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Article

Does CEO Power Affect Manufacturing Firms’ Green Innovation and Organizational Performance? A Mediational Approach

by
Qiuyan Yan
1,
Jing Yan
2,
Duo Zhang
3,
Shuochen Bi
4,
Ying Tian
5,*,
Riaqa Mubeen
6 and
Jaffar Abbas
7,*
1
Business School, Central University of Finance and Economics, Beijing 100081, China
2
School of Business, Shandong University, Weihai 264209, China
3
International Institute of Culture and Education, Northeast Agricultural University, Harbin 150038, China
4
D’Amore-McKim School of Business, Northeastern University, Boston, MA 02115, USA
5
School of Management, Shandong University, Jinan 250100, China
6
School of Management, Harbin Institute of Technology, Harbin 150001, China
7
School of Media and Communication (SMC), Shanghai Jiao Tong University (SJTU), Shanghai 200240, China
*
Authors to whom correspondence should be addressed.
Sustainability 2024, 16(14), 6015; https://doi.org/10.3390/su16146015
Submission received: 19 May 2024 / Revised: 4 July 2024 / Accepted: 8 July 2024 / Published: 14 July 2024
(This article belongs to the Special Issue Innovative Business Model for SMEs Sustainability)
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Abstract

:
In this research work, we investigate the direct impact of CEO power on corporate performance, as well as the mediating role of green innovation in this hypothesized relationship. In this study, we use observation data collected from 780 listed manufacturing companies, explicitly focusing on the Karachi Stock Exchange (KSE), and adopt a GMM (generalized method of moments) model for testing our hypotheses. The results of this research show that CEO power has a negative impact on sustainable corporate performance, while the mediating role of green innovation positively and completely regulates the effect of CEO power on enterprises’ sustainable performance. This study adds novelty to the literature as it explores the influence of green innovation in manufacturing enterprises on CEO power and firm performance and observes the direct impact of green innovation and CEO power on sustainable business performance. The results of this study show that a green innovation strategy significantly affects CEO power and manufacturing firm performance and that companies that adopt green initiatives can increase corporate value and improve their reputation among stakeholders. The conclusions of this study have important implications for both theory and practice in this field.

1. Introduction

Against the backdrop of accelerating globalization, the deregulation and integration of capital markets, and a string of recent financial scandals in Asia and other parts of the world [1], debate over how to improve firm performance and create an effective corporate governance system that will promote sustainable economic growth has intensified. Furthermore, good corporate governance is critical to modern organizations’ development and survival. There has been enormous growth in research on the role of corporate governance, with a primary focus on CEO power and firm performance. However, empirical evidence has not consistently supported either of these theories, yielding mixed outcomes. Some research works have found a significant positive connection between CEO power and firm performance [2,3,4], while others have reported a negative association [5,6,7,8]. One argument in favor of CEO power is that it may result in more effective decision making [9], while another study indicated that CEO power may prevent the board from properly overseeing the CEO, which could result in a lack of accountability [10]. According to the available evidence, there could be both negative and positive effects, depending on the situation [11].
CEO power has been extensively studied in developed nations, yet it remains relatively understudied in emerging countries [6,12]. More research is therefore needed to shed light on this problem and provide more reliable data about the relationship between CEO power and firm performance. To resolve this inconsistency and close theoretical gaps in the existing literature, it is important to conduct more research to better understand the relationship between CEO power and firm performance. Academics have advised that in order to determine whether and how CEO power influences company performance, intervening factors should be investigated [13,14,15]. After examining prior studies in the literature, the authors included green innovation as a mediating mechanism that creates competitive advantages and improves firm performance.
The aforementioned research points to a lack of clarity and a research gap in the body of knowledge regarding the effects of green innovation within organizations. Furthermore, there is a lack of information in the literature regarding whether or not important stakeholders exert pressure on businesses to adopt and implement green innovation methods and deliver green products to the market. Process and product innovation through enhanced production procedures and product design includes green innovation. The goals of green innovation are to minimize waste, save energy, cut down on pollution, and lessen companies’ negative environmental effects [16,17], and this innovation enhances environmental performance and offsets environmental costs by developing new markets, increasing market share, and increasing resource productivity [13,18]. Aiming to fill research gaps in the previous literature, the present research concentrates on exploring the mediating role of green innovation practices in the relationship between CEO power and better business firm performance in Pakistani firms.
In this study, we primarily focused on examining the role of Pakistani firms’ CEO power in attaining better business performance by incorporating the mediating effects of green innovation practices. This research work employed the GMM model and other selected statistical methods to observe the influence of CEO power on improving business performance. The current study’s empirical analysis showed a substantial negative association between CEO power and firm performance, while the results of examining the direct role of green innovation and CEO power yielded a positive linkage between them. Additionally, the relationship between CEO power and increased firm performance among Pakistani enterprises was found to be positively mediated by the role of green innovation techniques. Therefore, there was a positive relationship between a firm’s CEO power and its performance when we regressed green innovation on this linkage. This comprehensive study model provides insightful information about how the CEO of a Pakistani company mitigates the negative effects of green innovation methods to improve business performance. The results show that embracing CEO power helps firms achieve improved business performance. Therefore, by adopting a fresh framework in the context of an emerging economy, our study model addressed potential gaps in the literature.
This research model conceptually and empirically enhances the previous literature on the impact of CEO power on Pakistani firms’ performance by considering the setting of emerging economies, which have organizational structures distinct from industrialized ones. Notably, this study is the first to investigate how green innovation affects CEO power and enhances company performance, highlighting and filling a critical research gap in the literature. In this study, we first contribute by looking into the direct influence of CEO power on the performance of Pakistani manufacturing enterprises. Second, we contribute to existing research by analyzing the direct impact of CEO power on green innovation and demonstrating a favorable relationship between the two. Thirdly, we also examine how CEO power and company performance are mediated by green innovation, and the results show that green innovation has a positive mediation effect on CEO firm performance. Fourth, in this study, we investigate the direct relationship between green innovation and business performance. Fifth, we discuss how Pakistani companies’ shareholder relationships can greatly benefit stakeholders by advancing green practices within the organizations. These results offer a thorough understanding of the relationships that exist in developing economies between business performance, green innovation strategies, and CEO power. In this study, we also demonstrate how adopting green practices within businesses has a substantial positive impact on stakeholders and shareholders in Pakistani enterprises. In this study, the CEO’s ability to influence and improve company performance through the mediating impacts of green innovation methods is thoroughly examined, and this paper presents an empirical analysis based on the ability of the CEO of a Pakistani company to create strong financial results.

2. Review of the Literature

2.1. The Impact of CEO Power on Firm Performance

Previous research indicated that for a board to fulfill its authority role and support CEO entrenchment, greater powers primarily diminish board powers and limit board independence [8,16]. Furthermore, in a weak and politicized organizational structure, the CEO may misuse his or her dual authority and designate a closely related individual as a director who will probably follow the CEO’s instructions [19]. This supports the idea that the board’s ability to act as a watchdog can match the CEO’s power [20]. As a result, this leads to a waste of resources and a reduction in the effectiveness of organizational operations, such as the monitoring of activities carried out by elected boards [3]. According to all of these reasons, the CEO’s power undermines the organization’s oversight system and has a detrimental effect on business performance [21]. Furthermore, the majority of the empirical research on the relationship between CEO power and firm performance is contradictory and weak. Even so, some research failed to find a meaningful correlation between CEO power and business performance [22,23]. According to agency theory, the current research indicates that the relationship between CEO power and company performance is negatively impacted by factors, including the CEO’s personal benefits, replacement costs, and other expenses that are specifically related to the CEO [24,25].
In some instances, a CEO might not act in the best interests of the shareholders, which inevitably results in agency issues. It is also disputed that CEOs with greater authority make financial decisions without consulting specialized experts because they are overconfident in the outcomes of their choices. Occasionally, these choices become expensive because of poor judgment, making it difficult for a company to operate at its intended level [26,27]. Research has specifically shown that CEO power can negatively affect the performance of the company as measured by several performance metrics, including return on equity, shareholder return, Tobin’s Q, return on investment, and return on assets [6,17,28,29]. The literature provides conflicting information about the relationship between CEO power and company performance. Furthermore, companies with stronger corporate governance and higher information costs experience a broader performance disparity. According to this research, highlighting the benefits of CEO power in cutting down on information expenses and making quick decisions is advised.
In contrast, advocates of stewardship theory have stated that CEO power leads to improved corporate performance, stating that CEO power reduces the effectiveness of leadership strategy design and implementation [18,30]. As a result, there is no conclusive evidence on whether CEO power has a positive effect on firm performance due to persuasive leadership authority or a negative effect due to the CEO’s values. Considering the conflicting findings in the literature, the relationship between CEO power and firm performance is still questionable, and it needs to be examined further.
The impact of CEO power on firm values is a complex and multifaceted issue and influenced by a range of factors, including the specific characteristics of the company, industry dynamics, governance practices, and the capabilities of the individuals holding both positions. Different studies used various methodologies, sample sizes, and control variables and supplied inconsistent findings. The existing studies have not provided conclusive results regarding whether CEO power positively or negatively affects firm performance, and the contrasting arguments and mixed empirical findings highlight the need for further examination and research in this area. In summary, the current body of research suggests that the impact of CEO power on firm performance remains uncertain. To clarify this issue and offer more solid proof of the connection between CEO power and company performance, more research is required. The following theories were developed in this study based on the contentious literature:
H1. 
CEO power has significant and negative effects on firm performance.

2.2. The Mediating Role of Green Innovation in the Relationship between CEO Power and Firm Performance

To comply with environmental standards and foster sustainable growth within their corporate culture, stakeholders closely monitor businesses on environmental issues. This allows them to leverage the social process of knowledge mobilization to create sustainable knowledge for communities [31,32]. Because of this, a growing number of businesses are concentrating on green innovation to create environmentally friendly, sustainable processes to maintain their competitiveness in the market [33,34,35]. Increased transparency on social and environmental issues affecting stakeholders, the increased value of products and services to offset the costs of environmental investments, a decreased risk of stakeholders withdrawing resources or their usage becoming conditional, and improved firm performance are all made possible by green innovation [36,37]. Although the discussion of the connection between green innovation and business success has expanded, more empirical research is needed to clarify the relationship because it is currently unclear [18,29,30]. Businesses that are environmentally inventive are extremely successful, outperform their rivals overall, and are able to react swiftly and effectively to meet the needs of a variety of stakeholders [38].
Numerous studies have been conducted on the subject of the relationship between CEO power and business performance; some have shown a negative impact on performance, while others have found a positive one. However, the empirical data on the nature of this association have been conflicting and difficult to reconcile across several lines of evidence. For instance, some research looked at the relationship between CEO power and business performance and suggested that CEO power has a beneficial impact [28,29]. Conversely, prior research has indicated that a strong CEO denotes increased “insider control”, meaning that a strong CEO erodes board supervision.
The impact of CEO power on business performance is a complicated and multifaceted subject that is influenced by elements such as firm characteristics, industry dynamics, governance frameworks, and individual skills. Various research studies using different methodologies, sample sizes, and control variables have yielded inconsistent results. As a result, the existing research provides contradictory evidence on whether CEO power has a beneficial or negative impact on business performance. These diverse opinions and discordant empirical findings highlight the need for additional study and research in this area. Thus, following previous work, we added green innovation as a mediating factor influencing the role of CEO power and firm performance. A study using a Chinese database mentioned that CEOs are very influential members of an organization; as such, if they prioritize green innovation, this can result in the creation and adoption of sustainable practices and technology across the board [39].
Furthermore, according to a different study, businesses that use green innovation to attract environmentally conscious customers frequently have a competitive advantage [40], with another work stating that gains for the company and a larger market share may arise from this innovation. According to earlier research, CEO authority eventually results in cost reductions for businesses [41]. CEOs are more willing to fund these projects if they understand the financial advantages of sustainability. Top personnel who are dedicated to having a good environmental impact are more likely to be drawn to companies that prioritize green innovation under the direction of their CEO [42,43]. CEOs who support green innovation show that they are dedicated to CSR, which can improve a company’s standing and cultivate goodwill among stakeholders in addition to adding value and bolstering the long-term sustainability of their businesses [44,45,46].
The ability of a CEO to direct resources inside an organization towards green innovation projects, such as creating sustainable products or increasing energy efficiency, can boost business success [46,47]. Additionally, the CEO can improve product differentiation, lowers costs, and create new market prospects, all of which have a satisfactory effect on the performance of the company. CEOs inspire creativity, problem-solving skills, and adaptability, which in turn enhance business performance by creating a favorable atmosphere for green innovation [48]. CEOs who are seen as powerful and effective may have stronger bonds with important stakeholders which promote business performance [47].
Another study stated that incorporating green innovation and having CEOs position their companies for resilience and sustainable growth in the face of environmental concerns helps determine a company’s strategic direction and long-term perspective [44]. By increasing competitive advantage over time, lowering risks, and generating value for stakeholders, this long-term focus on sustainability can boost business performance [48]. Through its ability to facilitate resource allocation, shape innovation culture, create stakeholder relationships, and encourage a long-term orientation towards sustainability, green innovation functions as a mediating mechanism that relates CEO authority to company success [49]. Under the direction of powerful CEOs, businesses maximize the beneficial effects of green innovation on their performance by comprehending and utilizing this mediating function. Therefore, based on the above literature, the authors propose the following hypotheses:
H2: 
Green innovation mediates the role of CEO power and firm performance.
H2a: 
CEO power is positively and statistically significantly linked to green innovation.
H2b: 
Green innovation positively mediates the association between CEO power and firm performance.

3. Materials and Methods

3.1. Research Sample and Data Collection

To carry out the investigation described in this study, data were collected from manufacturing sectors in Pakistan. We omitted from our sample any companies that have missing data in their annual reports, as well as any companies for whom data are unavailable or that the Pakistan Stock Exchange (PSX) has declared defaulted. Furthermore, given that bigger corporations often regularly release sustainability reports, we chose businesses that had at least 100 million rupees in outstanding shares and were listed on the PSX. Because of sample heterogeneity, the results of those earlier studies are less similar across industries. Companies in these sectors engage in more environmental efforts than those in other areas [50]. Compared to other sectors, enterprises in the first sector disclose more information about their production, environmental, and welfare activities [51]. Second, industrial companies in Pakistan disclose a significant amount of environmental data since they have a larger market value on the PSX and greater resources available to them to engage in eco-friendly practices and record them in yearly reports. Environmental initiatives differ by firm size, industry, value, and managers’ and owners’ attitudes in the Pakistani market.
To ensure our sample was representative of the manufacturing industry overall, including certain sub-sectors like textiles, chemicals, and electronics, we used a stratified sampling technique. We were able to attain a balanced representation of various manufacturing activity types, firm sizes, and geographic regions by using this approach. By using these standards, we ensured our sample not only accurately reflected the variety in Pakistani manufacturing but also offered a strong basis for examining the relationships between green innovation and CEO traits in this particular setting.

3.1.1. Variable Measurement

We chose two alternative performance assessments as the dependent variable because there is no unique measurement for company performance. A variety of performance metrics were employed to gauge each firm’s value, and factors such as assets, shareholder equity, and overall earnings/net profits after all costs were used to measure the performance of the company from various angles. We employed two performance metrics for this study called return on equity (ROE) and return on investment (ROI), which calculate the organizational operational income divided by shareholders’ equity and net profit divided by shareholders’ invested capital, respectively, following previous works [7,28,52]. While ROE is more often associated with a company’s financial performance and is used mostly in the corporate governance literature, ROI highlights the profitability of an investment utilizing shareholder capital.
CEO power, also known as the leadership structure of a company, served as our main leading independent variable in this study to investigate the impact of CEO power on firm performance. Different proxies are available to measure CEO power, for example, CEO compensation and CEO double power (when the chief executive officer of a firm has more power/holds two executive positions in a firm). In this study, we measured CEO power using the dual power of the CEO, in accordance with other research. Dummy values were used to measure the CEO power: 1 was supplied if the CEO also served as the chairman of the board of directors; otherwise, 0 was given [53,54,55]. Furthermore, we did not include any observations from enterprises that modified their organizational leadership structure. Our control variables were asset tangibility, capital structure, quick ratio, and company size. The ratio of plant, equipment, and property to the company’s total revenue was used to calculate the tangibility of assets [18]. The total of cash, marketable securities, and accounts receivable divided by current liabilities is known as the quick ratio [50]. The most significant variable, firm size, is another control measurement that is utilized in nearly all studies pertaining to corporate finance, and we calculated the firm size using the log of the company’s revenues [56,57,58].
In this work, we examined the mediating variable of green innovation in the relationship between CEO power and company performance, with green innovation employed for the mediation analysis. The number of green patents granted is used in this study to measure an organization’s capacity for green innovation. [33]. To test our study hypothesis, we examine the mediation function of green innovation on the relationship between CEO power and firm performance. See Table 1 below.

3.1.2. Empirical Approach

We used panel data to examine the role of green innovation, CEO power, and firm performance and also examined its mediating role on the relationship between CEO power and firm performance. Our data comprise two performance measurements (dependent variables), namely ROI (return on investment) and ROE (return on equity). In order to perform this research, a panel dataset was utilized to investigate the connection between CEO power, green innovation, and business performance. In the panel data, an endogeneity problem mostly exists, resulting in biased and unreliable results [50]. The econometric rule states that a model must employ appropriate techniques to address endogeneity concerns if there is just one variable having endogenous problems throughout the entire model [50]. We employed the CEO’s dual position to measure CEO power, and the literature claimed that the appointment of CEO and CEO chair is related to several unobserved firm features that lead to endogenous concerns and thus affect company performance [5,7,59,60]. Other studies have suggested that a single leadership structure of organizations is primarily endogenous; the roles of chief executive officer and chairman of the board of directors are linked with some unobserved corporate factors that lead to endogenous difficulties [5]. To address the endogeneity issue, we employed a GMM (generalized method of moments) model to analyze the link. Endogeneity issues have been addressed using a variety of econometric methodologies, including instrumental variables, lagged dependent variables, random effects, control variables, fixed effects, and the GMM model [61]. We decided to use the GMM model, proposed in [62], as it has the highest power among all of the models and is the best at handling endogeneity. Heteroscedasticity and autocorrelation within a business are permitted by the GMM model, and their consistency is contingent upon instrumental validity and a lack of higher-order serial correlation in the error terms.
We ran a few checks on the data to determine whether they were appropriate for analysis before using the GMM model. To determine whether there were any multicollinearity issues with the data, we used a variance inflation factor (VIF) test. Using the AR (1) and AR (2) tests, we examined the data for serial autocorrelation and discovered that it was absent. We then looked for endogeneity problems in the data and discovered them; to address the endogeneity concerns about error terms and variables, we employed the GMM model, following [4]. The results of all of the tests for the instruments showed that our specifications did not suffer from weak instruments and that the instrumental variables performed adequately. See Table 2 below.

4. Empirical Analysis

4.1. Descriptive Statistics

Table 2 summarizes the statistics for all dependent and independent variables in this study. It includes the statistics for all of the dependent and independent variables in this study. Panel A explains the descriptive statistics. In this study, we used company performance as a dependent variable. Table 3 shows that the average ROI value is 0.244, with a standard deviation of 0.511, and the ROE mean value is 0.298, with a standard deviation of 0.726. Asset tangibility (AST) and firm size (FMZ) have average values of 0.271 and 0.970, with standard values of 0.167 and 0.590, respectively. The capital structure (CPST) has an average value of 0.069, and the CEO power (CEP) has an average value of 0.80 with a standard deviation value of 0.382. Table 2 describes the descriptive statistics analysis.
The problem of multicollinearity in regression models leads to larger standard errors of the coefficients, making inference difficult and biased. Consequently, the multicollinearity in this study was tracked down using the variance inflation factor (VIF). The variance inflation factor (VIF) is used in Table 2 to confirm that multicollinearity does not exist. When a VIF number is less than 10, it is confirmed that there is no multicollinearity in the data. When a value is greater than 10, it suggests that some variables are multicollinear [18,63]. The average VIF value for each variable in this study is 1.17, meaning that multicollinearity is not present in the data.
In addition, we computed multicollinearity in the data using correlation matrix analysis. The correlation matrix for each of this study’s independent, dependent, and control variables is shown in Table 3. According to the correlation matrix data, there is no multicollinearity among any of the variables. Table 3 provides the correlation matrix’s specifics.

4.2. Direct Link between CEO Power and Firm Performance

Hypothesis 1 states that CEO power and company performance are negatively related. As a result, Table 4 illustrates the coefficient values of the dependent and independent variables, demonstrating the association between CEO authority and business success. We developed Model 1 to study the relationship between CEO power and business performance. In Model 1, we examined CEO power and performance in relation to performance measurements—return on investment (ROI) and the coefficient value of CEP (CEO power shows −0.904). The negative coefficient value of CEP indicates a negative correlation with company performance, which is consistent with the previous findings [6]. These findings indicate that CEO power and business performance have a negative association with performance metrics like return on investment (ROI). The detrimental impact of CEO power on business performance is supported by agency theory. Agency theory contends that a CEO with greater powers will prioritize their private earnings, thus departing from the investor benefits. As a result, this naturally leads to agency issues and underlines the negative impact of CEO power on firm performance [9].
Furthermore, the literature showed that the shareholders of an organization lose their confidence in the company’s leadership and governance practices if they perceive that the CEO’s power is unchecked, leading to a decline in the firm’s stock price and market value [64]. Another study supported our results and stated that this decreases board powers and limits organizational structure, thus leading to poor firm performance [65]. The results of this investigation are consistent with earlier studies that have demonstrated the detrimental effects of a more powerful CEO on business success. Our analysis supported the first hypothesis, which stated that CEO power (CEP) has a significant and detrimental impact on business performance. Overall, our research supports the suggested theories by demonstrating a negative correlation between CEO power and firm success. Table 4 and Table 5 indicate the mediating role of green innovation, as well as the mediating impact of firm innovation, on the relationship between CEO power and firm performance. See Table 4 and Table 5.
Hypothesis 2 of this study states that green innovation impact is positive on CEO power and firm values. Before, examining the mediating role of green innovation, this study followed some mediation rules. Accordingly, the mediating effect of green innovation (GRIO) on the linkage between CEP and firm performance is established on the basis of Baron and Kenny’s (1986) suggestions [66], according to which some relevant steps were discussed here [66]. First, there must be a substantial correlation between the independent and dependent variables; second, there must be a substantial correlation between the mediating and independent variables; and third, the mediator must have an impact on the firm’s performance since the dependent variable is regressed on both the independent and mediating variables. By following Baron and Kenny’s mediation rules, Table 5 shows the direct roles of CEP (CEO power), green innovation, and firm performance and indicates the mediating role of green innovation (GRIO) on the abovementioned association.
Therefore, in accordance with the strategy for investigating mediation hypotheses [66], we first regressed CEO power (CEP) on firm performance. Model 1 shows the direct impact of the independent and dependent variables of this study. Second, we regressed the mediating variable on the independent variables. Thirdly, we regressed the capital green innovation (GRIO) on CEO power for the mediation effect in Model 2, and Model 3 shows the association between green innovation and dependent variables for this studied firm. Model 4 shows the mediating role of green innovation in CEO power and firm performance association; in Model 4, we regressed CEO power (CEP), green innovation (GRIO), and firm performance together. Table 4 shows the results of this study.

4.3. The Mediating Role of Green Innovation on the Relationship between CEO Power and Firm Performance

Table 4 indicates the results of Hypothesis 2, which reveals the mediating impact of green innovation (GRIO) on the relationship between CEO power and firm values. We regressed green innovation (GRIO) on CEO power (CEP) by following Baron and Kenny’s suggestions (Baron and Kenny, 1986) in Model 2. Model 2 demonstrates the positive coefficient value of CEP (0.028), which specifies that CEP (CEO power) impacts positively on green innovation. The positive coefficient value of CEP shows a positive link between green innovation and CEO power. Thus, our findings are in line with previous findings of [67,68] and also support Hypothesis 2a.
Our results are in line with earlier research, which found that CEOs in an organization can safeguard their advantages by associating with a joint leadership structure [69]. Our study results are also in line with the existing literature in which an author stated that CEOs with more powers engaged with firm stakeholders at all levels to adopt eco-friendly behaviors for green innovation initiatives [70]. Another work mentioned that a CEO should hold managers and departments accountable for progress towards green innovation targets. An existing study discussed how a powerful CEO used their influence to push for stricter environmental laws, encourage competitors to adopt eco-friendly business practices, and encourage good change throughout the industry [71].
Next, we regressed mediating and dependent variables together. Model 3 shows the linkage between firm performance (ROI) and green innovation. Model 3 indicates the positive (0.829) coefficient value, which highlights the positive linkage between green innovation and firm performance. Our results are supported by a previous study in which the author described that green innovation is necessary for corporations to stay in the market and is strongly tied to the firm’s growth. The literature stated that firms that put an emphasis on green innovation frequently have a good reputation, which can increase client loyalty, draw in investment, and boost organizational values [37]. Another work indicated that manufacturing companies that use green innovation practices reap long-term rewards by achieving sustainable economic performance [36].
Model 4 shows how the relationship between CEO authority and company performance (ROI) is mediated by green innovation. To examine the mediating impact of green innovation, we regressed CEO power, green innovation, and firm performance together in Model 4. Using the ROI firm performance variable in Model 4, we assessed the impact of green innovation and CEO power on firm performance. The coefficient of CEP in model 4 is (0.111). When green innovation, CEO power, and firm success are all regressed together, Model 4 shows a positive and statistically significant relationship. Our findings show that powerful CEOs set the company’s innovation agenda and give green innovation projects top priority. This results in the creation of eco-friendly goods, procedures, and technology that improve business performance. According to a different study, businesses investing in green projects can meet regulatory requirements, adjust to shifting consumer demands, and enhance their long-term performance and resilience [72]. Green innovation favorably mediates this association, according to the CEP coefficient, supporting Hypothesis 2—that is, that green innovation positively mediates the relationship between CEO power and business performance. Overall, the analysis in Table 4 verifies that the relationship between CEO power (CEP) and firm success is fully mediated by green innovation. Figure 1 below shows the results of this study. Figure 1 and Table 5 show the results.

4.4. Robustness Analysis

Table 5 shows a robustness analysis of the impact of the mediating factor of green innovation on the association of CEO power (CEP) and firm performance. Model 5 shows the direct impact of a mediating variable with another performance measurement such as return on equity (ROE). For the robustness analysis of green innovation, we developed Model 5 with a different performance variable such as return on equity (ROE). The outcomes of Model 5 indicate a positive coefficient value, which confirms the positive linkage between firm innovation and firm performance. In Model 7, we regressed the mediating, independent, and dependent variables of this study together, with the results showing a positive value of CEO power (CEP) (0.079), and the positive coefficient value indicates the positive mediating impact of firm innovation on the relationship between CEO power and firm performance. Thus, the robustness analyses in our study also confirmed Hypothesis 2 and specified the positive mediating impact on the abovementioned relationship. Thus, our study results support Hypothesis 2; green innovation positively mediates this connection [73] and provides support for our hypothesis. These outcomes support stewardship theory [74]. Table 5 represents the mediating impact of green innovation on the relationship between CEO power (CEP) and firm performance. Figure 2 below shows the robustness analysis conducted in this study. Figure 2 shows the study’s results.

5. Discussion

Numerous studies have been conducted on the connection between a chief executive officer’s function (or powers) and company performance [75,76,77]. The findings have been extensively reviewed in the literature [78,79,80,81]. Indeed, there are many variables that might affect a CEO’s ability to impact company performance, making it a complicated and diverse topic. Some variables have been shown to have a good relationship [3], while others have shown a negative relationship [6,8,29]; however, these findings are inconclusive and insufficient to provide a comprehensive understanding of the relationship between CEO power and firm performance [3,68]. The conflicting arguments and mixed empirical evidence from existing studies underscore the need for further examination and research in this area. It is essential to delve deeper into the specific circumstances and contexts in which CEOs operate to gain a more comprehensive understanding of their impact on firm values. By considering the complexities of the issue, we addressed this research gap by observing the CEO’s role in firm performance to explain the relationship between CEO power and firm performance. Furthermore, this study also examined the role of green innovation and CEO power while also discussing the mediating role of green innovation in the association between CEO power and firm performance. In this study, we analyzed observations of 780 firms to examine the relationship between CEO power and firm performance.
The results of this work deepens our understanding of the linkage between CEO power, green innovation, and firm performance in several ways. After performing an analysis, the results validated our hypotheses. Additionally, a robustness analysis was undertaken to ensure this study’s results were consistent. The results showed that a high level of CEO power has a negative impact, while the role of green innovation fully mediates the relationship between CEO power and firm performance. Hypothesis 2 of this study states that green innovation mediates the linkage between CEO power and firm values. This study advances our knowledge of the complex connection between high levels of CEO power and company performance, which is a significant contribution to the continuing scholarly debate in corporate finance. In this work, by analyzing the relationship between CEO power (CEP) and firm success, looking at mediating elements, and highlighting the significance of company revenues and governance structure in strengthening corporate values, we significantly advance the field of corporate governance.
Furthermore, the results of this empirical study reveal that green innovation fully mediates the association between CEO power (CEP) and firm performance, thus providing strong support for stewardship theory, and demonstrate that green innovation fully mediates the link between high CEO power and firm performance. These findings align with our hypothesis suggesting that green innovation serves as a mediator in the relationship between CEO power and firm performance. The mediating role of green innovation implies that when there is CEO support for green practices within a firm, firm performance is positively enhanced through this innovation.
This present research emphasizes the importance of businesses’ turbulent conditions considering the implementation of research and development investment plans for new studies [82,83,84]. Our findings demonstrate that increasing the effectiveness of research and development investments can lead to an increase in innovative products and increase firm benefits. Therefore, before investing in a company, it is crucial for investors to evaluate its corporate governance structure. These findings suggest that CEOs with more power contribute to firm performance by promoting green products and services and effectively utilizing the firm’s resources. The examination of the mediating role of green innovation between CEO power and firm performance adds a unique and essential contribution to the existing literature on CEO power. While scholars have previously acknowledged the importance of green innovation in the context of CEO performance, this research fills a gap in the literature by examining this specific mediation, and the mediating effect offers theoretical advancements and the potential to enhance firm performance by generating innovative products and increasing profitability.

6. Conclusions

The purpose of the research work is to explore the relationship between CEO power (CEP) and firm performance, the former being a corporate governance characteristic that grants the CEO more authority over the company’s external policy. However, the results of earlier studies on its effect on company performance have been contradictory. Therefore, this study aims to investigate this relationship and provide further insights. This study develops an empirical model to examine the factors that influence CEO power (CEP) and its association with firm performance. The proposed hypotheses were tested using statistical analysis, which included reliability and validity tests, as well as the generalized method of moments (GMM) approach. In addition to investigating the direct relationship between CEO power (CEP) and company success, we looked into the intermediary effect of green innovation in this relationship. Our objective in performing this empirical test was to provide insights into the interaction of factors influencing CEO power and its impact on firm performance.
The findings imply significant ramifications for corporate strategy. Managers of businesses should understand that green innovation techniques promote company benefits. It would be prudent for managers to consider the potential for process innovation and to increasingly invest in green innovation practices as it seems that green innovation improves business performance. Concern from managers positively compounds the impact of green process innovation on business success. Managers must therefore understand the value of green innovation and be willing to use it in their operations. A company’s dedication to environmental issues centralizes the cause, which raises managerial awareness of environmental challenges and ultimately improves business performance. Our results imply that the environment should not be considered a minor strategic detail or a disconnected afterthought. The beneficial impact of innovation on performance is amplified by the importance of management environmental concerns. Therefore, businesses can encourage green innovation as a way to achieve better performance by elevating environmental concerns to a managerially relevant and prominent CEO. Prominent CEOs support green innovation techniques because they benefit businesses and society at large. By fostering trust among stakeholders, such measures encourage managerial concern for the environment. Reducing emissions requires encouragement of and support for green innovation; as this study shows, this may require increased assistance from the government and CEOs.
As with many studies, there are certain limitations herein that point to areas that could be explored further. The absence of panel data makes it impossible for us to talk in detail about the dynamic process of green creative practices within firms. It would be helpful to conduct further research using different settings and different data sources or by following businesses and their innovation efforts over time. This study was limited to Pakistani manufacturing companies, so subsequent research could continue to examine particular industries in even greater detail and investigate the ways in which particular industries can influence CEO power and the applicability of green ideas. The question of how management-level environmental concern influences the relationship between green innovation, strategic behavior, and strategic outcomes such as corporate performance can ultimately be solved with more research encompassing the relevant intellect and activities.

Author Contributions

Conceptualization, J.A. and R.M., Methodology, Q.Y., J.Y., Y.T. and R.M.; Validation, S.B.; Formal analysis, R.M.; Investigation, Q.Y.; Data curation, D.Z.; Writing—original draft, J.Y., D.Z. and Y.T.; Writing—review & editing, J.A., S.B. and R.M., Supervision, J.A. All authors have read and agreed to the published version of the manuscript.

Funding

This research received no external funding.

Institutional Review Board Statement

Not applicable.

Informed Consent Statement

Not applicable.

Data Availability Statement

The data presented in this study are available on request from the corresponding author.

Conflicts of Interest

The authors declare no conflict of interest.

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Sustainability 16 06015 g001
Figure 1. Results of CEO power, green innovation, and firm performance. Note: Significance level: *** p < 0.001 and ** p < 0.01.
Figure 1. Results of CEO power, green innovation, and firm performance. Note: Significance level: *** p < 0.001 and ** p < 0.01.
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Figure 2. Robustness analysis of this study. Note: Significance level: *** p < 0.001 and ** p < 0.01.
Figure 2. Robustness analysis of this study. Note: Significance level: *** p < 0.001 and ** p < 0.01.
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Table 1. Study variables and measurements.
Table 1. Study variables and measurements.
Variable NamesAbbreviationsMeasurements
Dependent Variables
Return on investmentROINet profit divided by the shareholder invested capital
Return on equityROEFirm operating profit divided by shareholders’ equity
Independent and control variables
Firm sizeFMZLog of total sales
Asset tangibilityASTThe proportion of the company’s total revenue to its property, plant, and equipment
CEO powerCEPCoded as 1 if the CEO occupied the chairman of the board of directors position; otherwise, coded as 0
Capital structureCPSTRatio of total liabilities to total assets
Green innovationGRIOGreen patents issued to assess firms’ green innovation potential
Quick ratioQCTThe total of cash, marketable securities, and accounts receivable to current liabilities
Table 2. VIF analysis and descriptive statistics.
Table 2. VIF analysis and descriptive statistics.
VariablesObsMeanStd. DevVIF1/VIF
ROI7800.2440.511
ROE7800.2980.726
FMZ7800.9700.5901.120.896
AST7800.2710.1671.240.805
CEP7800.1800.3821.010.993
CPST7800.0690.0901.160.865
GRIO7800.1550.1111.280.781
QCT7801.271.791.190.838
Average VIF1.17
Notes: ROI: return on investment; ROE: return on equity; FMZ: firm size; AST: asset tangibility; CEP: CEO power; CPST: capital structure; GRIO: green innovation; QCT: quick ratio; VIF: variance inflation factor.
Table 3. Correlation matrix of study independent and dependent variables.
Table 3. Correlation matrix of study independent and dependent variables.
ROIROEFMZASTCEPCPSTGRIO
ROI1
ROE0.819 ***1
FMZ0.241 ***0.273 ***1
AST−0.152 ***−0.214 ***0.152 ***1
CEP0.00603−0.0031−0.054 **−0.043 *1
CPST−0.192 ***−0.145 ***0.271 ***0.251 ***0.0081
GRIO0.248 ***0.225 ***−0.078 ***−0.372 ***−0.019−0.211 ***1
Notes: ROI: return on investment; ROE: return on equity; FMZ: firm size; AST: asset tangibility; CEP: CEO power; CPST: capital structure; GRIO: green innovation; QCT: quick ratio. Significance level: *** p < 0.001, ** p < 0.01, and * p < 0.5.
Table 4. The role of green innovation, CEO power (CEP), and firm performance.
Table 4. The role of green innovation, CEO power (CEP), and firm performance.
Dependent VariablesGMM
Model 1Model 2Model 3Model 4
CEP−0.904 ***
(0.346)		0.028**
(0.016)		 0.111 ***
(0.053)
GRIO 0.829 ***
(0.210)		4.99 ***
(0.726)
AST−1.05 ***
(0.410)		−1.71 ***
(0.226)		−0.168 ***
(0.098)		0.610 ***
(0.177)
FMZ0.294 ***
(0.044)		−0.141 ***
(0.061)		0.304 ***
(0.035)		0.273 ***
(0.039)
QCT0.038 *
(0.026)		−0.023 ***
(0.007)		0.024 ***
(0.013)		−0.043 ***
(0.018)
CPST−1.05 ***
(0.269)		0.548 ***
(0.178)		−1.32 ***
(0.195)		−0.684 ***
(0.206)
Constant−2.14 ***
(0.416)		1.98 ***
(0.617)		−2.73 ***
(0.343)		−3.26 ***
(0.402)
AR(1)−3.06−4.81−3.25−5.59
AR (2)−2.12−1.23−1.95−1.30
Hansen test20.9537.4591.5491.92
Observation780780780780
Notes: ROI: return on investment; ROE: return on equity; FMZ: firm size; AST: asset tangibility; CEP: CEO power; CPST: capital structure; GRIO: green innovation; QCT: quick ratio; GMM: generalized method of moments. Significance level: *** p < 0.001, ** p < 0.01, and * p < 0.5.
Table 5. Robustness analysis of CEO power (CEP), green innovation, and firm performance.
Table 5. Robustness analysis of CEO power (CEP), green innovation, and firm performance.
Dependent Variables
Model 5Model 6Model 7
CEP−0.797 ***
(0.403)		 0.079 **
(0.047)
GRIO 0.961 ***
(0.238)		0.972 ***
(0.237)
FMZ0.465 ***
(0.062)		0.465 ***
(0.060)		0.468 ***
(0.060)
QCT0.036
(0.026)		0.465 ***
(0.060)		0.025 **
(0.013)
CPST−1.04 ***
(0.332)		−1.38 ***
(0.285)		−1.39 ***
(0.288)
Constant−3.55 ***
(0.584)		−4.12
(0.559)		−4.17 ***
(0.564)
AR (1)−4.12−4.27−4.33
AR (2)−1.27−0.99−0.98
Hansen test22.16108.67118.72
Observation780780780
Notes: ROI: return on investment; ROE: return on equity; FMZ: firm size; AST: asset tangibility; CEP: CEO power; CPST: capital structure; GRIO: green innovation; CPST: capital structure; QCT: quick ratio; GMM: generalized method of moments. Significance level: *** p < 0.001, ** p < 0.01.
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Yan, Q.; Yan, J.; Zhang, D.; Bi, S.; Tian, Y.; Mubeen, R.; Abbas, J. Does CEO Power Affect Manufacturing Firms’ Green Innovation and Organizational Performance? A Mediational Approach. Sustainability 2024, 16, 6015. https://doi.org/10.3390/su16146015

AMA Style

Yan Q, Yan J, Zhang D, Bi S, Tian Y, Mubeen R, Abbas J. Does CEO Power Affect Manufacturing Firms’ Green Innovation and Organizational Performance? A Mediational Approach. Sustainability. 2024; 16(14):6015. https://doi.org/10.3390/su16146015

Chicago/Turabian Style

Yan, Qiuyan, Jing Yan, Duo Zhang, Shuochen Bi, Ying Tian, Riaqa Mubeen, and Jaffar Abbas. 2024. "Does CEO Power Affect Manufacturing Firms’ Green Innovation and Organizational Performance? A Mediational Approach" Sustainability 16, no. 14: 6015. https://doi.org/10.3390/su16146015

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