Corporate Sustainability, Sustainable Governance, and Firm Value Efficiency: Evidence from Saudi Listed Companies

Abstract

This study aims to explore the synergy between corporate sustainability and corporate sustainable governance and its effect on a listed firm’s value efficiency. This research studies the interaction of these two critical dimensions of modern business, highlighting their combined effects on the value of the firm. We analyze the effects of corporate sustainability and the interactions of sustainability proxy and corporate governance practices on the value of 45 Saudi listed companies measured by Tobin’s Q during the period 2014–2022 using the True Fixed Effect model. Our results reveal that the average firm value efficiency of listed Saudi firms over a 10-year period is 87%. Our findings reveal that the interaction of corporate sustainability proxy and size of the board, number of board meetings, and board independence improve corporate value efficiency, while the interaction between corporate sustainability and ownership concentration has a negative impact on corporate value efficiency. Our research results indicate that sustainability initiatives can yield favorable effects on a firm’s value efficiency.

1. Introduction

Environmental concerns are escalating rapidly, prompting organizations to prioritize the reduction of carbon emissions. The concept of corporate sustainability (CS), encompassing economic, environmental, and social considerations, has emerged as a pivotal determinant of long-term success [1]. Simultaneously, corporate governance (CG), the system of rules and practices which guide the decision-making and operation of the company, has gained prominence as a safeguard for investor trust and corporate accountability.

The importance of CS and CG cannot be overstated, as they have become intrinsically linked to a company’s ability to create and maintain value. This research article explores the intricate interplay between these two essential facets of modern corporate strategy and their collective impact on firm value. By delving into the compelling dynamics that emerge when sustainability practices and governance mechanisms converge, we aim to highlight the compelling motivations for organizations to prioritize and integrate these principles into their business models.

Historically, the pursuit of short-term financial gains often overshadowed considerations of the broader social and environmental impacts of business activities. However, this approach has proved unsustainable, as corporations now face mounting pressures to address a wide array of global challenges, including climate change, social inequality, and resource scarcity. Consequently, the corporate landscape is evolving, with sustainability principles guiding strategic decision-making, supply chain management, product innovation, and stakeholder engagement.

Given that CG stands are a key sustainability mechanism for organizations [1], researchers contend that bolstering CG mechanisms is one strategy toward meeting decarbonization goals. Consequently, the interconnection among CG, CS, and financial efficiency is gaining prominence. Yet, despite the widely recognized significance of CG in enhancing environmental sustainability practices, a review of existing literature regarding the link between CG, environmental sustainability, and financial efficiency unveils certain gaps. Few studies delve into the effect of CG and CS on financial efficiency [1,2,3]. Recent research has focused on the relation between CG and carbon emission disclosure (e.g., [1,4,5]) or on the impact of CG mechanisms on CS performance or the reduction of carbon emissions (e.g., [1,6] ). In fact, CS and financial efficiency represent critical and delicate topics within the CG discourse, warranting further research attention.

While CG traditionally centers on mitigating the agency problem, which involves balancing the interests of managers and shareholders, CS extends its focus to a broader spectrum of stakeholders beyond just shareholders. Furthermore, Sacconi et al. [7] suggests that selecting the optimal CG structure can be viewed as a highly effective means of promoting sustainability across all stakeholder groups. Additionally, various scholars have affirmed the substantial influence of CG on social and environmental dimensions [8]. Consequently, recent empirical research endeavors have sought to establish connections between a firm’s sustainability strategies and its performance, considering the CG framework [9].

The rationale for selecting Saudi Arabia as the focus of this study lies in its status as the largest economy in the Middle East and the most affluent Arab nation. In 2022, Saudi GDP attained 769.63 billion US dollars, as reported by the General Authority for Statistics. The country’s adoption of extensive public infrastructure projects, along with substantial foreign direct investment and a robust banking and financial system, has positioned it as a regional economic powerhouse and a major player on the global stage. Additionally, the Saudi Council of Economic and Development Affairs has implemented 13 “Realization Programs” as part of the Saudi Vision 2030 initiative launched in 2016, focusing on promoting domestic companies and enhancing the financial sector.

This study develops a model that delves into the dynamic interaction between CS and firm value efficiency, with CG characteristics serving as pivotal moderating factors. This research yields noteworthy contributions by shedding light on how the correlation between CS and a corporate’s value efficiency hinges on the compatibility between CS and the existing CG practices. Consequently, it underscores the imperative of scrutinizing the impact of CS on a corporate’s value efficiency within the intricate context of CG. As a result, it assists in pinpointing the specific conditions within CG where CS has the potential to enhance value efficiency. Building on the insights developed by Grewatsch and Kleindienst [10], we advocate for the utilization of the moderator approach to meticulously evaluate the relationship and strength of the link between Corporate Social Responsibility and financial efficiency. Within this framework, we employ two distinct categories of CG factors as plausible determinants: those associated with board characteristics (such as board size, the presence of independent directors, and board meetings) and factors related to ownership structure (including CEO ownership and insider ownership). Our rationale for choosing these specific CG indicators stems from their well-documented influence on a firm’s decision-making.

2. Literature Review

2.1. Sustainable Governance

In general, several theories have emerged to explore the nexus between sustainable governance and financial efficiency or firm value. While no single comprehensive theory exists, scholars argue that integrating agency theory, stakeholder theory, legitimacy theory, and critical mass theory offers insights into sustainable governance [1,3,11]. Previous research, e.g., [1,6], suggests a coherence among these theories. Stakeholder theory and legitimacy theory can be viewed as interconnected in exploring the relation among CG, CS, and corporate value. Environmental sustainability, in this context, serves as a governance policy to showcase clarity to stakeholders and obtain credibility [1].

Current CG regulations often prioritize short-term goals, leading to a disconnect with CS efforts [12]. While CG is vital for supporting sustainability initiatives [13], traditional governance methods have limitations [14]. Research shows that typical governance factors like board diversity or independence do not necessarily promote the integration of sustainability issues [15]. To address this, there is a call to integrate sustainability goals, risks, and opportunities into CG frameworks [16]. Moreover, Miloud [17] investigates the determinants of sustainability disclosures, particularly focusing on the CG impact on compliance with Global Reporting Initiative (GRI) standards. Analyzing data from the French SBF 120 index spanning 2006–2017, the findings indicate that firms with strong governance practices are more inclined to adhere to GRI standards in their sustainability reporting, rendering the latter more informative. Additionally, the research indicates that the influence of CG depends on the size of the company and its leverage, suggesting implications for capital allocation toward sustainable enterprises in financial markets.

2.2. Hypothesis Development

Sustainable governance encompasses policies designed to safeguard the environment by regulating a company’s operations through resource provisioning and monitoring mechanisms. Researchers, such as Nguyen et al. [18], have explored its role in business management, with notable emphasis on theories like the resource-based view and agency theory, which are closely linked to these governance functions.

The resource-based view emphasizes a company’s need for distinct capabilities to succeed, while the natural-resource-based view underscores the importance of proactive environmental strategies for success [19,20]. Albertini [21] supports this, highlighting sustainability efforts as key for financial gains. Climate governance aligns with this view [22], providing resources for environmental awareness and strategic capabilities to address climate change [2,23]. Additionally, climate governance itself becomes a valuable resource for companies to tackle climate challenges [2].

Okafor et al. [24] demonstrate that implementing CG structures promoting sustainability enhances financial performance and firm value. Similarly, effective carbon management positively impacts financial metrics like Tobin’s Q, and higher environmental orientation enhances company business productivity and earnings growth [25]. Strategies to reduce CO₂ emissions influence Tobin’s Q, and a company’s environmental orientation correlates with better financial performance and firm.

While previous empirical research has shown ambiguity in the connection between CS and the efficiency of firm value [26,27], several research works have confirmed a positive link between climate performance and both market-based and accounting-based indicators [11,17,28,29], as well as financial efficiency [29,30]. Wu et al. [11] explores the role of CG in moderating the association between ESG controversies and company valuation, focusing on 883 non-financial Chinese publicly traded companies from 2018 to 2022. The study uncovers a notable negative influence of ESG issues on the value of a company, which is mitigated by the application of strong CG practices. Internal factors such as board diversity and external factors like regional competition intensity play roles in shaping this relationship. These findings emphasize the importance of strong governance in managing corporate controversies for firms and policymakers. Sustainable companies not only enjoy the aforementioned benefits, but also receive recognition from the financial sphere. Consequently, adopting sustainable governance practices could amplify the impact of CS on firms’ value efficiency.

From the previous discussion, our first main hypothesis is:

H1. 

Corporate sustainability positively affects a corporate value efficiency.

From this main hypothesis, we can derive the following sub-hypotheses:

H.1.1. 

Corporate sustainability policy is positively related to corporate value efficiency.

H.1.2. 

Corporate environmental policy is positively related to corporate value efficiency.

H.1.3. 

Corporate sustainability budget is positively related to corporate value efficiency.

H.1.4. 

Corporate sustainability committee is positively related to corporate value efficiency.

According to the agency theory proposed by Jensen and Meckling [31], a conflict of interest arises between the shareholders and the management. This conflict, known as the agency problem, arises when shareholders, who own the company, are separated from management, which may manage the company in its own interests rather than those of the shareholders [26,28,32]. Shareholders are often uncertain whether management has acted in their best interests [33]. Addressing agency problems necessitates effective CG. The board of directors (BoD) is pivotal in safeguarding shareholders’ interests [26,34,35,36]. A strong BoD presence can enhance firm value, reduce agency costs, and consequently improve company performance [26,34,36]. Thus, the agency theory emphasizes the key role of the BoD in employing good CG to enhance CS.

The literature also indicates that achieving CS involves fostering communication between CEO ownership and insider ownership [37]. This entails various processes and strategies aimed at enhancing owner participation, cooperation, consultation, information exchange, and knowledge acquisition [38]. Some research suggests that ownership structure can have a positive influence on the sustainability policy development [38] and enhance environmental performance [39].

Sustainability has now emerged as a critical component of company responsibility, leading to improved regulatory guidance [40]. Several organizations are currently collaborating to create consistent guidelines for reporting sustainability, including the Task Force on Climate-Related Financial Disclosure (TCFD) at the Financial Stability Board, the International Sustainability Standards Board (ISSB), and the European Financial Reporting Advisory Group (EFRAG). Research suggests that the reporting of sustainability data motivates managers to tackle social and environmental issues, integrating environmental, social, and governance considerations into decision-making and promoting the generation of environmental value [41,42]. Nevertheless, other studies indicate that sustainability reporting, although more descriptive than financial reporting, might have restricted organizational influence if it is exclusively employed for legitimization reasons [43].

In contemporary corporate landscapes, the nexus among CG, sustainability, and long-term value creation has become increasingly intricate and pivotal. As businesses navigate complex global challenges and stakeholder expectations, understanding the synergies and tensions between these domains is paramount. Before delving into the hypotheses, it is essential to underscore the multifaceted nature of CG, encompassing not only the traditional roles of the boards of directors but also executive compensation structures, shareholder activism, and regulatory frameworks. Moreover, the evolving role of sustainability as a critical driver of corporate accountability and competitiveness necessitates a nuanced examination of its integration into business strategies and reporting frameworks. Against this backdrop, hypotheses emerge as guiding principles to explore the intricate relationships among CG mechanisms, sustainability initiatives, and their impact on firm performance. By elucidating these hypotheses, we aim to shed light on the pathways through which CG practices and sustainability efforts intersect to shape organizational outcomes and long-term value creation.

From the earlier discussion, the second main hypothesis is:

H2. 

Sustainable governance has a positive effect on firm value efficiency.

From this main hypothesis, we can derive the following sub-hypotheses:

H.2.1. 

The interaction between board size and corporate sustainability positively affects corporate value efficiency.

H.2.2. 

The interaction between board independence and corporate sustainability positively affects corporate value efficiency.

H.2.3. 

The interaction between CEO ownership and corporate sustainability positively affects corporate value efficiency.

H.2.4. 

The interaction between insider ownership and corporate sustainability positively affects corporate value efficiency.

H.2.5. 

The interaction between board meeting and corporate sustainability positively affects corporate value efficiency.

3. Methodology

3.1. Firm’s Value

The valuation of a company hinges on the meticulous assessment of the present value of the cash flow derived from its assets, constituting both its current asset base and prospective growth avenues. Central to this evaluation is the scrutiny of the company’s market capitalization, a metric that amalgamates the market valuation of its debt and equity. A complementary measure, Tobin’s Q, offers insights into the company’s operational efficacy by juxtaposing the aggregate market worth of its debt and equity against the replacement cost of its existing assets. When a company strategically operates and invests in assets poised to yield substantial returns, its Q ratio typically surpasses the benchmark of 1, indicating an efficient utilization of resources to generate value. Nonetheless, a nuanced consideration arises regarding the equilibrium between investment and returns, as evidenced by the stipulation that the marginal q, denoting the productivity of the company’s least efficient asset, remains 1. This principle underscores the imperative of optimizing resource allocation to enhance overall company value. Essentially, the ascendancy of a company’s value is echoed through the elevation of its Q ratio, delineating its prowess in generating value through astute asset management and strategic investment decisions.

The inquiry regarding whether a manager effectively maximizes a corporate’s value can be reformulated in the following manner: does the firm trade at its highest possible Q ratio when all operating and investment choices are optimized? This optimal indicator, referred to as Q*, should possess two desirable attributes. Firstly, it should maintain consistency with a firm’s opportunity set and characteristics to ensure a fair and meaningful measurement of corporate value. Secondly, it should be stochastic, allowing for estimation errors and preventing the benchmark from being influenced by outliers.

By exploring different opportunity sets and corporate characteristics, we can construct a curve that represents the highest observed Q ratio within a given sample, considering various combinations of these factors denoted as X. This curve, referred to as the frontier function, serves as an estimation, denoted as Q* = f(X), accounting for variations in X among different firms. Companies whose actual Q ratio falls below the frontier curve fail to attain the potential valuation they could achieve if they performed as well as the frontier corporate with whom they share similar X characteristics. The difference between the frontier curve and the actual Q ratio, Q* − Q, serves as a measure of inefficiency of a firms’ value.

3.2. True Fixed Effect Model

In this study, the stochastic approach is utilized to assess the effectiveness of firm valuation and assess the impact of CS and CG on corporate value efficiency based on the True Fixed Effect model (TFE) by Greene’s [44,45,46,47].

$$Q_{it}={ \alpha }_i+{\beta x}_{it}+{\epsilon }_{it} , i=1, 2, \dots , N , t=1, 2, \dots , T$$

(1)

$${\epsilon }_{it}=v_{it}-u_{it}$$

$$v_{it} ~N(0, {\sigma }_v^2)$$

$$u_{it} ~N^{+}(0, {\sigma }_u^2)$$

where $Q_{it}$ indicates the Tobin’s Q of the firm i in the period t, $x_{it}$ specifies the combination of opportunity sets and firm characteristics of firm I for period t, β specifies the estimated coefficients, and ${\epsilon }_{it}$ stands for the error component, which, in turn, consists of two components, i.e., $v_{it}$ and $u_i$, with $v_{it}$ denoting the random error and $u_i$ standing for the error associated with the inefficiency [48].

In this model, ${x^{\mathrm{\prime }}}_{it}$, $v_{it}$, and $u_{it}$ are independent. The component $u_{it}$ shows the variability of the inefficiency score among firms and over time, while ${\alpha }_i$ shows the incorporation of variability among multiple firms in the model.

The aim of this study is to evaluate not just the efficiency of the value of publicly listed Saudi firms, but also to analyze how corporate social responsibility (CS) and CG impact the efficiency of these firms’ value. For this purpose, we employ models suggested by Wang and Ho [49], Sun et al. [50], Jarboui [51], and Jarboui and Alofaysan [30]. This model is presented as follows:

$$Q_{it}={ \alpha }_i+{\beta x^{\prime }}_{it}+{\epsilon }_{it} , i=1, 2, \dots , N , t=1, 2, \dots , T$$

(2)

$${\epsilon }_{it}=v_{it}-u_{it}$$

$$v_{it} ~N(0, {\sigma }_v^2)$$

$$u_{it}={ h}_{it} \times {u^{\ast }}_i$$

$$h_{it}={f(\delta z}_{it})$$

$${u^{\ast }}_i ~N^{+}(\mathrm{\mu }, {\sigma }_u^2)$$

3.3. The Empirical Model

For an accurate estimation of the model, it is important to establish a definitive stance on the selection of X variables that serve as a determinant for the border’s location, as well as Z variables that elucidate deviations from the border. Our choice of X variables is informed by the empirical research conducted by Habib and Ljungqvist [52] and Ben Mohammed and Jarboui [32]. Additionally, the inclusion of Z variables involves two distinct categories: variables related to company sustainability and those associated with CG. Therefore, the empirical model used in this research is presented as follows:

$$\begin{gathered} Q_{it}={\beta }_o+{\beta }_1\mathit{ln}({sales}_{it})+{\beta }_2 {\mathit{ln} \left({sales}_{it}\right)}^2+{\beta }_{3 }\raisebox{1ex}{${CAPEX}_{it}$}\!\left/ \!\raisebox{-1ex}{$K_{it}$}\right.+{\beta }_4 \raisebox{1ex}{$k_{it}$}\!\left/ \!\raisebox{-1ex}{${sales}_{it}$}\right.+{\beta }_5 {OperMarg}_{it}+{\beta }_6 {LEV}_{it} \\ +v_{it}-f({\delta z}_{it}) {u^{\ast }}_i , \end{gathered}$$

(3)

$$i=1, 2, \dots , N, t=1, 2, \dots , T$$

$Q_{it}$ is specified as the market-to-book ratio and it represents the actual observed Q. The component ${\mathit{ln}(sales}_{it})$ stands for the natural logarithm of incomes, $\raisebox{1ex}{${CAPEX}_{it}$}\!\left/ \!\raisebox{-1ex}{$K_{it}$}\right.$ is the ratio of capital expenditures (spending on capital formation) to the long-term tangible assets (K), while ($\raisebox{1ex}{$k_{it}$}\!\left/ \!\raisebox{-1ex}{${sales}_{it}$}\right.$) stands for the ratio of tangible long-term assets to sales. OperMarg represents the ratio of operating income before depreciation to sales, whereas leverage (LEV) stands for the ratio of total debt to total assets. The component $z_{it}$ stands for the components describing the inefficiency, ${\alpha }_i$, β, and δ are the coefficients of the estimation, and $v_{it}$ is the random error. Two models have been developed to model inefficiency. One is the corporate sustainability model:

$$\begin{gathered} {{h_{it}={{\delta }_1{\left(Corp.Sust.\right)}_{it}+\delta }_2{\left(Sust.pol.\right)}_{it}+\delta }_3{\left(Env.pol. \right)}_{it}+\delta }_4{(Sust.bud.)}_{it}+{\delta }_5{(Sust.com.)}_{it} \\ +{\delta }_{6 }{\left(COVID\right)}_t+{\delta }_7{\left(Year\right)}_t \end{gathered}$$

(4)

The corporate sustainability variable (Corp.Sust.) is an aggregate measure derived from [15], ranging from 0 to 4. It reflects several factors, including whether the company has implemented a sustainability policy (Sust.pol.) (dummy variable), an environmental policy (Env.pol.) (dummy variable), established a sustainability committee (sust.com.) (dummy variable), and allocated a budget for sustainability initiatives (sust.bud.) (dummy variable). In order to reduce potential biases in our results, we incorporated a set of control variables reflecting the effects of time (year) and the substantial impact of the COVID-19 pandemic in 2020 (“COVID”). Specifically, the “year” variable accounted for temporal trends that could influence the outcomes independently of the primary variables of interest, while the “COVID” variable captured any unique effects attributable to the pandemic period, ensuring that our analysis accurately isolated the impacts of other factors. By including these controls, we aimed to enhance the robustness and validity of our findings. The second model to predict inefficiency is the sustainable governance model:

$$\begin{array}{ll}{h}_{it}={\delta }_1(B.size& \ast Corp.Sust.{)}_{it}+{\delta }_2{(B.indep. \ast Corp.Sust.)}_{it}+{\delta }_3{(CEO owner. \ast Corp.Sust.)}_{it}\\ & +{\delta }_4{(Insider owner. \ast Corp.Sust.)}_{it}+{\delta }_5{(B.meeting \ast Corp.Sust.)}_{it}+{\delta }_{6 }{\left(COVID\right)}_t\hfill \\ & +{\delta }_7{\left(Year\right)}_t\hfill \end{array}$$

(5)

3.4. Data and Variables

Our data consisted of 45 Saudi industrial companies in the materials sector and were traded in the stock market on the SSE. We used the Tadawul website of the Saudi Stock Exchange (SSE) as well as the financial and other reports published on the companies’ websites. The database provided by Tadawul, especially the BoD reports, provides a detailed description of everything related to CG and sustainability variables (Model 3 and 5).

Table 1. Descriptive statistics.

	Mean	Std. Dev.	Minimum	Maximum
Firm value model
Tobin’s Q	1.894	1.192	0.214	12.245
Net sales (SAR millions)	38,670.318	125,925.603	0	701,612.727
CAPEX/K	0.326	0.214	0	1.104
K/sales	0.713	0.120	0	75.624
Operating margin	0.122	0.346	−0.986	3.281
Leverage	18.73	16.254	0	99.86
Inefficiency firm value variables
Sustainability policy	0.632	0.487	0	1
Environmental policy	0.491	0.504	0	1
Sustainability budget	0.438	0.501	0	1
Sustainability committee	3.952	1.677	0	5
Corporate sustainability	4.165	1.023	0	6
Board size	8.159	1.677	4	12
Independent board member	3.898	1.535	2	7
CEO ownership	0.478	0.503	0	1
Insider ownership	0.739	0.442	0	1
Board meeting	5.015	1.289	2	10

provides a comprehensive descriptive analysis of our variables. It presents the means and distributional information for the variables under consideration. Tobin’s Q had a mean value of 1.894. The sample firms were characterized by their large scale, with an average sales figure of 38,670.318 million SAR. “CAPEX/K” was found to be 32.6% in the sample. It is noteworthy that the mean operating margin of 14.5% provided a more informative measure than the raw figure, as it accounts for the influence of the 8% of company–years. Our findings indicate that the sample firms exhibited a high degree of capital intensity, as reflected by an average K/sales ratio of 0.713. This means that they utilized 0.713 SAR of tangible capital to generate 1 SAR of sales. Moreover, the average company demonstrated a leverage ratio of 19%, ranging from 0% to 99.86%.

The lower half of Table 1 presents descriptive statistics of the variables related to inefficiency firm value. This research sought to explore the impact of CG variables and CS variables on the efficiency of corporate value. It was observed that more than half of the sample firms implemented sustainability policies, as evidenced by the mean value of the sustainability policies application variable, which was 0.632. Additionally, approximately half of the sample firms adopted environmental policies, with a mean value of 0.491. Furthermore, half of the sample firms had a budget specifically allocated for sustainability, with a mean value of 0.438. The sustainable development committee variable refers to the number of sustainable development committee members established by the company, which ranged from zero to five in our sample. Regarding CG variables, our analysis revealed that the mean board size was 8.16, ranging from four to 12. Moreover, the mean number of board independent directors was 3.89, with a minimum of two and a maximum of seven. The average CEO ownership was 0.478, while the average insider ownership stood at 0.739. It is worth noting that CEO ownership exhibited a dependence on firm size, with an average of 6.8% in the smallest quartile and 1.1% in the largest quartile, although these specific results are not presented in this analysis.

4. Results

4.1. TFE Model Results

Using the 45 Saudi industrial companies’ data during 2014–2022, this research developed the TFE model to assess the corporate value efficiencies with reference to Equation (3). All the frontier variables, presented in the upper half of

Table 2. Estimation results of inefficiency firm value effect using the TFE model.

Variables	Parameter	Corp. Sustainability Model	Sustainable Governance Model	Combined Model
		Model 1	Model 2	Model 3
Constant	${\beta }_0$	0.012	0.016	0.018
		(1.161)	(1.184)	(0.862)
$\mathit{ln}{sales}_{it}$	${\beta }_1$	1.482	1.581	1.644
		(4.013) ***	(3.142) ***	(3.011) ***
$\mathit{ln}{(sales}_{it}$)2	${\beta }_2$	−0.032	−0.027	−0.062
		(−1.255)	(−1.591)	(−1.117)
${CAPEX}_{it}/K_{it}$	${\beta }_3$	0.085	0.395	0.045
		(2.567) ***	(2.791) ***	(2.537) ***
$K_{it}/{sales}_{it}$	${\beta }_4$	−0.0727	−0.148	−0.556
		(−2.698) ***	(−2.475) ***	(−3.255) ***
${OperMarg}_{it}$	${\beta }_5$	0.108	0.017	0.025
		(1.721) *	(2.332) **	(0.711)
${LEV}_{it}$	${\beta }_6$	−0.019	−0.012	−0.012
		(−1.814) *	(−2.116) **	(−0.614)
Corporate sustainability	${\delta }_1$	−0.489	-	−0.161
		(−3.115) ***	-	(−2.103) **
Sustainability policy  $\left(z_{1it}\right)$	${\delta }_2$	−0.198	-	−0.107
		(−2.112) **	-	(−2.323) **
Environmental policy $\left(z_{2it}\right)$	${\delta }_3$	−0.901	-	−0.485
		(−2.838) ***	-	(−3.241) ***
Sustainability budget $\left(z_{3it}\right)$	${\delta }_4$	−0.078	-	−0.056
		(−2.025) **	-	(−2.751) ***
Sustainability committee $\left(z_{4it}\right)$	${\delta }_5$	−0.015	-	−0.054
		(−2.982) ***	-	(−3.622) ***
B. size * Corp. Sust. ${(z}_{5it})$	${\delta }_6$	-	−0.078	−0.052
		-	(−2.901) ***	(2.122) **
B. indep. * Corp. Sust. ${(z}_{6it})$	${\delta }_7$	-	−0.307	−0.397
		-	(−3.455) ***	(2.652) ***
CEO owner * Corp. Sust. ${(z}_{7it})$	${\delta }_8$	-	0.187	0.053
		-	(2.651) ***	(1.809) **
Insider owner. * Corp. Sust. $\left(z_{8it}\right)$	${\delta }_9$	-	0.085	0.053
		-	(2.620) ***	(2.552) ***
B. meeting * Corp. Sust. $\left(z_{9it}\right)$	${\delta }_{10}$	-	−0.048	−0.036
		-	(−1.870) **	(−2.102) **
COVID $\left(z_{10t}\right)$	${\delta }_{11}$	0.015	0.019	0.016
		(2.608) ***	(2.412) ***	(2.381) ***
	${\sigma }_u$	0.122	0.119	0.127
		(4.726) ***	(3.523) ***	(3.312) ***
	${\sigma }_v$	0.133	0.134	0.127
		(4.617) ***	(3.521) ***	(3.354) ***
	$\lambda$	1.081	1.057	1.018
		(3.586) ***	(3.092) ***	(3.322) ***
Year effects		Yes	Yes	Yes
Sargan Test (p)		0.621	4.214	3.010
		(0.443)	(0.361)	(0.371)
Hansen Test (p)		2.715	3.340	1.178
		(0.320)	(0.635)	(0.434)
AR1(p)		−3.385	−3.768	−3.656
		(0.000)	(0.000)	(0.000)
AR2(p)		−1.973	−2.095	−1.725
		(0.167)	(0.146)	(0.174)
log likelihood		54.253	58.737	62.727

*, **, and *** significant at the 10%, 5% and 1% levels, respectively.

, exhibited the expected directional signs. The estimated results reveal that constant coefficients were not significant under every estimated models. The maximum attainable Tobin’s Q showed a significant increase with log sales, while it demonstrated a gradual decrease with the square of log sales, indicating the presence of a turning point beyond the range of sales values captured in our dataset. A similar U-shaped pattern was observed in the relationship between Tobin’s Q and tangible capital intensity (K/sales), indicating the existence of a turning point as well. The value of Q was found to decrease significantly with leverage, indicating that higher levels of debt were related with a decrease in corporate value. This negative leverage effect was a proxy for a positive relationship between the unobservable components of tangible assets and Tobin’s Q, highlighting the relatively secondary importance of debt tax shields. This finding aligns with previous studies by Habib and Ljungqvist [52]. Additionally, our results indicate that the Tobin’s Q value increased with expenditures on capital formation and operating margins (Y/sales). Our findings highlight that the COVID-19 pandemic had a detrimental impact on the efficiency of corporate value. As companies faced unprecedented challenges, many struggled to maintain their operational efficiencies and profitability, leading to a notable decline in overall firm value.

The rationale for using the TFE model was as follows. First, due to the small sample size, the issue of random parameter would not skew the estimation results. Second, the TFE model performed very well in this research. Third, to check the robustness of the estimated findings, stability tests could be applied.

Like Sun et al. [50], we included cross terms and the time square with time in model 1 to assess the stability of the results and the influence of the time variable. Our results validate that Model 1 remained unchanged by the time variable, affirming the accuracy of the efficiency score estimation.

We conducted different tests to validate the results found in this study (see Table 2). First, we assessed multicollinearity through the calculation of variance inflation factors (VIFs), as reported by Ott and Longnecker [53]. In addition, we treated heteroskedasticity by referring to White [54]. In addition, we performed endogeneity tests, using the Durbin–Wu–Hausman test, that indicated the absence of endogeneity problems in our model, and the Sargan test [55] to check the specifications of our model. In addition, we performed AR1 and AR2 tests for serial autocorrelation, as suggested by Arellano and Bond [56], which revealed no evidence of model misspecification.

4.2. Inefficiencies: Modelling Results

To explore the effects of CS and CG on the efficiency of value in Saudi industrial companies, this study incorporated a comprehensive set of factors and variables that elucidate sustainability and governance within the analysis. These variables are presented in the lower part of Table 1, labelled as “Inefficiency firm value variables.” They are introduced as influential factors that contribute to the efficiency of corporate value, drawing upon the model of Wang and Ho [49] as outlined in Equations (4) and (5). The estimation results of the model developed by Wang and Ho [49] are stated in Table 2.

Model 1 in Table 2 shows the estimation results of Equation (4) in order to verify hypothesis H1. Hypothesis H1 affirms that corporate sustainability positively affects corporate’s value efficiency. The findings found that the coefficient of the constructed sustainability proxy was negative and significant at the 1% level. This means that the first general hypothesis is verified. In this context, the findings indicate that the coefficient of the sustainability policy variable was negative and statistically significant at the 5% level, suggesting that a limited number of companies implemented sustainability policies. Hence, the adoption of sustainability policies contributes to the enhancement of the efficiency of the company’s value. H1.1 is thus supported. Additionally, the findings found that the coefficient of the environmental policy variable had a significant negative effect on the inefficiency term of firm value frontier. Consequently, the adoption of environmental policies contributes to the enhancement of the efficiency of the company’s value. H1.2 is thus confirmed. In addition, the coefficient of the sustainability budget revealed a negative and statistically significant value at the 1% level, suggesting that only a limited number of companies allocated a budget specifically for sustainability initiatives. Therefore, the act of allocating a budget for sustainability contributes to the enhancement of the efficiency of the company’s value; H1.3 is, thus, confirmed.

To investigate the effect of sustainable CG on the efficiency of firm value, this study incorporated a comprehensive set of CG variables multiplied by the CS proxies as presented in Equation (5). Model 2 of Table 2 shows the estimation results of Equation (5) in order to verify the hypothesis H2 and its sub-hypotheses. H2 affirms that sustainable governance positively affects the corporate value efficiency. In this framework, H2.1 affirms that the interaction B.size * Corp.Sust positively affects corporate value efficiency. The results show that the coefficient of the interaction B.size * Corp.Sust was negative and statistically significant (coefficient: −0.059; p-value < 0.1), indicating that this interaction negatively affected corporate value inefficiency. These findings confirm hypothesis H2.1, which affirms that the effect of CS on corporate value efficiency is strengthened by board size. Moreover, H2.2 states that the interaction B.indep.* Corp.Sust positively affects corporate value efficiency. The findings show that the coefficient of the interaction B.indep.* Corp.Sust was negative and statistically significant (coefficient: −0.241; p-value < 0.1), indicating that this interaction significantly and positively affected corporate value efficiency. These findings confirm hypothesis H2.2, which affirms that the impact of CS on corporate value efficiency is strengthened by board independence. Regarding H2.3, the hypothesis maintains that the interaction CEO owner.* Corp.Sust positively affects corporate value efficiency. The findings show that the coefficient of the interaction CEO owner.* Corp.Sust was positive and statistically significant (coefficient: 0.176; p-value < 0.1), indicating that this interaction significantly and negatively affected corporate value efficiency. These findings disprove hypothesis H2.3, which states that the CS effect on corporate value efficiency is strengthened by CEO ownership, as the results show the contrary. Thus, the effect of CS on corporate value efficiency was found to decrease with CEO ownership. With regard to hypothesis H2.4, which states that the interaction Insider owner.* Corp.Sust positively affects corporate value efficiency, the results show that the coefficient of the interaction Insider owner.* Corp.Sust was positive and significant (coefficient: 0.085; p-value < 0.1), indicating that this interaction negatively affected corporate value efficiency. These results disprove hypothesis H2.4, which affirms that the effect of CS on corporate value efficiency is strengthened by insider ownership, as the results show the contrary. Thus, the effect of CS on firm value efficiency was found to decrease with insider ownership.

In relation to hypothesis H2.5, which states that the interaction B.meeting* Corp.Sust positively affects corporate value efficiency, the findings indicate that the coefficient of the interaction B.meeting* Corp.Sust was positive and significant (coefficient: 0.085; p-value < 0.1), indicating that this interaction negatively affected corporate value efficiency. These findings confirm hypothesis H2.5, which affirms that the effect of CS on corporate value efficiency is strengthened by frequent board meetings.

Model 3 of Table 2 presents the results derived from solving Equations (4) and (5) to measure the robustness of the findings obtained from models 1 and 2, corresponding to hypotheses H1 and H2 simultaneously. Analyzing the effect of CS and sustainable governance on corporate value efficiency using the two sets of variables ensured the robustness of the results. Consequently, all coefficients, except for board size, exhibited statistical significance. These results align with those attained in models 1 and 2 of Table 2, affirming the effect of CS and sustainable CG on corporate value efficiency. Consequently, it is evident that sustainability initiatives can yield favorable effects on a firm’s efficiency and, consequently, its overall value. Moreover, the results of Equations (4) and (5) are both presented in Table 2, with and without the incorporation of various interactions proposed in hypotheses H1 and H2, to demonstrate the absence of multicollinearity issues that may arise from the inclusion of uncentered variables.

Furthermore, our analysis reveals that ownership concentration acts as a negative moderator in the synergy of SC and corporate value efficiency. This observation reflects the fact that, when ownership concentration increases, it tends to exacerbate information asymmetries, leading managers and major shareholders to engage in CS practices mainly for opportunistic reasons which serve their personal interests [11,17,57]. Unfortunately, this opportunistic behavior has a negative impact on corporate value efficiency.

Consequently, it is crucial for policymakers to recognize that a specific ownership concentration structure is essential to foster CS strategies, which, in turn, can lead to enhancements in corporate value efficiency [17]. This underscores the need for thoughtful governance measures to promote the alignment of sustainability practices with long-term value creation, ultimately benefiting all stakeholders involved.

Regarding the BoD, it is certain that board independence can have a positive impact on the efficiency of a firm’s value. When a company’s BoD is composed of independent members who are not involved in the company’s daily operations, several benefits arise that contribute to improved firm value efficiency. Independent directors bring an objective viewpoint to the boardroom. They are better positioned to offer unbiased oversight of the company’s management and strategic decisions. This oversight promotes accountability, minimizing the potential for conflicts of interest and guaranteeing that management operates in the shareholders’ best interests. Independent boards help alleviate agency costs stemming from the division of ownership and control. Independent directors act as intermediaries between shareholders and management, aligning management’s actions with shareholders’ interests and reducing potential conflicts. A board with many independent directors instils confidence in investors. It signals that the company is committed to transparency, ethical behavior, and shareholders’ interests and ensures the company’s compliance with sustainability standards and policy. This increased investor confidence can positively influence the company’s stock price and overall firm value.

4.3. Firm Value Efficiency Scores

Figure 1 presents the trend of firm value efficiency scores of listed Saudi companies estimated by the TFE model. For a certain level of input in the Tobin’s Q model, the value of the companies decreased due to operational inefficiency, resulting in a decrease in the efficiency of the firms’ value. The overall average efficiency of the listed Saudi companies value during the period 2014–2022 measured by the TFE model was 87%, i.e., without changing the values of the variables in the Tobin’s Q model, Saudi listed companies have the opportunity to improve their value efficiency by 13%.

Referring to Figure 1 and Figure 2, it is worth noting that no company had achieved complete efficiency at a value of 1 by 2022. From the estimation results of the TFE model, Saudi Cable Company, Tenaris Saudi Steel Pipes, NAMA Chemicals, and Arabian Pipes had the worst firm value efficiency levels, i.e., 0.6969, 0.7600, 0.7687, and 0.7908, respectively. In addition, three companies had consistently demonstrated the highest level of firm value efficiency by 2022, over the span of ten years, namely Advanced Petrochemical Company, Saudi Industrial Investment Group, Yanbu Cement, Saudi Vitrified Clay Pipe co. (SVCP), and Arabian Cement, with average firm value efficiency scores of 0.9483, 0.9250, 0.9521, 0.9353, and 0.9534, respectively.

Referring to Figure 2, it appears that, in the Saudi basic materials sector, there is a noticeable difference in firm value efficiency among various companies. Some companies, such as Yanbu Cement, Basic Chemical Industries Company (BCI), Arabian Cement, and UNITED WIRE FACTORIES CO. (ASLAK), have managed to maintain relative stability in their firm value efficiency. On the other hand, some companies like Arabian Pipes, NAMA Chemicals, and Methanol Chemicals Company have experienced significant fluctuations in their firm value efficiency.

This variability in firm value efficiency suggests that different companies within the sector may be implementing different strategies, facing distinct market conditions, or experiencing varying levels of success in managing their resources and operations. Our study affirms that the most important factors affecting firm value are CS and CG practices. Thus, improving the efficiency of the firms’ value in the Saudi basic materials sector can be achieved by acting on these different factors.

5. Discussion

Our findings highlight the intricate relationship among corporate CS, sustainable governance, and firm value efficiency. By integrating various theoretical perspectives and empirical evidence, this study’s contribution lies in enhancing the comprehension of the interaction among and impact of these factors on organizational performance.

Firstly, our research validates the beneficial influence of CS on firm value efficiency, aligning with prior studies that indicate how sustainability efforts can improve financial performance and overall company value. Specifically, we found that CS policies, environmental policies, and budget allocations for sustainability efforts are associated with improved efficiency of firm value. These results underscore the importance of integrating sustainability practices into corporate strategies and operations to achieve long-term value creation.

Moreover, our analysis delves into the role of sustainable governance in shaping firm value efficiency. The results reveal that the correlation between CS and board characteristics like size and independence significantly impacts firm value efficiency. Specifically, a larger board size enhances the positive association between CS and firm value efficiency, while board independence amplifies this effect even further. These findings highlight the critical role of the BoD in overseeing sustainability initiatives and ensuring alignment with shareholder interests.

However, our study also uncovers some unexpected results regarding CEO and insider ownership. Contrary to our hypotheses, the interaction between CEO ownership and CS, as well as between insider ownership and CS, exhibited negative effects on firm value efficiency. This suggests that higher levels of CEO and insider ownership may hinder the positive impact of sustainability efforts on firm value efficiency, possibly due to conflicting interests or governance challenges associated with concentrated ownership structures.

Furthermore, our analysis underscores the importance of frequent board meetings to strengthen the relationship between CS and firm value efficiency. More frequent board meetings provide opportunities for robust discussions and strategic decision-making regarding sustainability initiatives, ultimately enhancing their effectiveness in driving firm value.

In addition to these specific findings, our study also highlights the broader implications for policymakers and CG practices. Ownership concentration emerged as a negative moderator in the relationship between CS and firm value efficiency, emphasizing the need for governance measures that promote transparency and alignment with long-term value creation goals. Moreover, board independence was identified as a crucial factor in improving firm value efficiency, signaling the importance of diverse and independent oversight in CG structures.

Overall, our findings contribute valuable insights to the ongoing discourse on sustainable governance and its effect on firm performance. By examining the complex interplay among CS, governance practices, and firm value efficiency, we provide actionable recommendations for organizations seeking to enhance their sustainability efforts and promote long-term value creation for all stakeholders involved.

6. Conclusions

This research explores the critical roles that CS and CG play in enhancing firm value. As we conclude our exploration, several key insights emerge, emphasizing the fundamental importance of these intertwined principles for modern businesses.

First and foremost, it is evident that CS is no longer an optional endeavor; it is a strategic imperative. Companies that proactively address environmental and social challenges not only position themselves as responsible corporate citizens, but also harness opportunities for innovation and differentiation. By aligning sustainability with their core values and operations, firms can adapt to evolving consumer preferences and regulatory landscapes while reducing long-term risks related to resource scarcity, climate change, and reputational damage.

Furthermore, effective CG serves as the linchpin of trust in the corporate world. Robust governance practices foster transparency, accountability, and ethical behavior, building confidence among investors, stakeholders, and the wider public. Moreover, they enable organizations to navigate complex challenges with agility and resilience, ensuring that decision-making processes are in harmony with the interests of all stakeholders.

Our examination also reveals that the convergence of sustainability and governance creates a powerful synergy. Companies that integrate sustainability principles into their governance structures not only enhance their reputations, but also strengthen their resilience in the face of unforeseen disruptions. Sustainable governance practices facilitate the effective management of environmental and social risks, promote stakeholder engagement, and encourage long-term thinking among leaders.

Nonetheless, we must acknowledge that achieving the optimal balance between sustainability and governance can be a complex and evolving journey. Striking this balance may require trade-offs and investments, and it necessitates a commitment from leadership to embed sustainability into the organization’s DNA. It also calls for a clear and coherent communication strategy to convey the company’s responsibility to sustainability and responsible governance to all stakeholders.

In conclusion, the importance of CS and CG for improving firm value is undeniable. In a world where environmental, social, and governance (ESG) considerations increasingly influence investment decisions, market access, and competitive advantage, firms that embrace these principles are better positioned to prosper in the long term. Beyond financial performance, they contribute to the well-being of society and the preservation of our planet, reinforcing the notion that sustainable business practices are not just a choice but an imperative for the future.

As we move forward, it is essential for scholars, practitioners, and policymakers to continue exploring the evolving landscape of CS and governance, adapting frameworks and best practices to meet the everchanging demands of a responsible and value-driven business environment. Only through continued commitment to these principles can organizations truly unlock their potential for sustained value creation and make meaningful contributions to a more equitable and sustainable world.