When Governance Talks Back: Board Composition as a Boundary Condition of the ESG–Firm Value in Saudi Arabia
This study of Saudi non-financial firms reveals that while ESG disclosure generally correlates with a firm-value penalty, board composition attributes—specifically gender diversity, size, and expertise—act as critical boundary conditions that differentially moderate this relationship, with gender diversity and board size offering distinct, often substitutive or performance-dependent, effects on value across the distribution of firm performance.
Original paper licensed under CC BY 4.0 (https://creativecommons.org/licenses/by/4.0/). This is an AI-generated explanation of the paper below. It is not written or endorsed by the authors. For technical accuracy, refer to the original paper. Read full disclaimer
In the world of business, companies often try to prove they are good citizens. They publish reports detailing how they treat the environment, how they treat their workers, and how they run their internal affairs. These reports, known as ESG disclosures, are meant to signal to investors that a company is responsible and trustworthy, with the hope that this trust will translate into a higher market value. In Saudi Arabia, a major shift is underway. The nation is pushing hard for a sustainable future under a national plan called Vision 2030, and the stock exchange has introduced new rules requiring companies to share this kind of information. The big question for investors and regulators is simple: does actually publishing these reports make a company more valuable, or does it just add paperwork and cost?
To answer this, researchers looked at hundreds of non-financial companies listed on the Saudi Stock Exchange over a seven-year period. They did not just look at the average result for all companies; instead, they examined how the relationship between reporting and value changed for companies that were struggling, those that were doing just okay, and those that were already highly successful. They also paid close attention to the people sitting in the boardroom—the group of directors who oversee the company. Specifically, they looked at three things about these boards: how many women were on them, how many members had specialized skills or experience, and how large the group was. The goal was to see if the makeup of the boardroom changed the way the market reacted to the company's sustainability reports.
The researchers gathered data from public annual reports and governance documents for 413 company-year observations. They used a variety of statistical methods to ensure their findings were not just a fluke, checking for issues like whether the results held true over time or if they were skewed by the specific industries involved. The study focused on a measure of firm value that compares what the market thinks a company is worth against what its assets are worth on paper. They found that, overall, the act of disclosing ESG information did not automatically make companies more valuable. In fact, for many firms, the relationship was negative, suggesting that the market did not immediately reward the act of reporting. However, this story was not the same for every company. The effect was not spread evenly; it was concentrated at the very bottom and the very top of the value distribution. Companies that were already doing very well or very poorly saw a different reaction to their reports than those in the middle.
The composition of the boardroom turned out to be a critical factor in how these reports were received. The presence of women on the board was a strong, consistent positive factor. Regardless of the company's performance, having female directors was linked to higher firm value. This suggests that diversity brings a perspective that the market values on its own. However, when it came to the interaction between having female directors and publishing ESG reports, the dynamic changed for the most successful companies. For the highest-valued firms, having a diverse board and publishing detailed reports seemed to act as substitutes rather than partners. In other words, for these top-tier companies, the value provided by having women on the board was so strong that adding more sustainability reporting did not add extra value; the market had already priced in the benefit of the diverse leadership.
The size of the board also played a specific role. Larger boards were generally associated with higher firm value, particularly for the top-performing companies. Yet, similar to the gender diversity finding, a larger board size seemed to dampen the extra value that came from ESG reporting for these high-value firms. It appears that for companies already at the top of the market, a large, well-connected board provides enough oversight and credibility that the additional signal from a sustainability report adds little new information.
Finally, the study looked at the expertise of the board members. Contrary to what one might expect, having directors with specific, relevant skills was directly linked to lower firm value in the short term. The researchers suggest that these expert directors might be applying stricter, more rigorous standards to sustainability spending, which could increase costs or delay projects in a way that the market views negatively in the immediate future. While these experts might improve the quality of the reports, the market did not seem to reward that quality with a higher stock price right away. The interaction between expertise and reporting was also limited, showing a negative effect only for companies in the middle of the performance range.
The study concludes that the value of sustainability reporting in Saudi Arabia is not a simple "good news" story. It depends heavily on who is running the company and where that company stands in the market. For investors and regulators, the takeaway is that a one-size-fits-all approach to ESG rules will not work. The market reacts differently to a report from a small, struggling company than it does to one from a market leader. Furthermore, the people in charge matter immensely. A board with female directors brings inherent value, while a board with deep expertise might be doing the hard work of scrutiny that the market does not immediately recognize. As Saudi Arabia continues to build its sustainable economy, understanding these nuances is essential. The data suggests that simply forcing companies to publish reports is not enough; the quality of the governance behind those reports is just as important as the reports themselves.
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