Board characteristics in European sustainable companies: The moderating role of board gender diversity

Corporate governance is defined as the set of rules and policies that guide business behavior, established by legal, cultural, and institutional contexts. These factors impact on the level of control and risk management required for each organization (Blair, 1995). Financial scandals and the recent financial crisis have damaged market and institutional confidence in companies. In response, both regulators and investors have promoted the adoption of more responsible practices, underscoring the importance of corporate governance in fostering sustainability and economic development (Claessens and Yurtoglu, 2013). Thus, corporate governance not only regulates the internal structure and operations of companies but also establishes guidelines for their interactions with the external environment and their commitment to corporate social responsibility. The adoption of corporate governance practices offers various benefits, including reduced agency costs, improved access to financing, stronger relationships with stakeholders, and enhanced firm performance (Atif et al., 2021; Darrat et al., 2016; Fatma and Chouaibi, 2021; Kiharo and Kariuki, 2018). Among these practices, the corporate boards plays a relevant role, serving as a supervisory and advisory body in business management, safeguarding the interests of shareholders and stakeholders, and improving firm performance (Ben Fatma & Chouaibi, 2023; Harjoto et al., 2015). Environmental, social, and governance (ESG) practices have become a topic of interest for regulators, investors, stakeholders, and academics. Previous empirical research has analyzed the influence of board characteristics on ESG performance, revealing several benefits. These include improved quality of environmental disclosures (Iatridis, 2013), enhanced corporate efficiency (Xie et al., 2019), strengthened legitimacy and stakeholders’ relationship (Helfaya and Moussa, 2017), and improved corporate reputation (Martinez-Ferrero et al., 2018). In this context, ESG activities are considered as a relevant part of corporate strategic (Clarke, 2007). The relationship between board composition and firm performance remains a relevant subject of debate in the literature, with board gender diversity emerging as a pivotal governance mechanism. Historically, women have faced substantial barriers to attaining leadership positions. From the perspective of agency theory, the inclusion of female directors can strengthen the control mechanisms over managers and executives, as a more gender diverse board exhibit greater independence. Women are believed to bring distinct leadership styles compared to their male counterparts, fostering more balanced decision-making processes (Carter et al., 2010). Corporate governance practices promote female participation on corporate boards, and in some cases, gender quotas are implemented to ensure representation. A higher proportion of women on corporate boards enhances the diversity of perspectives, knowledge, and skills, which collectively support the effective adoption of environmental, social, and governance (ESG) strategies. This gender diversity not only enriches the board's decision-making capacity but also contributes to improved firm performance, emphasizing the strategic value of board gender diversity in corporate leadership. However, while numerous studies analyze the effect of board composition on firm performance, the role of board gender diversity is particularly significant. Female participation on board is encouraged through corporate governance recommendations and, in some cases, through the implementation of gender quotas. Boards with greater female representation bring an enriched diversity of perspectives, knowledge and skills, which contributes to a better adoption of ESG strategies and improve firm performance. The main goal of this PhD thesis is to analyze the moderating role of gender diversity, both at the board and country levels. Specifically, it seeks to understand how female directors’ representation on corporate boards and country-level gender parity influence other board characteristics to impact on firm performance and ESG performance in sustainable European companies. The study provides novel evidence on how institutional factors, such as a country financial orientation, can affect the impact of female directors on corporate boards on firm performance. Additionally, country-level gender parity may play a critical role in driving the adoption of more responsible corporate policies concerning environmental, social, and governance issues. This general objective is developed through three specific objectives: 1. To explore the moderating role of board gender diversity in the relationship between CEO duality, board size, the number of board meetings, and the firm performance of European sustainable companies listed in a sustainability index. 2. To analyze the moderating effect of country-level gender parity on the relationship between ESG performance and board gender diversity, corporate governance committee, nomination committee, remuneration committee, and Corporate Social Responsibility (CSR) committee, in European sustainable companies included in a sustainability index. 3. To examine the moderating role of board gender diversity in the relationship between busy directors, foreign directors, non-executive directors, and ESG performance of European sustainable companies included in a sustainability index. The study sample consists of European sustainable companies listed in the EuroNext Vigeo Eiris 120 sustainability index. This index includes the 120 most sustainable companies from Europe, assessed by Moody’s ESG Solutions Agency using its Equitics methodology. This methodology evaluates companies based on 38 criteria across six key categories of environmental, social, and corporate governance responsibility: (i) environment, (ii) human rights, (iii) human resources, (iv) community involvement, (v) business behavior, and (vi) corporate governance. Companies with low ESG scores relative to the general sample, as well as those involved in significant and recurring ESG controversies, are excluded (Refinitiv, 2022). Data on corporate governance variables, firm performance (Tobin’s Q), and ESG performance and pillars were sourced from the Refinitiv Eikon database. Additionally, information of country level, gender parity used as a moderating variable in Chapter 3, was obtained from the World Economic Forum’s annual Global Gender Gap Index. The hypotheses were tested through the Generalized Method of Moments (GMM) approach. This method, developed by Arellano and Bond (1991), is applied in first differences, incorporating instruments lagged by one period to address common econometric issues, such as cross-sectional dependence, autocorrelation, endogeneity, and heteroscedasticity in the analysis (Pham et al., 2021). Additionally, the data series are organized into panels, which, due to their structure, also help mitigate endogeneity problems. The thesis is organized into four chapters, each presented in the format of an article. Except for Chapter I, which provides a theoretical and introductory approach, the remaining three chapters are empirical studies directly linked to the specific objectives of the thesis. Chapter I. Integrating sustainability: the nexus of finance, governance, and gender diversity. It provides a theoretical framework on the development of sustainable finance, corporate governance codes in Europe, and gender diversity in corporate governance. This chapter covers the main concepts related to sustainability, sustainable finance, sustainability indices, and the rating agencies that produce them, as well as good corporate governance practices and gender diversity in European corporate governance. It offers an overview of these issues and their interrelationships, without delving too deeply into the specifics. Furthermore, it proposes a conceptual framework that identifies key areas of sustainable finance and examines the development of regulations on ESG matters within the European context. The chapter aims to provide a foundation for the subsequent chapters, structuring the theoretical concepts that underpin the thesis content. Chapter II. The impact of board gender diversity commitment on firm performance moderated by board characteristics: evidence from sustainable European firms and financial orientation. Over the decades, the role of female directors on corporate governance boards has been the subject of study (Adams and Ferreira, 2009; Arayssi et al., 2016; Alodat et al., 2023). Based on the agency theory, companies that have female directors on corporate board present a greater capacity to effectively monitor the behaviour of their managers, which will eventually improve firm performance (Ntim and Soobaroyen, 2013). This theory is supported by previous literature, the presence of female directors can improve the quality of disclosure of ESG information (Arayssi et al., 2016) and innovation performance (Chen et al., 2021) and mitigate managerial opportunism (Zalata et. al., 2019). Other theories such as resource dependence theory (Preffer and Salancik,1978) affirms that the presence of female directors improves the board's control and supervision mechanisms, ensure the rights of different stakeholders, provide knowledge, experience and skills that facilitate board decision-making and influencing the financial and economy performance of the firm. The literature explains that female directors on corporate board significantly contributes to improving firm performance (Alodat et al., 2023; Tran et al., 2024), strengthens management functions and reduces potential agency problems (Ain et al., 2021). Furthermore, the diversity of skills, experiences, and perspectives that women bring generates a competitive advantage for the organization (Arora, 2022), while improving its legitimacy and strengthening relationships with stakeholders. Several studies have examined the effect of boards characteristics on firm performance, such as CEO duality (Naseem et al., 2020), board size (Arayssi & Jizi, 2019), the number of board meetings (Puni & Anlesinya, 2020), board gender diversity (Ben Fatma & Chouaibi, 2023), among others. However, there was scant attention toward how board gender diversity moderates the association between board characteristics and firm performance. Scholars have studied the moderating effect of board gender diversity in other respects, such as tax planning and the value of listed European firms (Khaoula & Moez, 2019), different board sub-committees and firm performance (Grau & Bel, 2022), the impact of CSR performance on firm performance (Li et al., 2022), the influence of ESG performance on firm performance (Alahdal et al., 2024) but not studied the moderating role of board gender diversity in the association between CEO duality, board size and board meeting and firm performance. Filling this gap, this chapter analyzes the moderating role of board gender diversity in the relationship between CEO duality, board size, number of board meetings, and firm performance in European sustainable companies, using Tobin’s Q as a proxy (Vafeas and Vlittis, 2019). The study focuses on the 120 most sustainable companies in Europe, listed in the EuroNext Vigeo Eiris 120 index, during the period 2012-2020. Particular attention is given to financial orientation as a relevant institutional factor in the countries analyzed, specifically whether the financial systems are market-oriented or bank-oriented. The results reveal that board gender diversity negatively moderates the relationship between CEO duality and firm performance. However, a positive moderation is observed in the effect of the number of board meetings on firm performance. Additionally, the study confirms that the country’s financial orientation significantly influences corporate governance mechanisms. By dividing the sample based on financial orientation, the findings show that in bank-oriented countries, board gender diversity positively moderates the relationship between the number of board meetings and firm performance. In contrast, these effects are not significant in market-oriented countries. These findings contribute to the literature on the effect of board gender diversity on firm performance. It is found that female participation on boards plays a relevant role, but its impact may be limited on boards with a one-tier structure and a majority of male members in bank-oriented countries. According to the critical mass theory (Kanter, 1977), for women’s participation to have a significant impact, a representative number of women is required. On average, European sustainable companies do not exceed 40% female participation on boards, which could represent a barrier and explain the behavior of women in financial decision-making in the presence of CEO duality and a predominantly male board. Instead, their participation in board meetings enhances discussions and debates, underscoring their role in decision-making processes aimed at improving firm performance. According to critical mass theory, resource dependence theory, and agency theory, a greater presence of women on boards leads to increased involvement in board meetings. The diversity of experiences and skills offered by women improves communication, fosters greater discussion, and facilitates the exchange of ideas, all of which positively impact firm performance. This research highlights that, although progress has been made in female representation on boards, it is essential for regulators and policymakers to establish mechanisms ensuring effective participation of women in strategic decision-making. This study is innovative in exploring how board gender diversity moderates the relationship between board characteristics, CEO duality, and financial performance, considering the country’s financial orientation. Chapter III. The moderating role of country-level gender parity in the association between board gender diversity and board sub-committees on ESG performance in the European context Investors and other stakeholders increasingly penalize companies with low ESG performance and involvement in ESG controversies (Shakil, 2020). Consequently, companies are adopting a more responsible approach by integrating ESG issues into their corporate strategies. This not only enhances their legitimacy and reputation but also improves relationships with stakeholders (Velte, 2016), reduces stock volatility, and mitigates the firm's overall risk. Recent literature has increasingly focused on the relationship between corporate governance and ESG performance, particularly the impact of board characteristics (Bigelli et al., 2023; Birindelli et al., 2018; Biswas et al., 2018; Shaukat et al., 2016). However, there is still a gap in understanding the role of other board sub-committees in influencing ESG performance. Gender diversity, along with the existence of board sub-committees (such as corporate governance, nomination, compensation, and CSR), enhances the board's ability to address environmental demands related to ESG issues. This promotes greater participation in socially responsible practices (Arayssi et al., 2020). Additionally, the literature highlights that external factors can intensify corporate commitment to sustainability (Gillan et al., 2021). Differences between countries, in terms of development, religion, culture, and legal frameworks, significantly impact corporate actions related to ESG disclosures and practices (Bigelli et al., 2023; Hunjra et al., 2021). According to Institutional theory, the actions of individuals and organizations within a given social environment are influenced by the demands of the institutional environment (Scott, 1987; Zucker, 1987). These demands of the institutional environment include “informal constraints (e.g., sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (e.g., constitutions, laws, property rights)” (North, 1991, p. 97). This set of informal and formal constraints become guides of social behavior for individuals and organizations (Scott, 1995), being necessary to be addressed in corporate governance (Iannotta et al., 2016; Haxhi & Aguilera, 2017). In this context, country-level gender parity emerges as a critical institutional factor. It fosters values and social norms that are well-received by stakeholders, thereby legitimizing companies’ actions (Saeed et al., 2024). In countries that promote equal opportunities for both men and women in leadership positions, female leadership tends to enhance decision-making processes on boards, leading to a more balanced distribution of power (Byron & Post, 2016). From the perspective of institutional theory, country-level gender parity acts as a moderating role in the relationship between corporate governance mechanisms and ESG performance. This theoretical framework also helps to understand both the progress and challenges in implementing gender policies in the business world. In this context, legitimacy becomes a vital tool to ensure the sustainability and continuity of companies over the long term (Suddaby et al., 2017). The main goal of this chapter is to analyze the moderating role of country-level gender parity in the relationship between board gender diversity, board sub- committees, and ESG performance. The study is based on a sample of European sustainable companies listed in the EuroNext Vigeo Eiris 120 index from 2014 to 2023, with gender parity measured through the Global Gender Gap Index (GGGI). The results indicate that country-level gender parity negatively moderates the positive effect of board gender diversity on ESG performance. Following institutional theory, countries with higher gender parity can create environments where boards promote greater female participation, significantly improving their ESG practices. However, these findings could suggest that companies in countries with higher gender parity are not responding to stakeholder demands for increased female participation on boards, weakening their corporate image and legitimacy. There is no significant moderating effect of country-level gender parity on the relationship between board sub-committees and ESG performance. When analyzing the three pillars of ESG performance separately, the findings reveal that country-level gender parity negatively moderates the relationship between the CSR committee and environmental performance. Similarly, country-level gender parity has a negative moderating effect on the relationship between board gender diversity and governance performance. These results contribute to the understanding of how institutional factors, such as country-level gender parity, can influence the behavior of corporate governance structures, especially boards of directors. According to institutional theory, companies are expected to act based on accepted social norms and values. A failure to respond appropriately to these social demands may negatively affect ESG performance. Therefore, regulators and policymakers should promote the adoption of better ESG practices that align with environmental and societal demands. The results can be relevant to policymakers, regulators, and managers promoting policies that encourage the equal participation of women on board. Additionally, investors may consider country-level gender parity as a critical factor when selecting companies, particularly those with a stronger commitment to gender equality and opportunities. This approach can help identify firms that not only meet regulatory requirements but also actively foster an inclusive environment that could lead to better long-term ESG performance. Chapter IV. Director typology and ESG performance: does board gender diversity matter? evidence from European sustainable companies. The board of directors serves as an internal corporate governance mechanism, offering strategic direction and safeguarding the interests of both shareholders and stakeholders (Akisik & Gal, 2017). In turn, the corporate boards have the responsibility of aligning corporate strategies with sustainability principles, promoting a strong commitment to ethical and socially responsible practices (Orazalin, 2020). Several studies have explored the relationship between board composition and ESG performance (Agnese et al., 2024; Nuhu & Alam, 2024). Most of them, examine this relationship directly, focusing on board characteristics such as board gender diversity (Cambrea et al., 2023), board size (Nuhu & Alam, 2024), board independence (Naciti, 2019), and the presence of a CSR committee (Shahbaz et al., 2022). However, less attention has been given to other board characteristics, such as the presence of busy directors (Wang et al., 2023), foreign directors (Martinez-Ferrero et al., 2021), and non-executive directors (Cabeza-García et al., 2018). Corporate governance codes generally emphasize the need for boards to maintain an appropriate balance of diversity in experience, expertise, gender, and age (Code of Good Governance of Listed Companies, 2020; Code of Corporate Governance of Listed Companies, 2022). Notably, companies with more diverse boards tend to achieve better ESG performance (Velte, 2016). The association between board characteristics and ESG performance should not be examined in isolation. Research suggests that board characteristics can interact and complement each other impacting firm performance (Uyar et al., 2021). The participation of female board members is considered a valuable governance mechanism (Orazalin & Baydauletov, 2020). The literature highlights that women tend to be more ethical and socially conscious than men (Adams & Funk, 2012), enhance governance quality and reduce misconduct (McGuinness et al., 2017), and improve board monitoring effectiveness (Yarram & Adapa, 2021), ultimately leading to better ESG performance (Cordeiro et al., 2020; Menicucci y Paolucci, 2024; Yarram y Adapa, 2021). For these reasons, the main goal of this chapter is to explore the moderating role of board gender diversity on the association between busy directors, foreign directors, non-executive directors and ESG performance. From a theoretical perspective, the study draws on resource dependence theory, stakeholder theory, and gender socialization theory. These frameworks are particularly relevant for analyzing the moderating role of board gender diversity. The results reveal that board gender diversity negatively moderates the relationship between foreign directors and ESG performance. According to resource dependence theory, the presence of foreign and female directors on the board offers a wide range of knowledge, experiences, and values that facilitate the acquisition of resources and the implementation of a company's strategic initiatives, thereby strengthening the company's relationships and providing a competitive advantage (Hillman et al., 2009). However, the results suggest that the diverse perspectives and experiences brought by female and foreign directors can lead to communication and coordination challenges that may affect decision-making on ESG issues. Furthermore, board gender diversity does not moderate the relationship between busy directors, non-executive directors, and ESG performance. This result can be interpreted through gender socialization theory, which argues that men and women have different interests and characteristics. These differences impact their approaches to decision-making, especially in competitive and ethical situations, leading to distinct behaviors between the genders. Similarly, while resource dependence and stakeholder theories suggest that female participation on board brings a diversity of skills and perspectives, allowing for a broader representation of stakeholder needs and facilitating effective resource acquisition, the results indicate that the combined participation with busy directors, non-executive directors, and female directors does not generate the synergies necessary to improve ESG performance. To provide a more emphasized perspective, this study examines the three pillars of ESG performance. The findings reveal that board gender diversity negatively moderates the effect of foreign directors on environmental and social performance. Conversely, board gender diversity positively moderates the relationship between non-executive directors and governance performance, while it shows no moderating the relationship between busy directors and ESG dimensions. Consistent with resource dependence, stakeholder, and gender socialization theories, women on boards tend to be more rigorous in monitoring governance quality and performing board duties (McGuinness et al., 2017; Li & Li, 2020). These qualities contribute positively to non-executive directors’ involvement in decisions related to governance practices. Our findings offer several important implications. The positive moderating role of board gender diversity on the relationship between non-executive directors and governance performance underscores the influence of women on board monitoring functions. This influence encourages other board members to take actions that enhance good governance practices. Additionally, it demonstrates that women’s involvement in monitoring activities fosters a productive dynamic with non-executive directors, strengthening their collective oversight. This study offers significant practical implications for practitioners and policymakers. While female participation on boards is recognized as a robust mechanism for corporate governance, bringing unique experiences and skills that help address the needs of a broader group of stakeholders and promote socially responsible practices, it remains unclear which factors or actors influence their involvement in board dynamics. The findings highlight that gender diversity and the independence provided by non-executive directors are critical aspects of board composition, representing governance priorities to ensure long-term firm success and enhance environmental and social engagement. The results of the thesis offer new insights that enrich academic literature. This thesis advances understanding of the role of board gender diversity, showing that female participation influences the behavior and dynamics of other board members. In certain scenarios, these interactions generate synergies that enhance firm performance and foster greater commitment to sustainable practices. However, some limitations or barriers are observed that restrict the influence of women on board. The analysis underscores how the institutional context, particularly country-level gender parity, shapes board dynamics and ESG performance. This provides evidence of the influence of external factors on corporate governance mechanisms and highlights the indirect relationship between women's management roles on boards and their participation in political, economic, and social leadership positions. This thesis takes a comprehensive approach by integrating both firm performance and ESG performance, offering a more holistic understanding of the strategic role of female participation and other board characteristics. The findings reinforce the perspective of agency, legitimacy, and stakeholder theories in the ESG performance context. According to agency theory, female board members help mitigate agency problems through enhanced board monitoring. Additionally, their sensitivity to social and environmental issues supports the adoption of sustainability practices, fostering better alignment with stakeholder interests. The results support legitimacy theory, suggesting that including female directors on corporate boards responds to societal expectations for diversity and gender equality. Companies that adopt such practices not only enhance their legitimacy with stakeholders but also improve ESG performance. The findings validate stakeholder theory by showing that appointing women to leadership roles addresses not only shareholder expectations but also those of consumers, employees, and other stakeholders advocating for social, environmental and governance practices. In addition, the findings suggest that companies should prioritize gender diversity as a relevant element of their corporate governance strategies. Firms aiming to enhance firm performance and ESG performance may benefit the inclusion of female directors on corporate boards as a critical tool. Policies promoting gender parity not only advance workplace equity but also bolster long-term competitiveness. Inclusive cultures enable organizations to benefit from diverse perspectives, driving innovation and creativity, which are essential in today’s dynamic business environment. Furthermore, the institutional context influences the relationship between board characteristics and firm performance and ESG performance. In banking-oriented countries, female directors impact on firm performance. Similarly, country-level gender parity serves as an enabler for firms to adopt robust gender diversity policies, thereby improving ESG performance. Companies embracing such policies demonstrate commitment to ethical and social values, enhancing their reputation and appealing to investors and a diverse talent pool. Ultimately, gender diversity emerges as a competitive advantage, unlocking new market opportunities and fostering strategic partnerships. By integrating diverse perspectives, companies can innovate more effectively and complex challenges, ensuring sustainable success.

Subvenciones para la contratación de personal investigador de carácter predoctoral CIACIF/2021/075.