The associations between the diversity of governance committees, environmental, social, and financial performance, and share prices: An empirical study of Australia’s largest companies

The associations between the diversity of governance committees, environmental, social, and financial performance, and share prices: An empirical study of
Australia’s largest companies

Regulatory bodies such as Australian Securities and Investments Commission (ASIC) and market organisations (Australian Securities Exchange (ASX)) identified that establishing sound corporate governance mechanisms is essential for businesses to be globally competitive. While boards are fundamental for corporate governance and a plethora of board-level research has been undertaken, a significant portion of board decision-making is delegated to their committees. Committees are vital due to increasing legal requirements and the escalating complexity of the business environment. Board committees play a vital role, including determining executive compensation, suggesting possible board members, and providing oversight of financial reporting, to name just three examples. This study tests the impact of committee diversity, as recommended in the ASX Corporate Governance Principles and Recommendations, on board decision-making. It examines whether such diversity affects outcomes in either ESG performance or financial performance, reflecting governance compliance and board effectiveness, respectively. Sound corporate governance aids organisations with their financial and non-financial performance. This thesis examines the relationships between the four components of diversity in corporate governance committees (DCGCs): gender diversity, the proportion of independent non-executive directors (INEDs) and non-executive directors (NEDs), and the size of committees — and firms’ financial and non-financial performance. The study's objectives were to examine the direct effects of DCGCs on firms' return on capital employed (ROCE), firms’ value (Tobin’s Q) and ESG performance. Also, the moderating effects of DCGCs and ESG on firms’ ROCE and Tobin’s Q will be tested in Hypothesis 3. Hypothesis 4 will be tested by examining the mediating effects of ESG on the associations between, firstly, DCGCs and firms’ ROCE, and secondly, DCGCs and firms’ Tobin’s Q. Panel data analysis was utilised on data collected for the period 2018-2020 from the Bloomberg and MorningStar databases plus data collected from firms’ annual reports and corporate governance statements. This period was selected as it represented the pre-quota implementation of the 2019 ASX corporate governance recommendation 1.5. The findings reveal that the effects of DCGCs on firms’ financial and non-financial performance vary due to committees’ functions and roles. Furthermore, ESG performance is found to either moderate the relationship between DCGC diversity and financial outcomes, or mediate the influence of DCGC diversity on firm profitability and market value. These relationships suggest that higher DCGCs in specific committees, such as nomination, risk and sustainability committees, be considered key to enhancing firms’ performance. These results underscore the importance of the DCGCs on firms’ both financial and non-financial performance, which may prompt future regulations or recommendations due to the paucity of studies into DCGCs’ and the link between diversity and performance.