The moderating effect of sustainability reporting on the relationship between board characteristics and firm financial performance

Abstract

Purpose: This study primarily focuses on probing whether sustainability reporting has a moderating effect on the relationship between board characteristics and financial performance of Sri Lankan firms.

Design / Methodology / Approach: The study draws on data from 50 listed companies in Colombo Stock Exchange (CSE) with the highest market capitalization during the period 2016 – 2018. This study considers seven board characteristics: board size, gender diversity, board independence, CEO duality, Number of board meetings held, nationality of board members and the number of members with PhD qualifications as independent variables to measure the board characteristics. Firm financial performance is measured by market and accounting based financial performance measures; ROA and Tobin’s Q. The Ordinary Least Square (OLS) regression models are applied and the moderating effect of sustainability reporting is measured using a GRI based index and PROCESS macro version 3.4 by Andrew F. Hayes.

Findings: The results reveal that the sustainability reporting moderates the relationship between board characteristics and firm financial performance. Further, the results show that the board size, nationality of board members and number of board meetings held have statistically significant negative relationships with firm financial performance. Other independent variables: gender diversity, board independence, CEO duality and board members with PhD qualifications do not show a statistically significant relationship with firm financial performance.

Practical Implications: This study contributes to the understanding of relationships between board characteristics and financial performance with the moderating impact of sustainability reporting. It provides academic evidence to policy makers in Sri Lanka for current and future governance reforms.

Originality / Value: Recent local and global financial catastrophes have stressed the significance of following corporate governance mechanism either on a mandatory basis or a voluntary basis. Further, the sustainability reporting has become a contemporary concern in global context and adoption of globally accepted standards and principles has become a current practice in Sri Lankan context. Therefore, a study carried out to examine the relationships between such sustainability reporting adoptions, present governance characteristics and firm financial performance is a timely necessity in Sri Lankan context.