Energy Policy

ESG performance in relationship with board of directors sustainability incentives and

CSR sustainability committee: firms from MENA region
--Manuscript Draft--

Manuscript Number:

Article Type: Research Note

Section/Category: Investment, financing, and other economic issues

Keywords: ESG performance; board of directors; sustainability incentives compensation; CSR

sustainability committee

Corresponding Author: Ali Ahmadi

Sfax, TUNISIA

First Author: Mondher Youssef

Order of Authors: Mondher Youssef

Ali Ahmadi

Abdelfettah Bouri

Abstract: This paper seeks to fill the gap of environmental, social and governance performance
in the literature by testing the impact of Board Size, Board independence, Women on
the Board, sustainability incentives compensation and CSR committee on ESG
performance. Using one of the largest datasets to date, consisting of an unbalanced
panel dataset consisting of 313 firm-year observations from MENA region, covering a
period of 11 years (2007–2017), our findings are fivefold. First, our results suggest that
board size is positively associated with ESG performance. Second, we show that the
board independence is positively related to the ESG performance. Third, our findings
show that the women impact strongly significant the firm’s ESG performance. Fourth,
our results reveal that sustainability incentives compensation has a positive effect only
for some geographic areas. Fifth, there is a positive link between ESG performance
and CSR committee.

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Manuscript

ESG performance in relationship with board of directors sustainability incentives and CSR
1 sustainability committee: firms from MENA region
2
3
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6
7
8 Abstract
9
10 This paper seeks to fill the gap of environmental, social and governance performance in the
11
12 literature by testing the impact of Board Size, Board independence, Women on the Board,
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14 sustainability incentives compensation and CSR committee on ESG performance. Using one of
15
16 the largest datasets to date, consisting of an unbalanced panel dataset consisting of 313 firm-year
17 observations from MENA region, covering a period of 11 years (2007–2017), our findings are
18
19 fivefold. First, our results suggest that board size is positively associated with ESG performance.
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21 Second, we show that the board independence is positively related to the ESG performance. Third,
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23 our findings show that the women impact strongly significant the firm’s ESG performance.
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25 Fourth, our results reveal that sustainability incentives compensation has a positive effect only for
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some geographic areas. Fifth, there is a positive link between ESG performance and CSR
28 committee.
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30 Keywords—ESG performance; board of directors; sustainability incentives compensation; CSR
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32 sustainability committee.
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34 1. INTRODUCTION
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37 A company’s performance essentially depends on the board of directors [1], given that they are
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39 responsible for approving and overseeing the implementation of strategic goals, the system of
40 governance and creating company culture [2] A successful board of director will also make an
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42 emphasis on business ethics and corporate responsibility [3]. An increasing amount of research
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44 finds a strong positive relationship between a firm’s sustainability performance and profitability:
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46 companies with high sustainability ratings significantly out perform their counterparts both in terms
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48 of stock market value and accounting performance [4].
49
50 Based on these considerations, this study aims to identify the characteristics of the board of
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52 directors, which raise environmental social governance performance. According to the existing
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54 literature [3], [5] our analysis examines the impact of a board’s characteristics (gender diversity,
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size, activity, compensation and ESG controversies) on ESG performance in a sample of 313
57 observations from MENA region covering the period of 2007 to 2017. To proxy a firm’s
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59 sustainability performance, we use Thomson Reuters’ ESG Asset4 score, a broad and verified
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61 measure of CSR performance adopted by scholars both for non-financial firms.
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 Our main empirical evidence shows that there is a linear relationship between board of directors’
1 characteristics, compensation policy and CSR committee and a firm’s ESG performance.
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3 Interestingly, the link between the dependent and independent variables is linear confirming that
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5 board characteristics’, compensation policy and CSR committee are positively impact a firm’s ESG
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7 performance. Therefore, we do support the critical theory for firms’ stricto sensu, meaning that
8 after reaching large Board Size, high level of Board independence, increasing presence of female
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10 directors in Board, the adoption sustainability incentives compensation and an implementation of
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12 CSR sustainability committee have a positive impact on firm’s ESG [3], [6].
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14 The remainder of the paper is organized as follows. Section 2 presents the research hypotheses.
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16 Section 3 discusses the sampling procedure, the variables measurement. Section 4 shows and
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18 discusses the results, and finally, Section 5 presents the conclusions.
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20 2. HYPOTHESES DEVELOPMENT
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23 The variables most widely used in the literature to describe the impact of board size, gender
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25 diversity, board independence, sustainability incentives compensation and CSR committee on ESG
26 performance. Below we develop our hypotheses for each of these characteristics of corporate
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28 governance [7], [8], [9], [10], [11].
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31 Hypothesis 1. Board size affects positively the ESG performance.
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33 Hypothesis 2. The share of board independence affects positively the ESG performance.
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35 Hypothesis 3. A high level of gender diversity affects positively the ESG performance
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38 Executive compensation and carbon performance
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40 Hypothesis 4: Ceteris paribus, greater firms adopt ESG sustainable compensation incentives,
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42 greater for process-oriented ESG performance.
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44 Hypothesis 5. The establishment of a CSR sustainability committee has a positive effect on ESG
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46 performance.
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48 3. RESEARCH METHODOLOGY
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51 A. Sample Selection and Data Sources
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53 Our initial sample was based on the availability of ESG data in the Thomson Reuters Asset4
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55 database and Thomson Reuters Eikon. Our final sample is based on an unbalanced panel dataset
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57 consisting of 313 firm-year observations from 64 listed firms from MENA region, covering a
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59 period of 11 years (2007–2017).
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61 Table 1 shows the country-wise distribution of the sample. We used the Asset4 dataset and the
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 Thomson Reuters Eikon to collect ESG score and corporate governance data. The ASSET4
1 database from Thomson Reuters is utilized in our research because it is readily available for many
2
3 investors and scholars.
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6 TABLE I. SAMPLE DISTRIBUTION
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8 Distribution of the sample by country
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11 Number of observations per
12 Firms Percent (%) per country
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country
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15 Bahrain 6 2%
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17 Egypt 73 23%
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19 Jordan 9 3%
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21 Kuwait 49 16%
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23 Morocco 18 6%
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25 Oman 20 6%
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27 Qatar 36 12%
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29 Saudi Arab 67 21%
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31 United Arab Emirates 35 11%
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33 Total 313 100%
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35 B. Variables measurement
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38 TABLE II. VARIABLES MEASUREMENT AND THE EXPECTED RELATIONSHIP WITH ESGSCORE
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41 Variable Measurement
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43 This score is based on three dimensions:
44 ESG performance (ESGSCORE)
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environmental, social and corporate governance
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Board size (BOARDS) Total number of directors on the bank’s board
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48 Percentage of independent board members as reported
49 Board independence (BINDEP)
50 by the company (variable Independent Board Members)
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52 Total number of women on the board of directors
53 Gender diversity (GENDERD)
54 divided by the total number of board members
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56 Dummy variable (yes = 1/no = 0) responding either the
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58 Sustainable Compensation question “Does the frim apply extra-compensation
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60
incentives (SCINCENTIVES) policy” or “Is the senior executive's compensation
61 linked to CSR Sustainability target”.
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 Dummy variable (yes = 1/no = 0) responding the
CSR sustainability committee
1 question “Does the company have a CSR Sustainability
2 (CSRSUSTCOMM)
3 committee or team?”
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5 The next section will test the hypotheses regarding the effect of the board characteristics on the
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7 ESG SCORE, using panel data analysis. We estimate the following model:
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9 ESGSCORE it = β0 + β1 BOARDS +β2 BINDEP +β3 GENDERD +β4 SCINCENTIVES + β5
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11 CSRSUSTCOMM + ε (1)
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13 4. EMPIRICAL RESULTS AND DISCUSSION
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A. Descriptive Statistics
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18 The table 3 illustrates the descriptive statistics for both the dependent and independent variables.
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20 The average level of ESG performance (ESG SCORE) of firm analysed is 38,80%, with a
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maximum equal to 76,6%. This reveals that the firms’ sustainability performance for the period
23 2007–2017 was very satisfactory by the standards of the score definition. The board size is 10.5
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25 with a minimum of 3 members to eighteen directors. Equally, the average of board independence
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27 seems inadequate, considering that some firm boards have no independent director (a maximum of
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29 the 100% with a minimum value is equal to zero %). Similarly, the women mass (the proportion of
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31 female gender on the board) reaches an average value of (6,6%) and the maximum value is 52,7%,
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seems it still low but suggesting that there are firms of which board members are all women.
34 Equally, the average of adoption of Sustainable Compensation incentives seems weak considering
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36 that 1,6% of our observations have a Sustainable Compensation incentives. In addition, around
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38 26% of firms have adopted a CSR sustainable committee.
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41 TABLE III. SUMMARY STATISTICS OF ESG SCORE AND EXPLANATORY VARIABLES.
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43 Std.
44 Variable Obs Mean Min Max
45 Dev.
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48 esgscore 313 38.80111 15.29801 10.83474 76.59603
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board_size 313 9.571885 2.438101 3 18
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51 bindep 313 25.13203 26.63696 0 100
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53 genderd 313 6.650018 9.334408 0 52.77778
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55 scincentives 313 .0159744 .1255772 0 1
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57 csrsustcomm 313 .2555911 .4368914 0 1
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59 This table shows the summary statistics of ESG SCORE and explanatory variables. The
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number of firm-year observations is 313 for all the variables. Data source: Thomson Reuters
62 Asset4 and Datastream.
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 B. Regression results and discussion
1
2 Table 4 shows the estimation results which can address our hypotheses relating to the impact of
3 board composition, Activity and Compensation on ESG performance of a sample of 313
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5 observations from MENA region. In our Model, BOARDS is significant and positively related to
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7 ESG performance. When interactions are involved, the final sign of the effect of a predictor is
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9 immediately readable from an estimation table. It is more likely that larger boards are served by
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11 directors with different skills and attitudes, including directors characterized by a strong propensity
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13 towards a culture of sustainability. Therefore, this result does corroborate Hypothesis 1.
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15 Hypothesis 2 predicts a relationship between independent number of meetings board and ESG
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17 performance, even though the sign is certain. Our results show a positive relationship: the
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19 coefficient related to BINDEP is positive and significant. This result is in line with the studies of
20 [3], [12]. It is likely that an excessive number of meetings of board of directors act as improving
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22 components increasing the firm’s ESG performance. Therefore, this result does corroborate
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24 Hypothesis 2.
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26 Hypothesis 3 predicts a positive relationship between gender diversity and ESG performance. In
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28 this case, the hypothesis seems to be confirmed. Hence, the econometric model indicates that the
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30 high shares of female in the board are associated with better sustainability performance. This
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32 positive effect is broadly consistent with the findings of [13]. Therefore, this result does
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34 corroborate Hypothesis 3.
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36 Contrary to the prediction of our Hypothesis 4, the findings show a positive but insignificant
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38 coefficient for the variable SCINCENTIVES. We argue that in the presence of a sustainable
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40 compensation incentive might be in a better position to evaluate the carbon risks of a firm to design
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42 a more effective executive compensation scheme, which may enhance corporate ESG performance.
43 H4 not supported.
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45
46 Finally, Hypothesis 5 is verified very strongly: the establishment of a CSR committee seems to
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48 positively impact a firm’s ESG performance. Regarding this variable (see Table 4), in line with
49 several studies, it is interesting to point out that it have a positive and significant impact on ESG
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51 performance. These findings show that better sustainability performance is particularly achieved by
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53 larger and more profitable firms (Qa’dan, & Suwaidan, 2019).
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55 TABLE 4. RESULTS OF REGRESSION MODELS OF ESG SCORE
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58 ESGSCORE Coef. t P>t
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60 BOARD_SIZE .4990464* 1.76 0.081
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62 BINDEP .0336106* 2.31 0.090
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 GENDERD .4301542*** 5.91 0.000
1 SCINCENTIVES 5.978273 1.12 0.264
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3 CSRSUSTCOMM 20.57513*** 13.18 0.000
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5 N. Obs 313
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7 F(6, 307) 43.83
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9 Prob > F 0.0000
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11 R-squared 0.4165
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13 Adj R-squared 0.4070
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15 This table shows the results regression for all set of a sample of 3134 observation. Data source:
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17 Thomson Reuters Asset4 and Datastream. Significant coefficients are indicated by the usual
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19 significance levels: ***, 1%; **, 5%; *, 10%
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21 CONCLUSION
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23 Based on prior literature demonstrating that boards play a key monitoring role in financial
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25 institutions, this study investigates the relationship between board composition (size, activity,
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27 gender diversity and compensation) and ESG performance in a sample of 313 observations for 64
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29 listed firms from MENA region for the period 2002–2017. Main findings reveal that size,
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31 independence, gender diversity, compensation and CSR committee are positively impacts a firm’s
32 ESG performance for all models regression for the whole the sample full set either for each
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34 geographic area. For this reason, we support the critical perspective that emphasizes board
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36 characteristics, such as board size, share of board independence, proportion of women in the board,
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38 executive sustainability incentives compensation and CSR committee are very important to
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40 enhancing a firm’s ESG performance. The empirical results of this research present a significant
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42 effect of ESG controversies on the ESG performance. This shows that the importance of this
43 variable on ESG performance would be even more pronounced if the region were to implement
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45 stronger corporate governance measures. Since this variable is significant in forming a good
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47 reputation and encouraging the firm to be more involved in societal, environmental and governance
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49 activities and performance, firms should strive to increase their ESG score.
50
51 REFERENCES
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53 [1] Ajaz, A., Shenbei, Z., & Sarfraz, M. (2020). Delineating the influence of boardroom
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Declaration of Interest Statement

Declaration of interests

☒ The authors declare that they have no known competing financial interests or personal relationships
that could have appeared to influence the work reported in this paper.
Title page

ESG performance in relationship with board of directors sustainability incentives and

CSR sustainability committee: firms from MENA region

Mondher Youssef1, Ali Ahmadi 1*, Abdelfettah Bouri 1

1
Faculty of Economics and Management, University of Sfax, Tunisia.

*Corresponding Author: E-mail: ahmadi2402@gmail.com.