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Article

Corporate Governance Characteristics and Environmental Sustainability Affect the Business Performance among Listed Saudi Company

by
Nasareldeen Hamed Ahmed Alnor
Accounting Department, College of Business, Jouf University, Sakaka 72388, Saudi Arabia
Sustainability 2024, 16(19), 8436; https://doi.org/10.3390/su16198436
Submission received: 2 August 2024 / Revised: 23 September 2024 / Accepted: 25 September 2024 / Published: 27 September 2024
Versions Notes

Abstract

:
This study examines how committees’ characteristics affect business performance (BuPE) in Saudi Arabia. Moreover, this study investigates the connection between BuPE and Environmental Sustainability (ESG), as determined by Corporate Social Responsibility (CSR). Design/methodology/approach: Econometric methods, such as feasible generalized least squares (FGLS) regression, and random effects, ordinary least squares (OLS), are applied to investigate the connection between the independent and dependent variables, utilizing a sample of 131 Saudi listed firms spanning from 2015 to 2021. Findings: Regression analysis shows that the size and independence of audit committees have a positive impact on BuPE, while audit committee meetings are negatively linked to BuPE. The outcomes also indicate that audit committee commitment was not affected by BuPE. Moreover, ESG has a positive and significant relationship with BuPE. On the same path, the results of the additional analysis confirm the main results. Practical implications: The findings of this study may serve as a valuable basis for regulatory actions, particularly with respect to audit committees and CSR. These findings have far-reaching implications for regulators and investors, as they offer valuable insights into the effects of CSR and audit committee features on BuPE. Originality/value: The current research demonstrates that audit committees and CSR have distinct implications for firms’ BuPE, as evidenced by empirical data. The findings suggest that policymakers and researchers should not view CSR as a homogenous concept, as it has varying effects on firms’ BuPE.

1. Introduction

Investors and stakeholders are putting increasing pressure on businesses to be more accountable for the impact of their operations and decisions on environmental sustainability in response to climate change, biodiversity loss, deforestation, resource depletion, water scarcity, agricultural land degradation, and pollution [1,2]. In the absence of strict mandatory regulation of sustainability reporting, Companies choose whether and to what degree to publish Environmental Sustainability (ESG) information in designated sustainability reports, as well as whether and how closely these reports follow generally recognized sustainability reporting standards and guidelines [3]. The signaling hypothesis states that managers decide to talk about their sustainability practices with stakeholders and shareholders to draw attention to the company’s outstanding sustainability performance and to obtain competitive benefits, such as simpler financing [4,5], as well as cheaper equity capital expenses [3,6]. Compliance with sustainability reporting standards (SRS) can further increase stakeholders’ and shareholders’ confidence in the accuracy and truthfulness of the company’s voluntary sustainability disclosures by proving that a firm takes sustainable development seriously [7]. However, the legitimacy hypothesis contends that voluntary sustainability reporting may also be advantageous for environmentally conscious businesses susceptible to external pressures and legitimacy issues, such as solar or clean energy providers [8]. To lessen the negative effects of poor environmental sustainability on their legitimacy and brand recognition in an environmental sustainability-related area, company management uses sustainability reporting in business as a tool to manage investor and stakeholder attitudes and expectations [9,10,11]. However, hiding or neglecting to disclose inadequate CSP will reduce the quality of sustainable reporting because it is not presented honestly in all material aspects (SRQ) [12,13,14]. Environmental sustainability refers to appropriate interactions with the environment to ensure long-term environmental quality and to prevent the depletion or degradation of natural resources [15]. This entails protecting the environment from deterioration, preserving ecological equilibrium, and maintaining natural resources. Acknowledging the interdependence of social, economic, and environmental systems, this notion seeks to foster equilibrium between human necessities and the conservation of the environment for posterity [16].
As part of its aggressive efforts to diversify its economy and lessen its dependence on oil, Saudi Arabia has prioritized environmental sustainability and renewable energy [17]. Saudi Arabia’s Vision 2030 strives for environmental sustainability through the use of renewable energy sources and reduction in carbon emissions, such as solar and wind power, conserving various natural resources, and motivating businesses to support the realization of Vision 2030 [18]. Additionally, the nation wants to advance sustainable methods in a variety of sectors, including urban planning, agriculture, and water management [19].
Businesses may choose to actively participate in environmentally responsible operations because of two main factors: first, to outperform competitors by obtaining the necessary resources [11,20]; second, to obtain support from the public for their activities to give them legitimacy [21,22]. Finally, stakeholder theory contends that a company’s reputation and image can be boosted by demonstrating higher accountability and transparency through a greater commitment to good environmental practices, thereby balancing the opposing interests of several stakeholders [11,23]. Thus, theories suggest that well-designed governance structures effectively protect the interests of several stakeholders, which may improve the environmental performance of firms [24].
Corporate governance is the body of laws, norms, and guidelines governing how a company runs. It includes systems used to manage and control businesses and other organizations [25]. Transparency, accountability, fairness, responsibility, independence, compliance, and strategic vision are essential traits for effective company governance [26]. An audit committee is necessary to ensure that internal controls and financial reporting are accurate within the corporation [27]. A corporation can boost its performance, improve its reputation, and foster stakeholder trust by implementing these traits in its governance system [28]. Corporate performance is an assessment of a company’s success in achieving its goals and objectives, which are often planned [29]. It includes a range of operational components such as a company’s profitability, efficiency, ability to generate cash flows, market share, and overall industry competitiveness [30]. Key performance indicators (KPIs), such as revenue growth, profitability, return on investment, cash inflow growth, market share, customer happiness, and employee productivity, are often analyzed to evaluate a company’s performance [31,32]. To evaluate the success of a company’s strategies and management choices, stakeholders such as investors, shareholders, employees, and customers periodically evaluate the company’s performance [33]. Strong business performance is typically associated with success and the ability to achieve sustainable long-term profitability and liquidity growth over the long-term [32,34]. A company’s substandard performance is also a sign of operational difficulties, strategic problems, or inefficiency that needs to be fixed to raise the company’s performance and enhance its liquidity [35].
The intersection of corporate governance and environmental sustainability practices is the area of unmet research needs for this article because little is known about the effects of particular corporate governance mechanisms (such as ownership structure, diversity, and board independence) on environmental sustainability practices in Saudi businesses. This may yield fresh insights into how governance features affect the uptake and efficacy of certain approaches. Recent legal changes and instructions from Saudi authorities (such as Saudi Vision 2030 and the Kingdom’s growing focus on sustainability) may have altered the corporate governance landscape in addition to the impact of changes on business performance. The manner in which these modifications affect the interplay among corporate governance, environmental sustainability, and company performance is not well understood.
Based on the above disunion, the objective is to evaluate and optimize the characteristics of the audit committee, such as its size, independence, frequency of meetings, and member commitment, to enhance financial transparency and corporate governance. Moreover, this study aimed to examine the relationship between ESG and BuPE. It attempts to improve the dependability and accuracy of financial reporting by placing a robust oversight framework and promoting effective communication, independence, and competence among committee members.
Our work contributes to existing studies on the audit committee characteristics as a mechanism for corporate governance and sustainability, as well as their impact on company performance in several ways. First, the audit committee and the effectiveness of board oversight on environmental sustainability have been recognized in previous research, but the underlying mechanisms are still poorly understood empirically [36]. This is particularly true with regard to CG’s implications for environmental sustainability, which are only now starting to garner scholarly interest from researchers [37].
Second, in contrast to studies that focus on variables related to corporate sustainability performance (CSP), SRQ, or SRS, we examine the effects of the determinants of audit committee characteristics and environmental sustainability, considering their interdependence. Thus, we add to the literature by revealing the potential indirect effects of sustainability reporting processes and performance. Third, previous studies have investigated how corporate governance (CG) processes influence environmental sustainability [38]. Environmental sustainability was measured through text analysis using complex self-created scores that have proven difficult to implement in previous research. The most accurate and comparable indicators for this study come from the Transparency Benchmark, which is based on objective research evaluating the impact of sustainability and audit committees on performance. To ascertain whether Saudi businesses adhered to sustainability reporting standards, we collected information from the Sustainability Disclosure Database of the Global Reporting Initiative (GRI). Finally, most research on the variables influencing SRQ and ESG is cross-sectional [39], which poses a problem in terms of causality. Our approach uses panel data that allow us to infer the causes.
This study sought to ascertain the effects of environmental sustainability practices and corporate governance traits on business performance among Saudi-listed companies. The research design included research methodology, data collection and analysis, result extraction, and the provision of useful and practical recommendations [40]. The main inquiry for the research was [41] What effect do corporate governance characteristics and environmental sustainability practices have on the financial performance of Saudi listed companies? The following sections explain the theoretical framework of the article, a section on methodology and analysis, from which the results are drawn and discussed, and a proposal for future research.

2. Literature Review and Research Hypothesis

Saudi Arabia’s population has expanded by 1.62% annually over the past 40 years because of a population explosion. Saudi Arabia, with 35,013,414 people, was the fourth-largest Arab country in 2018 [42]. In addition, due to the recent expansion of the Saudi economy [43], there are a large number (more than 200 companies) of companies listed in the Saudi market that publish their information annually [44]. To our knowledge, there are no previous studies examining corporate governance and environmental sustainability and their impact on Saudi business performance. Thus, the main problem of this research is represented by the following question: Do corporate governance mechanisms obligate companies to publish sustainability reports on a regular basis to help enhance environmental sustainability and, thus, the performance of Saudi businesses?
Saudi Arabia’s corporate governance code prioritizes social responsibility programs undertaken by Saudi businesses, and the public reporting of these endeavors [45]. Many previous studies and the literature have concluded that corporate governance and environmental sustainability positively affect company performance [46,47]. Corporate governance encourages sustainable actions [48].
A company’s reputation is improved, and the risk of legal and regulatory repercussions decreases when the audit committee complies with pertinent legislation and standards, which has a beneficial effect on business performance [49,50]. Non-compliance can have negative effects on a company’s reputation and possibly impair its capacity to conduct business, including financial and legal ramifications [51].
The field of sustainable or responsible business practices serves as a foundation for several theories that investigate the relationship between environmental sustainability and corporate governance traits in relation to company performance [52]. Several frameworks and theories may be useful for understanding this relationship [53]. First, stakeholder theory states that businesses must consider the interests of all parties, including consumers, employees, shareholders, and the general public [54]. Second, the interaction between principals, such as shareholders and agents, such as firm executives, is the main emphasis of agency theory [55]. This implies that corporate governance practices, such as executive salaries and board structures, are intended to balance the interests of principals and agents [25].
Theoretical backgrounds:
Agency, stewardship, resource dependence, and institutional theories are theoretical frameworks and historical contexts used to study the impact of corporate governance on company performance [56]. The idea of environmental sustainability is supported by many academic frameworks, including stakeholder theory, triple bottom line (TBL) theory, natural resource-based view (NRBV), and legitimacy theory [57]. Contemporary research and empirical evidence on corporate governance and business performance frequently investigate how specific governance characteristics, such as board diversity, CEO duality, and ownership structure, affect performance measures (e.g., return on assets and market valuation) [58]. In Saudi Arabia, research has yielded varied results, with some claiming that corporations with superior governance processes have greater market valuations, while others have found no such association [59]. This could be attributed to different levels of governance maturity and enforcement across businesses. Environmental sustainability and business performance: Empirical research in numerous markets, including Saudi Arabia [60], shows that enterprises devoted to environmental sustainability frequently perform better financially, particularly in the long run. These benefits can result from cost reductions (e.g., energy efficiency), improved brand reputation, and fewer regulatory concerns [61].

2.1. Audit Committee Characteristics and Business Performance

The board of directors’ subcommittee, which oversees the management of the company’s financial reporting, is called the audit committee. The audit committee oversees several processes, such as facilitating communication between the board and the external auditor and financial reporting, including internal controls [62,63]. The performance of a company’s operations can be significantly impacted by the quality of its audit committee [64]. Maintaining consistent and efficient correspondence with external auditors can improve the audit procedure and bolster the dependability of financial statements [50,65]. This promotes cooperation, which may result in improved risk assessment and reduction [66]. Financial and operational concerns are proactively identified and addressed by an efficient audit committee [32,67]. This preventive strategy can lessen the effects of possible problems and improve business performance [68]. The quality of an audit committee can have a significant impact on how well a corporation performs [69]. A competent, impartial, and well-run audit committee has a greater chance of supporting accurate financial reporting, efficient risk management, and improved corporate governance, all of which can have a favorable effect on business outcomes [70].
The findings of a few earlier studies supported the notion that corporate environmental social responsibility significantly improves business success [68,69,71]. The findings of a few earlier studies suggest that having a director on both audit and nomination committees is important and has a negative impact on profitability [64]. However, earlier research found no meaningful correlation between experience and business performance [69].

2.1.1. Audit Committee Size and Business Performance

According to the best standards, the audit committee’s size and makeup should match the complexity and requirements of the company [72]. A smaller audit committee would be more flexible and effective in reaching decisions [73]. It is simpler to organize and communicate when there are fewer participants [74]. However, a larger committee may include a wider range of knowledge and viewpoints, which could improve the standard of oversight [75]. A smaller committee would find it difficult to include all areas of expertise required for efficient financial supervision [76]. A broader committee may have members with a range of experiences and backgrounds, offering a more thorough understanding of risk and financial management challenges [77]. Smaller committees may have simpler coordination and communication, which accelerates decision-making [78]. Larger groups could have trouble coordinating and communicating effectively, which could delay the decision-making process [79]. Smaller committee members might have more work to do, which could make it harder for them to carefully review financial data [80]. In larger committees, workload distribution may be easier to manage, thus allowing members to concentrate on their areas of expertise [81].
The results of earlier studies show a statistically significant and favorable relationship between the size of the audit committee and the organization’s success [69,82]. A few earlier studies’ findings showed that audit committee size had no appreciable effect on a company’s performance. For example, [83]. Hence, the following hypothesis was formulated based on the conversation and analysis of earlier literature:
H1. 
There is a positive relationship between the size of the audit committee and business performance.

2.1.2. Audit Committee Independence and Business Performance

An independent audit committee is essential to guarantee impartiality and objective supervision, and an independent audit committee is essential [84]. Since independent members are less likely to be involved in conflicts of interest, the financial reporting process may be more accurate and open [85]. A weakened supervision process caused by a lack of independence could result in false financial reporting and lower investor confidence [86]. Smaller committees may find it easier to preserve independence and objectivity because there are fewer possible conflicts of interest [87]. A larger committee size may make it more difficult for members to remain impartial and independent [88].
According to earlier research, there is a strong positive correlation between profitability and independent committee members [64,69]. Earlier research findings did not indicate that audit committee independence had any additional impact on financial performance [89]. Thus, in light of the discussion and examination of previous literature, the following hypothesis is developed:
H2. 
The independence of the audit committee improves business performance.

2.1.3. Audit Committee Meeting and Business Performance

The audit committee guarantees the dependability and correctness of financial statements [90]. Sustaining the confidence of creditors, investors, and other stakeholders is contingent upon this [91]. Companies that present their finances accurately and transparently have a higher chance of drawing investment and keeping their names in the industry [92]. The literature utilizes meeting frequency as a proxy to quantify audit committee activity, and the number of meetings represents the effectiveness of the committee’s monitoring [69,93]. Regularly meeting audit committees have a greater understanding of a company’s situation [69,94].
According to earlier research findings, there is a strong explanatory relationship between the performance of market-based enterprises and audit committee meetings [95]. According to the findings of a few earlier studies, the performance of the company and audit committee meetings are statistically significantly negatively correlated [71]. Earlier research on the frequency of audit committee meetings failed to find a meaningful correlation with business success [69,83,89]. Thus, the following hypothesis was created in light of the discussion and analysis of earlier literature.
H3. 
There is a negative relationship between the frequency of audit committee meetings and business performance.

2.1.4. Audit Committee Commitment and Business Performance

A devoted audit committee ensures that financial statements are reliable and accurate. Consequently, this strengthens a company’s financial reporting trustworthiness [96]. The committee’s commitment to understanding hazards plays a role in their identification and reduction and supervises the business’s risk management procedures [97]. Thus, total business resilience may improve [98]. An enthusiastic audit committee makes sure the company abides by all relevant laws, regulations, and corporate governance standards [99]. The committee’s dedication to keeping an eye on and assessing internal controls aids in the prevention of financial reporting fraud and errors [100]. It is crucial to remember that there are many moving parts and a complicated relationship between the AC’s dedication to the audit committee and business performance [25]. The success of a company can benefit from an engaged audit committee [84]. As a result, the following hypothesis was developed in light of previous literature’s analysis and discussion:
H4. 
There is a positive relationship between audit committee commitment and business performance.

2.2. Environmental Sustainability and Business Performance

Institutional theory examines how societal norms, beliefs, and expectations affect and are influenced by organizations [101]. Within the framework of environmental sustainability, the institutional theory posits that proficient corporate governance methodologies are consistent with societal norms regarding conscientious and enduring business conduct, thus augmenting favorable business outcomes [102].
A company’s reputation, long-term survival, and many other aspects of its operations and performance can be significantly affected by environmental sustainability [98]. Over time, adopting environmental sustainability practices, such as waste reduction strategies or energy-efficient technologies, can lead to significant cost savings [103]. Reducing waste leads to lower disposal costs, whereas using renewable energy sources can reduce energy prices and improve company performance [104]. Customers have become more aware of environmental sustainability issues and often choose companies that demonstrate a strong commitment to environmental sustainability [105]. By implementing environmentally friendly measures, companies attract environmentally conscious customers, thus improving their performance [106]. Companies with increasingly stringent environmental standards are subject to fines, penalties, or other negative impacts [107]. Companies must stay ahead of regulatory requirements and reduce potential legal and financial risks by implementing environmental sustainability practices and improving their performance [108]. Adopting environmentally responsible practices helps companies expand their existing customer base and reach new markets as sustainability becomes a top priority for consumers and companies globally, both generally and specifically in Saudi Arabia [109]. Certain sectors can require or comply with sustainability certifications to enter new markets or supply networks [110].
According to previous studies [111,112], investors boost a company’s social and environmental performance once stocks show financial returns on social and environmental advancements. Many previous studies have concluded that there is a positive relationship between environmental sustainability practices and company performance [104,106,108,111,112,113]. Few prior studies have yielded evidence to substantiate the association between environmental sustainability and business performance [98]. The association between environmental sustainability and company performance has been discussed previously. In light of this, the authors propose the following hypothesis:
H5. 
There is a positive relationship between environmental sustainability and business performance.

3. Research Method

Correlational studies were employed to investigate the relationship between business performance as the dependent variable and environmental sustainability, commitment, meeting, size, independence, and commitment of the audit committee as independent variables to achieve the study’s objectives.
The panel data approach was used in this study to examine how the independent variables affect the dependent variable, company performance [114]. This approach has been used in earlier accounting research projects. Panel data were also used in this investigation. For instance, studies have been conducted in [64,115].

3.1. Data Collection

As previously stated, the CG (audit committee characteristics) study needed certain data obtained from the annual reports of Saudi market businesses. ESG was gathered from the Bloomberg database. More specifically, data on business performance were gathered from the data stream.
Only Saudi businesses with annual ESG ratings in the Bloomberg database and the data necessary for the analysis from 2015 to 2021 were used in this study. As of December 2021, 216 companies have been registered in the Saudi market in various sectors, such as the financial and non-financial sectors. Of these, 85 had no ESG reports, and a few were missing data. Consequently, 917 company-year data (included in the study’s models) covering 131 companies from 2015 to 2021 constitute our final sample.

3.2. Measurement of Variables

This section Table 1 describes all variables as independent, independent variables control and dependent variables were measured.

3.3. Model Regression

OLS regression assumes a linear relationship between the independent and dependent variables. However, in many real-world scenarios, this relationship may be nonlinear. By applying this technique, variables can be transformed to capture nonlinear relationships, allowing for a more accurate regression model. Therefore, OLS regression analysis was used to investigate the relationship between audit committee characteristics, ESG, and business performance. This study is similar to previous studies [50]. The regression equation is as follows:
Model:
BuPE = α0 + β1 × ACSE + β2 × ACIND + β3 × ACMET + β4 × ACCOM + β5 × ESG + β6 × Gth +β7 × Bg4 +β8 × LOS + β9 × LEVG + β10 × TOASSET +β11 × YEARS + ε

4. Study Findings

4.1. Descriptive Analysis

The descriptive statistics of the continuous variables are shown in Table 2. State version 18 was used to calculate the mean, standard deviation, and minimum and maximum of the descriptive statistics. Based on the descriptive analysis summarized in Table 2, the mean value of BuPE was −1,506,853 with a minimum of −1.09 × 109 and a maximum of 3.71 × 108. Moreover, the mean values of the ACSE, ACIND, ACMET, ACCOM, and CSR were 3.517029, 0.614529, 5.805664, 0.821808, and 0.979677, with a minimum of 3, 0.5, 3, 0, and −0.04054, and a maximum of 5, 0.666667, 18, 0.95, and 2.783784. The mean values of the control variables Gth, LEVG, and TOASSET were 409.3897, 1.015606, and 1.91 × 109, respectively.

4.2. Correlation Analysis

As shown in Table 3, Pearson’s correlation analysis was used to evaluate and elucidate the strengths of the relationships among the study variables. Table 3 provides the correlation coefficient (r) values that indicate the strength of the association between the variables and aids in assessing this strength. A correlation of 0 indicates no association, but a correlation of ±1.0 indicates an ideal relationship [131]. Conversely, the correlation (r) between ±0.1 and ±0.29 indicates a little association; between ±0.30 and ±0.49 a medium link; and above ±0.50 a strong relationship, according to the interpretation of the correlation between 0 and 1.0. The results of this study demonstrated that all correlations were lower than 0.80. This supports the claim that to guarantee that the multicollinearity problem was not present in this study, the correlation matrix should not be greater than 0.80 [132]. Determining the VIF in Table 3 was the next step, as a VIF greater than 10 indicates a multicollinearity problem [131]. The observed VIF values ranged from 1.05 to 2.00, indicating the absence of multicollinearity.

4.3. Regression Results

Performing the Breusch–Pagan LM test compares the OLS and RE models. These two models differ primarily in that they consider individual influences. Therefore, the existence or absence of ui, which represents a random effect, can be the basis for the creation of a statistical test. The Breusch–Pagan LM test was appropriate for this assessment. The test is mostly predicated on the notion that if ui is equal to zero for all i’s, then individual heterogeneity does not exist, and the pooled OLS model can be applied. Conversely, if the LM test yields a significant chi-square value, meaning a p-value greater than 0.05, the pooled estimation appropriateness of the null hypothesis is accepted. Therefore, pooled ordinary least squares (OLS) was recommended. Table 4 indicates that the pooled OLS method was preferred. Ordinary Least Squares (OLS) regression is the most commonly used regression technique, which assumes that errors are homoscedastic and normally distributed [133]. Furthermore, Table 4’s results from the Breusch–Pagan/Cook–Weisberg test for heteroskedasticity indicated that the data were heteroskedastic, necessitating the use of a robust model to address this problem [134].
Table 5 describes the results of the regression analysis of the models—linear regression of the article variables that relate the independent variable to the dependent variable.
Additional analysis:
As mentioned earlier, pooled OLS was preferred, but because this estimator cannot manage the potential danger of endogeneity, using statistical models such as pooled OLS may produce biased results. However, we employed the popular lagged independent variables strategy to lessen the negative impact of endogeneity in our model [45,135]. As a result, we regressed the lagged independent variables audit committee meetings, audit committee independence, and audit committee size to re-estimate our baseline model, audit committee commitment, and environmental sustainability on our dependent variable as independent variables and business performance. Based on the results, the value of Prob > chibar2 was less than 0.05, and the random-effects GLS regression was appropriate. Table 6’s findings demonstrated that strong correlations between environmental sustainability and corporate success and audit committee size, independence, meetings, and commitment were still present.
Moreover, based on the results of the Breusch–Pagan/Cook–Weisberg test for heteroskedasticity in Table 4, the data had heteroskedasticity, and FGLS regression was appropriate for solving the problem of heteroskedasticity [114].
Moreover, the FGLS regression addresses heteroscedasticity by estimating the parameters of the model while considering varying levels of variance across the observations. This was performed by applying weights to the observations based on their estimated variances. This allowed for more accurate parameter estimates than ordinary least squares (OLS) regression, which assumes a constant variance across all observations. By accounting for heteroscedasticity, the FGLS regression can provide more reliable and efficient results. Significantly, in environmental research, FGLS regression can be applied to analyze the relationship between pollution levels and different factors, such as population density, industrial activity, and geographical variables. By considering heteroscedasticity, the FGLS regression can improve the precision of the estimated effects and help identify significant predictors. Table 6’s findings demonstrated that strong correlations between environmental sustainability and corporate success and audit committee size, independence, meetings, and commitment were still present.

4.4. Discussion

The outcomes of the linear regression analysis revealed the impact of various independent variables on business performance (BuPE), presenting coefficients, t-values, and p-values for each predictor. Notably, the audit committee independence variables ACSE (Coef. = 0.161, t = 3.77, p = 0.000) and ACIND (Coef. = 2.157, t = 4.6, p = 0.000) demonstrated a statistically significant positive correlation with BuPE. The observed positive and statistically significant correlation between ACSE and business performance, as indicated in Table 5 and Table 6, supports H1. This study hypothesized that increased ACIND positively impacts business performance. This finding was similar to expectations, as apparent in Table 5 and Table 6. Thus, the results support H2. This finding aligned with prior research, which also identified a significantly positive relationship between ACSE, ACIND, and business performance [135,136].
Similarly, ACMET indicated a statistically significant negative correlation with BuPE, as evidenced by its coefficient of −0.02, t-value of −2.1, and p-value of 0.036. This study predicted that ACMET influences aspects of business performance. This study hypothesized that increased ACMET negatively affects business performance. This finding was similar to expectations, as apparent in Table 5 and Table 6. Thus, the results support H3. Corporate Social Responsibility (CSR) (Coef. = 0.325, t = 7.1, p = 0.000), Growth (Gth) (Coef. = 0.003, t = 5.88, p = 0.000), and affiliation with Big Four audit companies (Bg4) (Coef. = 0.499, t = 9.12, p = 0.000) exhibited a statistically significant positive association with BuPE. This study anticipated that CSR influences various aspects of business performance. Specifically, the hypothesis posits that increased emphasis on CSR positively affects business performance. The findings, as reflected in Table 5 and Table 6, aligned with this expectation, providing support for H5. These results are consistent with earlier studies, such as those conducted by [137,138], and which also identified a positive and statistically significant relationship. These studies suggested that the ACMET plays a crucial role in determining firm performance across diverse emerging markets. Additionally, they implied a potential trade-off between the monitoring and advising functions of the audit committee in relation to the ACMET.
Conversely, the (ACCOM) (Coef. = −0.406, t = −1.42, p = 0.156), Losses (LOS) (Coef. = −0.105, t = −1.86, p = 0.063), Leverage (LEVG) (Coef. = 0.183, t = 1.55, p = 0.121), and Total Assets (TOASSET) (Coef. = −0.005, t = −0.27, p = 0.785) did not achieve statistical significance at the conventional level. This study predicted that ACCOM has a positive relationship with business performance. This finding was in conflict with expectations, as apparent in Table 5 and Table 6. Thus, the results do not support H4. This result was similar to that of earlier studies that found no statistically significant difference between ACCOM and business performance [139]. These studies suggested that ACCOM is not an important factor for determining firm performance in emerging markets. They also implied that ACCOM may have a trade-off between the monitoring and advisory roles of the audit committee.
It is crucial to approach the interpretation cautiously, considering both statistical and practical significance and recognizing potential limitations in the model. The results highlighted the potential influence of factors such as CSR initiatives and affiliation with Big Four audit companies on business performance, offering practical insights for strategic decision-making in the business context.
Finally, during our supplementary analysis, we employed both feasible generalized least squares (FGLS) and pooled ordinary least squares (OLS) regression techniques to examine our findings thoroughly. Remarkably, both methods produced coherent results, strengthening the robustness and dependability of the research outcomes. The alignment of outcomes across the linear regression, Pooled OLS, and FGLS approaches amplifies the credibility of our study, validating the stability of the observed relationships among the variables in question. This dual confirmation underscores the steadfastness and potency of the identified associations, instilling an additional layer of confidence in the overall reliability of the research findings.
These data indicate that audit committees operating in companies with poor environmental performance can improve business performance by implementing effective corporate governance. These audit committees also have longer terms than their peers do.

5. Conclusions

This study endeavored to explore the impact of audit committee attributes on BuPE among Saudi-listed companies while concurrently examining the connection between BuPE and ESG measured by sustainability and climate risk SCR. To achieve these objectives, this study adopted 131 firms from 2015 to 2021 and used appropriate analysis to test the hypotheses of this study. This study also employed an additional analysis to verify the robustness of the preliminary results.
The preliminary findings of this study indicated that ACSE and ACIND have a favorable influence on BuPE, whereas ACMET has a detrimental impact on BuPE. However, no correlation was observed between ACCOM and BuPE in the present study. Furthermore, our analysis revealed a positive and statistically significant association between ESG levels and BuPE levels. The results of the additional analyses conducted in this study confirmed the validity of these findings.
The findings of this study are of great significance to both current and prospective investors in the Saudi market as well as government agencies in Saudi Arabia. These findings provide a thorough understanding of how audit committee attributes affect the degree of BuPE as well as the influence of ESG factors on BuPE. Examining the attributes of audit committees provides a more refined understanding of the connection between the characteristics of audit committees and ESG and BuPE, enriching the understanding of how these attributes function in various organizational contexts. Furthermore, this study contributes to the existing literature on SCR by providing insights into the effectiveness of SCR in the Saudi environment. SCR has received great attention among researchers because it has recently been applied in the Saudi context.
This study, like the rest of the research, has some limitations. First, it utilized non-financial businesses in the Saudi market. As such, the outcomes of this study cannot be extended to a broader market. Consequently, future research should focus on the financial sector, which is a crucial component of the Saudi market. Second, this research focused on a specific set of AC features of the audit committee, namely ACSE ACIND, ACMET, and ACCOM. Therefore, it is recommended that researchers conduct research that examines all characteristics of this committee. Finally, this study explored the influence of two variables, audit committee and ESG, on the level of BuPE. As such, it is suggested that future research should examine additional factors that may impact BuPE and address investors’ concerns, such as earnings management, value-added tax, and voluntary disclosure.
Environmental sustainability and corporate governance have a significant impact on the success of businesses. Organizations that fortify their governance structures and embrace sustainable methodologies may witness amplified fiscal outcomes, elevated prestige, and amplified investor attention, all of which can play a role in generating enduring value. These considerations are particularly important in the Saudi Arabian context, where there is a strong push for sustainable development and economic diversification.
Future studies on the effects of environmental sustainability and corporate governance on business performance should focus on the following, according to the author: The relationship between environmental performance and a company governance functions in ESG integration The effect of market performance on sustainability reporting analysis of governance and sustainability practices across time creativity in sustainability and corporate governance ESG ratings’ effect on investor behavior.

Funding

This work was funded by the Deanship of Scientific Research at Jouf University under contract no. (DGSSR-2023-03-02391).

Institutional Review Board Statement

Not applicable.

Informed Consent Statement

Not applicable.

Data Availability Statement

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

Acknowledgments

The authors extend their appreciation to the Deanship of Scientific Research at Jouf University for funding this work through a large-group Research Project under grant number (DSR2023-04-02391).

Conflicts of Interest

The author declares no conflicts of interest.

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Table 1. The measurement of all variables.
Table 1. The measurement of all variables.
Variable and AbbreviationHow to Measure It (Related Source)
Business Performance, BuPEThe log of the gap between the equity market and book values is used to measure it [116].
Audit committee size, ACSEIt is measured by the total number of committee members of the audit committee [117].
Audit committee independence, ACINDIt is measured by the ratio of audit committee independence to the total number of committee members of the audit committee [118].
Audit committee meetings, ACMETIt is measured by how many meetings of the audit committee were held per year [119,120].
Audit committee commitment, ACCOMIt is measured by the ratio of attendance at meetings of the audit committee members to total meetings [121,122].
Environmental Sustainability, ESGThe Bloomberg score is utilized to gauge a company’s level of environmental, social, and governance (ESG) disclosures [123].
Growth, GthIt is measured by the change in sales divided by lagged sales [124].
Big Four audit companies, Bg4It is measured by dummy variable: 1 is the firm audited by Big4 and 0 if other [125].
Loss, LOSIt is measured by dummy variable: 1 if the firm has loss and 0 if other [115,126].
Leverage, LEVGIt is measured by total debts to total assets [127,128].
Total Assets, TOASSETThe logarithm of market capitalization [129,130].
Table 2. Descriptive Statistics of Continuous Variables.
Table 2. Descriptive Statistics of Continuous Variables.
VariableObsMeanStd. Dev.MinMax
BuPE917−1,506,8537.98 × 107−1.09 × 1093.71 × 108
ACSE9173.5170290.70983635
ACIND9170.6145290.0715840.50.666667
ACMET9175.8056642.23652318
ACCOM9170.8218080.09685800.95
CSR9170.9796770.71776−0.040542.783784
Gth9170.35308313.89853−82.1065409.3897
LEVG9170.4169610.23788401.015606
TOASSET9172.36 × 1071.14 × 10801.91 × 109
Table 3. Results of Pearson Correlation analysis and multicollinearity test.
Table 3. Results of Pearson Correlation analysis and multicollinearity test.
VariableBuPE_LogACSEACINDACMeet~gAUDITC~MCSRGthBg4LOSLEVGTOASSETVIF1/VIF
BuPE_Log1.000 -
ACSE0.0621.000 1.760.568
ACIND0.032−0.654 ***1.000 1.80.555
ACMET−0.0040.113 ***−0.134 ***1.000 1.050.956
ACCOM−0.081 **−0.0040.0150.0201.000 1.040.966
CSR0.375 ***0.094 ***−0.109 ***0.158 ***−0.0291.000 1.150.872
Gth0.077 **0.017−0.0420.025−0.126 ***0.0561.000 1.020.976
Bg40.397 ***0.059 ***−0.122 ***0.038−0.0750.275 ***0.0271.000 1.140.880
LOS−0.131 ***0.0190.019−0.084−0.072−0.192−0.014 ***−0.132 ***1.000 1.130.888
LEVG0.093 ***0.013−0.021 **−0.019−0.0940.031−0.021 *0.116 ***0.219 ***1.000 1.080.924
TOASSET0.036−0.0190.0800.0000.0100.0410.0430.0850.0470.0141.0001.030.975
Mean VIF1.22
Notes: *** Correlation is significant at the 0.01 level, ** Correlation is significant at the 0.05 level, and * Correlation is significant at the 0.1 level.
Table 4. Test of heteroscedasticity and Lagrangian multiplier test.
Table 4. Test of heteroscedasticity and Lagrangian multiplier test.
Breusch and Pagan Lagrangian Multiplier Test for Random EffectsBreusch–Pagan/Cook–Weisberg Test for Heteroskedasticity
chibar2(01) = 0.00 chi2 (1) = 23.96
Prob > chibar2 = 1.0000OLS is appropriateProb > chi2 = 0.0000 − there is hetro
Table 5. Regression results of models—linear regression.
Table 5. Regression results of models—linear regression.
Robust
VariableCoef.tp > t
ACSE0.1613.770.000
ACIND2.1574.60.000
ACMET−0.02−2.10.036
ACCOM−0.406−1.420.156
CSR0.3257.10.000
Gth0.0035.880.000
Bg40.4999.120.000
LOS−0.105−1.860.063
LEVG0.1831.550.121
TOASSET−0.005−0.270.785
YEARSIncluded
_cons4.1038.420.000
Number of obs917
Prob > F0.000
R-squared0.288
Root MSE0.678
Table 6. Random-effects GLS regression and cross-sectional time-series FGLS regression.
Table 6. Random-effects GLS regression and cross-sectional time-series FGLS regression.
The Dependent Variables: Business Performance (BuPE)Random-Effects GLS RegressionCross-Sectional Time-Series FGLS Regression
VariableCoef.zp > zCoef.zp > z
Audit committee size (ACSE)0.1613.380.0010.1523.360.001
Audit committee independence (ACIND)2.1574.390.0002.2354.740.000
Audit committee meetings (ACMET)−0.02−1.740.082−0.019−1.670.095
Audit committee commitment (ACCOM)−0.406−1.40.160−0.31−1.10.272
Corporate social responsibility (CSR)0.3258.040.0000.3278.480.000
Growth (Gth)0.0031.750.0800.0031.520.129
Big Four audit companies (Bg4)0.4998.950.0000.4989.310.000
Losses (LOS)−0.105−1.710.088−0.111−1.880.060
Leverage (LEVG)0.1831.60.1090.1981.80.071
Total assets (TOASSET)−0.005−0.320.750−0.005−0.320.752
YEARSIncludedIncluded
_cons4.1037.960.0003.9877.970.000
Number of obs917--917--
Number of groups7--7--
Wald chi2(16)273.35--296.78--
Prob > chi20.000--0.000--
R-sq: overall0.288-- --
Coefficient---generalized least squares
Panels---heteroskedastic
Correlation---no autocorrelation
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Alnor, N.H.A. Corporate Governance Characteristics and Environmental Sustainability Affect the Business Performance among Listed Saudi Company. Sustainability 2024, 16, 8436. https://doi.org/10.3390/su16198436

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Alnor NHA. Corporate Governance Characteristics and Environmental Sustainability Affect the Business Performance among Listed Saudi Company. Sustainability. 2024; 16(19):8436. https://doi.org/10.3390/su16198436

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Alnor, Nasareldeen Hamed Ahmed. 2024. "Corporate Governance Characteristics and Environmental Sustainability Affect the Business Performance among Listed Saudi Company" Sustainability 16, no. 19: 8436. https://doi.org/10.3390/su16198436

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