise, and abilities to resolve problems. A larger board of directors will boost the whole performance of the company as it will provide an enhanced monitoring process. By offering different styles in the discussions of the board, board size has the ability to progress the practices of decision making, which comprise the strategies, policies, and decisions about ESG. Thus, more board members may produce new thoughts and provide diverse opinions regarding the decision making, which could ultimately lead to a positive influence on ESG. To this end, a larger board could better contribute to increasing ESG disclosure. In fact, [103] found that the quality of ESG commitment considerably constrains manager misconduct. The results are consistent with the Saudi code of corporate governance that the number of board members should be a minimum of 3 and at most 11. Furthermore, our results concerning the positive association between board size and ESG disclosure give practical support to the resource dependence theory.

The results also indicate that more independent directors on Saudi listed companies lead to more ESG disclosure. The reason behind these results can be that the presence of many independent directors will simplify the communication of the beneficial appearance of the company by enlightening social responsibility, in addition to balancing between the financial aims of the company and its social responsibilities [14]. In particular, members of the board who came from outside the company may have a vital role in enhancing companies to release additional ESG information because they appreciate the social impact of the company. This finding is confirmed by the new Saudi corporate governance code of 2017. In this code, specifically in points 2 and 3 of Article 16, it is indicated that “the majority of the board members shall be of non-executive directors and the number of independent directors shall not be less than two members or one-third of the board members, whichever is greater.” Our results indicate that independent directors can boost financial outcome and address ESG issues. A further reasonable clarification for this finding is that having the presence of independent directors is not only to follow the best practices mentioned in the code of Saudi corporate governance but also to firmly control the activities of management. It is clear that they can exercise their power in terms of ESG as well. That is, as the number of independent directors on the board increases, the commitment of management toward ESG will increase. These results lend empirical support to the argument of agency theory that including more independent directors with additional capability and understanding to the board of directors may improve the performance of the company, including its performance in ESG practices. The independent director will work on decreasing the agency costs and conflicts between stakeholders and the company’s management. Consequently, for companies to disclose their ESG initiatives, issues, and practices, the presence of independent directors on their boards must be guaranteed.

For board gender diversity, the results display that the involvement of females in the boards of Saudi companies has a positive but insignificant influence on their ESG disclosure scores. This result is in line with [18]. A plausible reason behind the result is that the female presence on boards is very small and so women cannot have a strong impact on ESG transparency. In fact, Hill et al., [104] indicated that Saudi Arabia comes last among countries, with only 0.1% of board seats found to be occupied by females. Kramer et al., [105] revealed that if female directors on the board are less than three, this will restrict those females from becoming involved in the board processes. One problem, that is still challenging to overcome and may require some cultural adjustments to be removed, is the perceptions of roles in a male-dominated field. A different justification for the insignificant connection between the existence of females on a board and the ESG disclosure score is that gender diversity, as stated by previous studies, only has a slight outcome until there is a definite number of females on the board, three being the minimum [106,107].

The results related to the moderating influence of corporate governance reforms on the association between board composition (board size, board independence, gender diversity) indicated that the reforms positively and significantly enhance the association between board size and board independence with the ESG disclosure score. However, the moderating impact of these reforms on the connection between gender diversity and ESG disclosure score is positive but insignificant, indicating that the improvements are still in progress. Generally, our study provides evidence for the achievement of the 2017 Saudi corporate governance reforms in boosting more sustainable activities and a higher ESG disclosure. Specifically, for sustainable development and continuing growth, Saudi companies should carry on adopting the regulations of corporate governance. This result thus supports the institutional theory and is in line with those of [22,64,65]. It also affirms that the reforms of board composition reinforce the observing task of the board and authorize investors and stakeholders outside companies to lead modifications in the decision making of companies.

The results show that there have been progresses in the quality of corporate governance in Saudi Arabia in the last five years. To this end, corporate governance reform has a significant payoff. To put it in a different way, well-operative regulations of corporate governance in developing markets, such as the Saudi market, are of critical importance for both local listed companies and foreign investors who are interested in hunting the marvelous investment opportunities that are available in emerging markets. To conclude, our results confirm the constructive role undertaken by a country’s employment of corporate governance reforms in boosting the ESG practices and disclosures of companies.

6. Conclusions, Implications, Limitations, and Future Directions

The management of corporate sustainability activities is a subject of dominant interest to academics, practitioners, regulators, and the public. In our study, we were inspired by the developing literature that explores the association between the structure of corporate governance and ESG scores. Specifically, we were concerned with examining the association between board composition (i.e., size, independence, and gender diversity) and ESG disclosure scores, not as a performance indicator but as a degree of general transparency. Furthermore, we examined the moderating role of corporate governance reforms in enhancing this relationship. Through the frameworks of agency theory, resource dependency theory, and institutional theory, and utilizing the ESG scores from the Bloomberg database for a sample of 38 Saudi companies (241 company-year observations) through the period 2015–2021, our results confirm the important role of board size and board independence in leading ESG activities (and their separate components: environmental, social, and governance) and enhancing the disclosure of ESG information. Specifically, our empirical evidence demonstrates that larger boards and more independent directors could support companies to legitimize their activities by motivating management to disclose ESG information voluntarily. The effect of gender diversity on the board of directors on the disclosure of ESG (and their separate components: environmental, social, and governance) is also found to be positive but insignificant. However, the impact of gender diversity on the individual score of governance is positive and significant. Additionally, the corporate governance reforms positively and significantly moderate the association between board size and board independence with the ESG disclosure score. To ratify the nonexistence of the endogeneity problem in our regressions, we further employed a GMM estimation method utilizing the lagged value of the ESG score (dependent variable) in a dynamic panel framework correlated to the board composition and the ESG disclosure. Interestingly, our reported results by the GMM estimation method obviously show that our initial empirical results continue to be robust after considering the potential issue of endogeneity. Similar results were found when using different estimations, such as White, Fama–MacBeth, Newey–West, Quantile, and GLM.

6.1. Theoretical Implications

This study provides some theoretical implications. It enlarges the prevailing body of literature by adding evidence to enhance the estimation that companies associated with good governance practices (i.e., board size and board independence) are more inclined to disclose ESG practices. Our study also contributes to the rising research on the role of females on boards in sustainability reporting, namely ESG. Studies on the corporate governance–ESG relationship are still limited and the association remains an open empirical question in the Saudi context. Thus, we try to fill this gap. Another theoretical innovation for our study is that it is considered the first to address the moderating role of corporate governance reforms between board composition and ESG disclosure. In particular, it provides a quantitative investigation of how the Saudi Capital Market Authority, as a national organization, supports or confines the ESG disclosure of companies. It examines how the boards of Saudi listed companies and their ESG practices and reporting changed after the 2017 corporate governance regulations were issued. Finally, we built our hypotheses in line with several theories, such as the agency, resource dependence, and institutional theories. The results of board size and board independence provide support to the theories of agency and resource dependence. Our results also provide support to the institutional theory, as it is reported that the reforms of the Saudi Capital Market Authority to corporate governance regulation enhanced the impact of board structure on ESG disclosure.

6.2. Practical Implications

Our study’s results offer crucial practical implications for different parties, including policymakers, management of companies, and investors. Although this study was conducted in a developing country, Saudi Arabia, it could provide implications for developed countries as well. First, for policymakers, the results should help companies be more efficiently involved in ESG practices and reporting. This is so companies can work in line with their national sustainability initiatives and the global recommendations of the United Nations that companies should report their ESG activities by 2030. Clearly, ESG disclosure is more enhanced in developed countries, but more efforts should be continued owing to the importance of ESG for all stakeholders. Given that Saudi Arabia is a developing country, companies should now be involved in sustainability practices based on Saudi Vision 2030, which is focused on sustainability and the ESG disclosure guidelines of the Saudi Stock Exchange. In addition, as our results show that board gender diversity does not have a significant impact on ESG disclosure score or its dimensions (i.e., environmental, social, and governance scores), policymakers may also create or review the policies and regulations to encourage board gender diversity and thus enhance the benefits of sustainable development and ESG practices. Even developed countries may also consider more representation of women on boards to fully satisfy the fifth sustainable development goal of the 2030 Agenda of the United Nations that is related to gender equality.

Policymakers and regulators may likewise recommend the listed companies to create a sub-committee of the board of directors, namely a sustainability committee, to put more effort into sustainability issues besides the efforts of the board of directors. Since the results show that the number of companies disclosing ESG information is still small and the level of disclosed ESG score is small, another implication is that policymakers in developed and developing countries should provide incentive policies and training for companies to encourage better engagement in ESG activities and disclosures. These ESG practices will lead to sustainable and long-term growth for companies, help them during crises (i.e., economic turmoil and pandemics such as COVID-19), and enable them to mitigate issues such as the impacts of climate change, which is one of the main global concerns. Furthermore, for Saudi Arabia, our results provide a robust evaluation for the 2017 reforms of the Saudi code of corporate governance, which could inform the future decisions of the Saudi Capital Market Authority. These also confirm the positive impact of corporate governance reforms that happened and were reported in developed countries.

Second, the managerial implication of our study includes suggestions for companies to enhance the quality of their governance structure to gain more benefits from ESG activities and disclosure. The findings of our study propose that an increase in ESG reporting accompanies an enhancement of board composition. Although developed countries have well-established governance systems, we still observe the scandals of some companies in these countries. That is, there is a need in both developed and developing countries to boost their corporate governance regulations. To increase their level of ESG practices and disclosures, companies may also have in place support, an incentive system, and a sustainability culture to sustain constructive conducts from workforces while following their sustainability policy. Furthermore, our results suggest that companies may assign more females to their board of directors to attain the significant impact on ESG activities and reporting.

Finally, for sound investment decision, investors in developing and developed countries may employ the ESG score and its dimensions to identify companies that give more consideration to ESG matters through the mechanisms of corporate governance. It is actually evident that ESG issues may have impacts on stock market returns and price fluctuations. Nowadays, socially responsible investing, specifically in developed countries, integrates the ESG information to evaluate companies and their stocks. Thus, the use of sustainability indicators by investors may positively affect the management of companies toward adopting and disclosing more ESG practices. For local and foreign investors, our results support the assumption that corporate governance reforms decrease the concerns of investors that insiders might expropriate the outsiders (i.e., investors) as well as represent a significant role in boosting international investing and financing.

6.3. Limitations and Suggestions for Future Studies

This study recognizes some limitations that can lead to opening new opportunities for future studies. To start with, we only analyzed and examined 38 Saudi listed companies that were found to have ESG scores based on the Bloomberg terminal. Thus, future research on ESG can re-examine the companies specifically after the ESG disclosure guidelines were issued by the Saudi Stock Exchange at the end of 2021. These issued guidelines may result in more companies with ESG scores. Furthermore, we conducted our study in the Saudi market context, which may be different in settings and regulations compared with other markets. Accordingly, our findings should be generalized to other markets with caution. This limitation also opens new room for future studies to compare the Saudi context results with those from international markets, given variances in the markets, cultures, and lawful schemes. Last but not least, despite confirming that corporate governance reforms moderate the association between board composition and ESG disclosure scores, our study leaves uncertain which laws or regulations of corporate governance contributed more in determining such a moderating role. As a result, future works may deal with this issue by exploring the moderating impact of some specific variables of corporate governance reforms.