Board Diversity and Corporate Sustainability Performance: Do CEO Power and Firm Environmental Sensitivity Matter?

Abstract

The study assesses whether CEO power and firm environmental sensitivity matter to board diversity (i.e., board cultural (BCD) and board gender (BGD) diversity) and corporate sustainability performance nexus. Australian S&P/ASX300′s firm data for a period of ten years (2011–2020) were used in the study’s analysis. Although board diversity positively influences ESG performance, the presence of powerful CEOs and when firms operate in environmentally sensitive industries weaken the board diversity and sustainability performance nexus. Additionally, the study found that although board diversity is essential, the effect of BGD has a greater statistical power on sustainability than BCD, affirming the present focus on BGD.

Full text

Citation: Donkor, A.; Trireksani, T.;
Djajadikerta, H.G. Board Diversity
and Corporate Sustainability
Performance: Do CEO Power and
Firm Environmental Sensitivity
Matter? Sustainability 2023,15, 16142.
https://doi.org/10.3390/su152316142
Received: 16 October 2023
Revised: 12 November 2023
Accepted: 17 November 2023
Published: 21 November 2023
Copyright: © 2023 by the authors.
Licensee MDPI, Basel, Switzerland.
This article is an open access article
distributed under the terms and
conditions of the Creative Commons
Attribution (CC BY) license (https://
creativecommons.org/licenses/by/
4.0/).
sustainability
Article
Board Diversity and Corporate Sustainability Performance:
Do CEO Power and Firm Environmental Sensitivity Matter?
Augustine Donkor 1, Terri Trireksani 1and Hadrian Geri Djajadikerta 2, *
1Murdoch Business School, Murdoch University, Perth, WA 6150, Australia;
augustine.donkor@murdoch.edu.au (A.D.); t.trireksani@murdoch.edu.au (T.T.)
2School of Accounting, Economics and Finance, Curtin University, Perth, WA 6102, Australia
*Correspondence: hadrian.djajadikerta@curtin.edu.au
Abstract:
The study assesses whether CEO power and firm environmental sensitivity matter to board
diversity (i.e., board cultural (BCD) and board gender (BGD) diversity) and corporate sustainability
performance nexus. Australian S&P/ASX300
0
s firm data for a period of ten years (2011–2020) were
used in the study’s analysis. Although board diversity positively influences ESG performance,
the presence of powerful CEOs and when firms operate in environmentally sensitive industries
weaken the board diversity and sustainability performance nexus. Additionally, the study found that
although board diversity is essential, the effect of BGD has a greater statistical power on sustainability
than BCD, affirming the present focus on BGD.
Keywords:
board cultural diversity; board gender diversity; corporate sustainability performance;
CEO power; environmental sensitivity; Australia
1. Introduction
Corporate sustainability performance and board diversity have gained significant
attention in business. The link between these two factors lies in recognising that diverse
boards, comprised of individuals with various backgrounds, perspectives, and experiences,
may make more informed and strategic decisions that benefit the company and the broader
society and environment [
1
,
2
]. While ample literature has examined the association between
board diversity and sustainability performance, the role of powerful CEOs and industry
types (i.e., environmentally sensitive and non-sensitive industries) in this nexus seems to
be missing in the literature, although powerful CEOs shape organisational paths [
3
,
4
] and
the nature of firms’ environment is a key antecedent of sustainability [
5
–
7
]. Additionally,
the board diversity literature seems to focus on board gender diversity (BGD), neglecting
other board diversities. This study extends the board diversity (i.e., board cultural (BCD)
and board gender (BGD) diversity) and sustainability performance literature by evaluating
whether the presence of a powerful chief executive officer (CEO) and firm environmental
sensitivity matter to the board diversity and sustainability performance nexus.
Sustainability performance issues have inundated the literature in recent times, es-
pecially on their antecedents, e.g., [
8
–
14
]. This is probably due to the continuous call to
promote sustainability performance [
15
,
16
], as the concept reflects the impact of corpora-
tions’ management practices and activities on society. Within the business process context,
diversity in boardrooms has been projected to provide valuable resources for the effective
functioning of boards [
17
,
18
]. Lu and Herremans [
8
] assert that “diversity allows for a
healthy mix of knowledge and experience”. In this regard, debates on the association be-
tween boardroom diversity and corporate sustainability performance have been extensive
among academics and practitioners [8,9,19].
Empirical assessments of the association between corporate board and performance
have been dominated by studies on board structure, composition, and characteristics, and
their links to financial and sustainability performance, e.g., [
9
,
20
–
23
]. While the existing
Sustainability 2023,15, 16142. https://doi.org/10.3390/su152316142 https://www.mdpi.com/journal/sustainability

Sustainability 2023,15, 16142 2 of 24
literature on board diversity and corporate sustainability performance has mostly centred on
gender diversity, to the point that board gender diversity quotas have been institutionalized
in many countries—France, Germany, Belgium, Italy, Norway, and Spain—e.g., [
24
–
28
], other
board diversities seem ignored.
Cumming and Leung [
29
] remark that the “value of diversity to a firm depends on the
type of diversity”, but not enough attention seems to have been given to board cultural
diversity (BCD) in the literature [
19
,
29
–
32
]. Culture influences behaviour, personality,
risk tolerance, and decision-making [
33
], and, hence, cultural diversity in boardrooms is
expected to influence the board’s actions, including sustainability performance. However,
as a double-edged sword, the influence of culture on sustainability performance can either
be positive or negative. Osazevbaru and Yahaya [
34
] expressed that “culture can either
provide a lift or create a drag”. Hence, cultural diversity in the boardrooms may not
necessarily lead to improved board effectiveness and, by extension, improved corporate
sustainability performance.
Agency and stakeholder theories, although contrasting theories, both project that
increasing boardroom diversity generally decreases managerial power to advance effective
board monitoring and potentially improve reporting performance [
35
–
37
]. Thus, the range
of skills and expertise available due to improved boardroom diversity reduces agency
costs, increases board monitoring capacity, and increases attention to stakeholders [14,38].
However, powerful CEOs are noted to inhibit effective board monitoring and promote
managerial entrenchment, creating agency problems and thereby hampering firms’ per-
formance, including sustainability practices [
3
,
39
–
43
]. Contrarily, powerful CEOs are
considered essential for firm performance as they present advantages that outweigh agency
costs [
44
–
46
]. Powerful CEOs monitor management strictly for efficiency, which enhances
performance [45–47], including sustainability performance [48].
Furthermore, stakeholder theory projects that the survival of firms is tied to their
relationship with society as sustainability concerns increase [
49
,
50
]. Consequently, firms’
level of engagement with society is affected by industry type (i.e., environmentally and
non-environmentally sensitive industries) [
51
,
52
], as environmentally sensitive firms are
subjected to more stringent sustainability issues [
53
]. Moreover, according to Cumming and
Leung [
29
], the effects of diversity centre on industry type and nature of diversity, while
certain industries are also noted to be male-dominated [
8
]. Regardless of these connexions,
the present literature seems to be missing the role of industry type and CEO power on the
board diversity and sustainability performance nexus.
To address this research gap and contribute to the literature, this study assesses the
moderating role of firm environmental sensitivity and CEO power on the board diversity
and sustainability performance nexus. It further expands the board diversity literature
beyond BGD to the inclusion of BCD.
Following Australian S&P/ASX300 firms for a period of ten years (2011 to 2020), this
study finds that, in addition to BGD, BCD positively associates with firms’ sustainability
performances. However, it found that BGD has a greater influence on ESG than BCD.
This possibly explains the focus on BGD over other board diversities. Along with the
literature that postulates that powerful CEOs inhibit board monitoring ability to hinder
sustainability performance [
3
,
41
], this study finds the presence of CEO power to weaken the
positive association between board diversity (i.e., BGD and BCD) and firms’ sustainability
performance. Additionally, the study found that firms’ environmental sensitivity moderates
the board diversity and sustainability performance relationship, suggesting that both CEO
power and firm environmental sensitivity matter to the board diversity and sustainability
performance nexus.
Overall, the study makes three important contributions to the literature. First, it
expands that board diversity-sustainability performance nexus beyond BGD to include
BCD. Second, the study empirically provides evidence of the effect of CEO power on
board diversity and sustainability performance relationships. It projects that the presence
of powerful CEOs reduces the positive effect of board diversity on firms’ sustainability

Sustainability 2023,15, 16142 3 of 24
performance relationship. This affirms that powerful CEOs impede the monitoring capacity
of boards. Lastly, the study provides evidence that the nexus between board diversity and
sustainability performance is affected by industry type. Specifically, the study projects that
the positive effect of board diversity on ESG performance is weaker among firms operating
in environmentally sensitive industries. Assessing the moderating roles of industry type
and CEO power is essential for policy directed at enhancing sustainability performance
and firms seeking to improve upon their sustainability issues. Environmentally sensitive
firms and firms with CEO power seeking to improve their sustainability performance
should institute other measures beyond board diversity to curtail their negative impacts on
sustainability.
2. Literature Review
2.1. Theoretical Perspective
Several theories have been employed to explain the relationship between effective
governance and corporate reporting performance. Agency and stakeholder theories have
guided most of the governance and reporting performance literature [
54
]. Whereas agency
theory calls for enhanced board monitoring mechanisms to improve reporting performance
and curtail agency problems [
55
–
58
], stakeholder theory calls for effective corporate gover-
nance that directs firms’ focus beyond shareholders’ interest to all stakeholders (i.e., society
at large) [
59
,
60
]. Thus, to be accountable to all stakeholders, corporate reporting has moved
beyond just financial reports to the inclusion of non-financial (sustainability) reports [
61
].
However, to ensure improved reporting performance, agency and stakeholder theories
advocate for effective governance systems [35–37].
Diversity in the boardroom is considered an effective corporate governance mechanism
for improved reporting performance as diverse boards are identified to possess a variety
of resources, skills, and expertise for enhanced corporate performance, including firms’
sustainability performance [
14
,
38
]. However, from the perspective of social identity theory,
diversity may not bring the desired positive outcome of corporate governance [
62
–
65
].
Aligned with the social identity theory, diversity may lead to “us and them” perception,
which may hamper effective communication, harmonization of purpose, power struggles,
eventually affecting the effectiveness of corporate governance [
64
,
65
]. Such situations may
curtail effective corporate governance (i.e., reduce board monitoring capacity and increase
agency problems) and/or hinder firms from meeting societal goals. Hence, it is expected to
hinder corporate governance and reporting performance relationships.
2.2. Corporate Sustainability Performance
Aligned with the demands of stakeholder theory, corporate sustainability reporting
has emerged in recent decades as a disclosure and accountability tool for corporations to be
answerable to all stakeholders on their use of resources and their responsibilities to meet
and balance the needs of current and future stakeholders [
12
,
15
]. The concept entails a
complex system that accounts for a corporation’s activities beyond financial performance to
cover non-financial aspects, i.e., environment, social, and governance, “to protect, maintain
and augment the human and natural resources required in the future” [
15
]. The heightened
interest in sustainability reporting coupled with country-specific requirements and sustain-
ability reporting standards (e.g., Global Reporting Initiative (GRI) Standards) has been the
driving force behind the continuous increase in sustainability reporting globally [66,67].
According to Artiach, Lee, Nelson and Walker [
15
], the assessment of “the extent
to which a firm embraces economic, environmental, social, and governance factors into
its operations, and ultimately the impact they exert on the firm and society” is what is
termed as corporate sustainability performance. Over decades, the literature has used
a plethora of databases, indexes, and rating agencies with established methodologies
in measuring corporate sustainability performance (e.g., DowJones Sustainability World
Index, ESG disclosure scores by Bloomberg, Thomson Reuters—Refinitiv ESG Data, S&P
Global ESG scores, MSCI, Sustainalytics ESG scores, etc.), e.g., [
8
,
15
,
68
–
70
]. Other studies

Sustainability 2023,15, 16142 4 of 24
have also resulted in content analysis assessing corporate sustainability performance
with the GRI standards on sustainability as the benchmark [
9
,
13
,
71
]. Some other studies
have also used other different approaches. For instance, Gao and Zhang [
72
] linked
stakeholder engagement, social auditing, and corporate sustainability, utilizing the AA1000
framework, and Herbohn et al. [
73
], developed a sustainability performance index based on
the International Finance Corporation’s Measuring Sustainability Framework (2001), while
Goyal et al. [74] used a graph theoretic approach to measure environmental sustainability.
Most of the existing sustainability assessment studies have focused on measuring
performance. One of the notable corporate sustainability assessments is the Refinitiv ESG
scores, which transparently and objectively assess corporations’ relative ESG performance,
commitment, and effectiveness based on publicly available auditable data [
75
,
76
]. This
platform measures sustainability performance by scoring corporations positively through
the extent to which a firm embraces environmental, social, and governance factors in its
operations [15,75,76].
2.3. Board Diversity
Aligned with agency and stakeholder theories, effective governance systems have been
identified as some of the critical means for enhancing corporate financial and non-financial
reporting performance [
77
]. As a result, many studies have assessed and confirmed an
association between some board characteristics and corporate reporting performance,
e.g., [
9
,
20
–
24
,
27
,
70
]. Regarding corporate sustainability performance, many studies have
assessed the association between board size, board independence, as well as board diversity
on sustainability performance e.g., [24–28].
While essential, the benefits of diversity are hinged on the type of diversity (gender,
age, culture, etc.) [
29
]. Albeit, most prior literature focuses on BGD with little focus on other
types of boardroom diversity [
19
,
29
,
31
,
69
]. The attention to gender diversity on boards
in the literature is linked to the assertion that women make significant contributions to
boards [
78
]. The socialization make-up of men and women is different, and such differences
are noted to provide boards with valuable resources to function effectively [
14
,
70
,
79
].
Gender-diverse boards are noted to promote responsible business practices and effective
governance performance as “women are more committed and involved, more diligent
and ultimately create a good atmosphere in the board” [
22
,
78
,
80
,
81
]. This has significantly
grown to be accepted as an important dimension of corporate governance [
80
] and is linked
to advancing board monitoring power for effective and transparent reporting, including
issues of sustainability reporting [22,79,80,82].
Corporate boards predominantly constitute diverse individuals with different cul-
tural backgrounds [
64
,
83
], making cultural diversity an essential governance issue [
19
].
Culture is a way of life; hence, it influences individuals’ behaviour, decisions, and even
tolerance levels [
33
]. Its potential influence on board activities can be positive or negative
to stakeholders; either it provides a lift or creates a drag. Though cultural diversity can
bring about different perspectives and creativity, it can also introduce negative externalities
and impose friction [
19
]. Thus, cultural diversity may present boards with a variety of
skills and expertise for improved performance [
64
,
84
]. Aligned with social identity theory,
it may also create ‘in-groups and out-groups’, ‘us vs. them’, which can impede board
functioning [
62
,
65
]. Braendle et al. [
85
] thus call for more attention to BCD and its influence
on board activities.
On this basis, some scholars concluded that cultural diversity in the boardroom sig-
nificantly influences innovation and firm performance, e.g., [
19
,
29
,
86
–
88
], while others
argue otherwise [
9
,
89
]. Wang and Clift [
89
] measured BCD based on racial diversity and
concluded no significant relationship exists between racial diversity and firm financial
performance. Zaid, Wang, Adib, Sahyouni and Abuhijleh [
9
] focused on culturally and
traditionally inclined countries to conclude that foreign board members do not signifi-
cantly influence corporate sustainability actions. In an international analysis, García-Meca
et al. [
90
] concluded that boardroom cultural diversity inhibits banks’ performance. On

Sustainability 2023,15, 16142 5 of 24
the other hand, Harjoto et al. (2019) [
88
] postulated that a conscious increase in cultural
diversity in boardrooms improves corporate social responsibility. De Klerk and Singh [
64
],
focusing on sustainability in healthcare institutions, found a positive association between
cultural diversity and sustainability performance. Giannetti and Zhao [
91
] affirmed the
“double-edged sword” of BCD by asserting that the pros and cons of diversity lead to high-
performance volatility and concluded that BCD might lead to inefficiencies and boardroom
conflict.
2.4. CEO Powers
CEO power is the “ability of CEO to control boards decisions” [
92
]. According to
Garcia-Sanchez, Raimo and Vitolla [
3
], CEOs shape organizational paths with regard to
corporate strategies and directions. To Minnick and Noga [
4
] and Daily and Johnson [
93
],
CEOs are the most powerful members of organizations and are responsible for resource al-
location and corporate strategic decisions. Although CEOs are the most powerful members,
the power of CEOs can be constrained by effective boards as boards perform two important
functions: advisory and monitoring [
93
,
94
]. Notwithstanding, powerful CEOs have subtle
means of entrenching themselves and securing authority [
94
], for either a self-serving inter-
est [41,95] or efficient monitoring of management for enhanced firm performance [45–47].
This suggests that powerful CEOs can use their influence on boards to curtail the mon-
itoring power of boards [
3
,
41
,
93
,
94
], which can be detrimental to transparent disclosures,
including sustainability reporting. In this perspective, the presence of powerful CEOs is
linked to informational opacity and agency problems [
3
,
39
–
43
]. However, according to
efficiency and organizational theories, CEO power leads to strict monitoring of managerial
activities, resulting in enhanced firm performance [
44
–
47
]. Brickley, Coles and Jarrell [
44
]
postulate that the benefits of the presence of CEO power compensate for the agency’s cost.
CEO power is also found to enhance firm transparency when found within an effective
governance system [
46
,
47
]. In this regard, powerful CEOs among a well-diversified board
are expected to enhance transparency—corporate reporting performance.
CEO power emanates from several sources: CEO duality, CEO tenure, family CEO
status, CEO ownership, the presence and role of the CEO on boards, CEO compensation
ratio, and a greater percentage of executive directors or boards [
3
,
41
,
96
]. Although ample
studies have assessed and affirmed a relationship between CEO power and firms’ disclosure
practices, most of these studies based the measure of CEO power on a single dimension
of CEO power [
97
,
98
]. On a valid proxy for CEO power, Muttakin, Khan and Mihret [
41
]
postulate that “no single measure is likely to capture every possible dimension of CEO
power”. They [
41
], therefore, used a CEO power index comprising a number of these CEO
power sources to project that CEO power inhibits board monitoring ability. Following this,
Garcia-Sanchez, Raimo and Vitolla [
3
] used a CEO power index to affirm that powerful
CEOs negatively influence board decisions on disclosures. They [
3
] assessed CEO power
on integrated reporting to affirm that powerful CEOs oppose the disclosure of integrated
information.
2.5. Environmental Sensitivity
According to Li et al. [
99
], environmentally sensitive firms are those whose operations
are considered to have higher chances of degrading or polluting the environment. The
literature mostly classifies firms within the mining, industrial, oil and gas, fisheries, forestry,
agriculture, construction, etc., as environmentally sensitive firms [
52
,
99
–
102
]. Due to their
high potential for polluting the environment, environmentally sensitive industries are
mostly subjected to stricter scrutiny concerning sustainability [5–7,52].
In this regard, a section of the literature projects that environmentally sensitive firms
are more likely to present better environmental or sustainability disclosures than non-
environmentally sensitive firms [
101
,
103
], in adherence to the need for survival as postu-
lated in the lens of stakeholder theory [
49
,
50
]. However, other empirical assessments also
posit that environmentally sensitive firms are more prone to negative sustainability impli-

Sustainability 2023,15, 16142 6 of 24
cations [
5
,
7
,
52
]. Hence, they resort to impression management or greenwashing concerning
their sustainability disclosures [
5
,
104
,
105
]. Hahn and Lülfs [
106
] add that the sustainability
disclosures of firms with environmentally sensitive industries do not paint the true picture
of their sustainability performance. Slack [
107
] agrees by asserting that the sustainability
disclosures of environmentally sensitive industries are “largely window dressing that
serves a strategic purpose” of manipulating public perception about their negative sus-
tainability implications. These considerations suggest that firms within environmentally
sensitive industries have weaker sustainability disclosures than portrayed. Focusing on the
advent of integrated reporting, Solomon and Maroun [
108
] and Du Toit et al. [
109
] show
a continuous decline in the sustainability performance of firms within environmentally
sensitive industries, affirming that such firms may have been engaging in window dressing
of sustainability disclosures to portray a better sustainability performance.
Notwithstanding the mixed view, firm environmental sensitivity is an essential an-
tecedent of corporate sustainability performance that may influence the board diversity
and sustainability performance nexus [
8
,
100
,
110
]. Due to the view that females are more
sensitive to and practical about environmental issues than their male counterparts [
111
],
males are believed to historically dominate environmentally impacting industries [
8
], and
that industry type is an essential antecedent of firms’ sustainability performance.
2.6. Board Diversity and Corporate Sustainability Performance
Aligned with agency and stakeholder theories, ample literature has assessed the
antecedents of corporate sustainability performance, e.g., [
8
,
9
,
19
,
24
–
28
,
52
,
68
]. For example,
the effects of board structure, composition, characteristics, expertise, and gender diversity
on corporate sustainability performance have been assessed in the literature, e.g., [
24
–
28
].
However, one key antecedent of corporate sustainability performance that has not seen
the required level of attention in the literature is the BCD [
19
,
29
–
32
], even though cultural
diversity is an essential diversity feature that influences individual choices, decisions, and
risk tolerance [34,85,112].
While the cultural identity of board members has been seen as a fundamental element
of board effectiveness [
34
], empirical evidence of board diversity on board effectiveness
provides mixed findings [
9
,
29
]. More culturally diverse boards have been identified as more
creative, innovative, have deeper insight and perspectives, and have a deeper knowledge
of problem-solving [
113
–
116
]. However, aligned with the social identity theory, such
boards may also possess some communication challenges, conflict and mistrust, and longer
decision-making processes, leading to inefficiencies [64,91,117–119].
The literature thus identifies cultural diversity as a double-edged sword that can
either provide a lift or create a drag [
19
,
29
,
34
]. Whereas cultural diversity can encourage
further discussions among boards for improved performance, it can also undermine trust
within the group, which hinders performance [
34
,
64
,
119
]. Thus, as culture influences
behaviour, the board of directors are susceptible to the positive and negative externalities
of culture [19,30].
Nonetheless, improved diversity is associated with effective stakeholder management
and satisfying their needs [
37
,
120
]. More culturally diverse boards are thus expected to be
more prone to different stakeholders [
37
,
88
,
116
], making them more inclined toward the
rights and interests of stakeholders. In this regard, a highly culturally diverse board should
align to better sustainability performance. On the other hand, if the negative effects of
cultural differences are prominent within a board (e.g., communication challenges, conflict
and mistrust, and longer decision-making processes), it can impede or create a drag on
the effectiveness of the board [
34
]. In this case, firm performance, including sustainability
performance, will suffer. For example, De Wit et al. [
121
] argue that conflict and mistrust
impede group outcome. Giannetti and Zhao [
91
] add that it leads to an erratic decision-
making process, which may benefit or cost the firm.
This study thus expects cultural diversity in boardrooms to influence corporate sus-
tainability performance. However, the influence is dependent on the cost and benefit of

Sustainability 2023,15, 16142 7 of 24
cultural diversity [
112
]. Additionally, this study, along with the literature that projects
BGD as an essential corporate governance dimension that advances managerial monitoring
ability for transparent reporting, further tests the BGD and sustainability performance
nexus. The study, therefore, proposes the following hypotheses.
H1. Board cultural diversity has an association with firms’ sustainability performance.
H2. Board gender diversity has an association with firms’ sustainability performance.
Diversity in the boardroom is generally linked to decreasing managerial power and
advancing effective board monitoring [
35
]. Powerful CEOs, on the other hand, are noted to
create agency problems, thereby inhibiting effective board monitoring and promoting man-
agerial entrenchment, which can be detrimental to firms’ sustainability practices
[3,39–42]
.
On the other hand, powerful CEOs are considered essential, as they can use their power to
strictly monitor management for enhanced performance of firms [
45
–
47
]. Organizational
and efficiency theories suggest that the presence of powerful CEOs leads to enhanced firm
value [
44
], while agency and economic theories posit that powerful CEOs create agency
costs by inhibiting board monitoring capacity for their opportunistic behaviour [41,95].
CEOs are key players in decisions regarding corporate disclosure, including sus-
tainability disclosures [
3
,
122
]. They are considered the most important individuals in
organisations and are responsible for resource allocation and corporate strategic deci-
sions [
4
]. Powerful CEOs may use this for a self-serving interest rather than for seeking the
interest of shareholders or stakeholders [
41
,
95
] or to advance the profit maximisation goal
of shareholders through efficient monitoring of management activities for enhanced firm
performance [45–47].
Generally, boardroom diversity is linked to effective corporate board monitoring
and decreased managerial power [
35
], including the CEO. Despite this, powerful CEOs
have subtle means of entrenching themselves and securing authority [
94
] to control board
decisions [
92
]. Thus, powerful CEOs can use their influence on boards to advance the
profit maximisation goal of shareholders or seek the interest of stakeholders through strict
monitoring of management activities [
45
,
46
]. They can also use this power to curtail the
monitoring ability of boards for their opportunistic gains [
3
,
41
,
93
,
94
]. This may influence
the board diversity and sustainability nexus [35].
Muttakin, Khan and Mihret [
41
] affirm this by asserting that powerful CEOs impede
board monitoring ability. Garcia-Sanchez, Raimo and Vitolla [
3
] also posit that powerful
CEOs oppose the disclosure of integrated (i.e., financial and sustainability) information.
Koo and Kim [
43
] assert that powerful CEOs positively associate information opacity. On
the contrary, Busenbark, Krause, Boivie and Graffin [
46
] postulate that powerful CEOs are
linked to greater transparency in a strong governance environment. They are also linked
to positive firm values [
45
,
46
]. In this view, the presence of powerful CEOs can inhibit or
advance the effect of board diversity on firms’ sustainability performance. The study thus
hypothesizes the following.
H3.
The relationship between board cultural diversity and firms’ sustainability performance will be
moderated by the presence of a powerful CEO.
H4.
The relationship between board gender diversity and firms’ sustainability performance will be
moderated by the presence of a powerful CEO.
In line with the assertion that the effects of board diversity may not be the same for all
firms in all industries (i.e., some industries are male-dominated, and culture is a double
edge-sword), Byron and Post [
123
] postulate that institutional context should be considered
when examining the effects of diversity. Industry type is one of the key aspects when
evaluating antecedents of firms’ sustainability performance [
8
,
110
]. The value of diversity
also centres on firms’ industry type and the nature of diversity [
29
]. Environmentally

Sustainability 2023,15, 16142 8 of 24
sensitive industries are mostly subjected to stricter scrutiny concerning sustainability [
5
–
7
].
Although environmentally sensitive firms are considered to present better environmental
disclosures [
101
,
103
], other studies project that environmentally sensitive firms are more
prone to negative sustainability implications [
5
,
7
]. Li, Zhao, Chen, Jiang, Liu and Shi [
99
],
therefore, called for the need to extend diversity studies into the industry context for a
detailed assessment of the established relationship. On these bases, the study expects the
environmental sensitivity of firms to influence the relationship between board diversity
and firms’ sustainability performance and proposes the following hypotheses.
H5.
The relationship between board cultural diversity and firms’ sustainability performance will be
moderated by firms’ environmental sensitivity.
H6.
The relationship between board gender diversity and firms’ sustainability performance will be
moderated by firms’ environmental sensitivity.
3. Methodology
To test the proposed hypotheses in this study, firms are drawn from the S&P/ASX300
index and data collected from the Refinitiv database. The S&P/ASX300 is an index of stocks
listed on the Australian Securities Exchange (ASX) maintained by Standard & Poor’s (S&P).
It comprises a variety of firms across different industries. The total equity of S&P/ASX300
firms accounts for more than 85% of the market capitalization of the ASX firms [
10
]. Aus-
tralia is one of the most culturally and linguistically diverse populations in the world (Di-
versity in Australia|Abroad Guide|Diversity Abroad, https://www.diversityabroad.com/
articles/travel-guide/australia#:~:text=Australia%27s%20population%20of%20about%20
23.4,many%20different%20countries%20and%20cultures (accessed on 7 November 2023)),
with a continuous increase in gender and cultural diversity among boards and management
teams [
10
,
112
,
124
–
126
]. Though cultural diversity in the boardroom in Australia does not
proportionately align with that of the population, there is some growth in board cultural
diversity among non-Anglo-Celtic and First Nations people [
124
]. Empirically assessing
the impact of cultural diversity on corporate outcomes may inform policy directions. Fur-
thermore, Dodd and Zheng [
112
] propound that the impact of board cultural diversity may
vary across countries due to country-specific characteristics that may interplay with other
cultures.
Although firms on the ASX300 are on track for parity in BGD, the same cannot be said
about BCD [
125
,
126
]. The cultural background of boards influences board effectiveness [
34
];
hence, following the diversity recommendation by the Principle of Good Corporate Gov-
ernance and Best Practice Recommendation in 2011, this study assesses the relationship
between board diversity (BCD and BGD) and corporate sustainability performance of
S&P/ASX300 firms from 2011 to 2020. It extends the literature by assessing whether firm
environmental sensitivity and CEO power matter to the board diversity and sustainability
performance relationship. Utilizing the Refinitiv database, sample firms are limited to 98
(see Table 1) based on the availability of board diversity (BCD and BGD) and corporate
sustainability performance (ESG) data.
Table 1. Sample selection process.
No. of Firms Firm Year Observations
S&P/ASX300 firms from 2011 to 2020 300 3000
Less firms without BCD data in the period under consideration (202) (2020)
Less missing DV data (87)
Less missing control variables data (178)
Observations 98 715

Sustainability 2023,15, 16142 9 of 24
3.1. Variable Definitions
This study assesses the relationship between board diversity and firms’ sustainability
performance and the moderating role of CEO power and firms’ environmental sensitivity
to the relationship. Hence BCD, BGD, ESG, firm’s environmental sensitivity, as well as
CEO power are the key variables of interest.
Following the literature, this study measures the dependent variable (i.e., sustain-
ability) by Refinitiv’s environment, social and governance (ESG) performance [
70
,
75
,
76
].
Refinitiv’s ESG is a percentile score that evaluates firms’ relative ESG performance, com-
mitment, and effectiveness to ESG factors [
75
,
76
]. In line with Refinitiv’s ESG score, the
higher the ESG score, the higher the ESG performance of a firm and vice versa.
Board diversity, the study’s independent variable, is assessed based on BCD and
BGD. Board diversity is assessed from the Refinitiv database. The database defines BCD to
represent the percentage of foreign nationals on boards or members of the board that have a
different cultural background from the domicile country of the company [
9
,
69
]. BGD is also
measured as the percentage of females on boards [
11
,
14
]. For robustness of the findings, the
study follows the literature to include the Blau index of diversity and the Shannon index of
diversity [127,128] as alternative measures of both BCD and BGD.
The moderating variable, CEO power, is measured in line with Garcia-Sanchez, Raimo
and Vitolla [
3
] and Muttakin, Khan and Mihret [
41
]. Thus, the study used a CEO power
index that includes the different dimensions of CEO power (i.e., CEO presence on boards,
CEO duality and percentage of executives on the board [
3
]). A score of 1 is assigned for
each of the three dimensions if there is a presence of a CEO on the board, if there is a CEO
duality (i.e., the CEO is also the chair of the board) and if the percentage of executives on
the board is above the median score; otherwise, 0 is assigned. The CEO power index is the
sum of all three dimensions’ scores for each year per firm. A maximum score of 3 if all three
dimensions score 1 and a minimum of 0 if all three dimensions score 0 for the CEO power
index. The second moderation variable, the firm’s environmental sensitivity, is measured
based on whether a firm’s activities have a higher chance of polluting the environment or
not [
99
]. Firms categorized in the more environmentally impacting industries (e.g., mining,
industrial, oil and gas, etc.) are assigned 1; otherwise, 0 is assigned.
With regard to the control variables, variables identified to align with diversity and
sustainability performance are considered. Thus, both board and firms’ characteristics
are controlled in line with the literature. Specifically, this study controlled for board
size (Bsize) measured as the natural logarithm of total board size, board independence
(Bindp) as the ratio of independent board members to total board size and audit committee
(Acmtt) of the board measured as the ratio of independent board members on the audit
committee [15,19,25,113,116].
Firm characteristics controlled for are firm size (Fsize), measured as a natural logarithm
of total assets, return on assets (ROA) as the ratio of earnings before interest and tax to
total assets, leverage (LEV) by the ratio of total debts to total assets, firm’s intangible assets
(intan), as a percentage of intangibles to lagged total assets. The existence of assurance
or not of firms’ sustainability performance (Assured) is also controlled for; 1 assigned if
assured and, otherwise, 0 is assigned [
19
,
114
,
116
,
123
,
129
].
∑YD and ∑I N D
are the year
and industry dummies, respectively.
3.2. Empirical Model
To examine the relationship between board diversity (i.e., BCD and BGD) and corpo-
rate sustainability performance, and the moderating roles of CEO power and environmental
sensitivity, the study employs a least-squares dummy variable (LSDV) regression model, a
variant of the fixed effect model based on OLS [
52
,
68
,
130
] to test the hypotheses. The LSDV
model maintains the pane structure of data by controlling for time-invariant characteristics

Sustainability 2023,15, 16142 10 of 24
and cross-sectional variation by adding dummy variables of year and industry [
130
]. In
line with Hypotheses 1 and 2, the following regression models are used.
ESGit =b0+b1BCDit +b2BGDit +b3Controlit +∑Y D +∑IND +εit (1)
The following estimating models are employed to test the moderating role of CEO
power and firms’ environmental sensitivity (i.e., Hypotheses 3–6). Models 2 and 3 focus
on the moderating roles of CEO power and firms’ environmental sensitivity on BCD and
ESG nexus (i.e., Hypotheses 3 and 5), while models 4 and 5 examine the moderating
roles of CEO power and firms’ environmental sensitivity on BGD and ESG nexus (i.e.,
Hypotheses 4 and 6).
ESGit =b0+b1BCDit +b2CEO powerit +b3BCDi t ∗CEOpowerit +b4BGDit +b3Controlit +∑YD +∑CD +εit (2)
ESGit =b0+b1BCDit +b2EnvSenit +b3BCDit ∗EnvSenit +b4BGDit +b3Controlit +∑YD +∑CD +εit (3)
ESGit =b0+b1BGDit +b2CEOpowerit +b3BGDit ∗CEO powerit +b4BCDit +b3Controlit +∑YD +∑CD +εit (4)
ESGit =b0+b1BGDit +b2EnvSenit +b3BGDit ∗EnvSenit +b4BCDit +b3Controlit +∑YD +∑CD +εit (5)
4. Results and Discussion
4.1. Descriptive and Correlation Analysis
Tables 2and 3contain the descriptive statistics and correlation matrix of variables of
interest in this study. Table 2shows an above-average mean score of 0.539 and a deviation
of 0.198 for ESG performance, indicating that sample firms’ commitment and effectiveness
towards ESG performance is above average. The cultural diversity of the board recorded
a merger mean of approximately 21% (0.211), implying that, on average, 21% of board
members of the sampled firms are foreigners, with a range of (0% to 78%). Board gender
diversity (BCD) also recorded a mean value of 0.251, a little above BCD, indicating that, on
average, 25% of the board are female directors, with a range of (0% to 57%). Environmental
sensitivity recorded a mean of 0.406, while an average score of 1.52 was recorded for the
CEO power index, suggesting that over 40% of the sample are environmentally sensitive
firms and more than 50% of the sample, based on the CEO power index, have powerful
CEOs.
Table 2. Descriptive statistics table.
Mean Std Dev. Min. Max.
ESG 0.539 0.198 0.029 0.919
BCD 0.211 0.121 0 0.778
BGD 0.251 0.104 0 0.571
EnvSen 0.406 0.491 0 1
CEOpower 1.521 0.615 0 3
Bsize 2.729 0.092 2.381 2.958
Bindp 0.707 0.199 0.083 1
Acmtt 0.964 0.081 0.6 1
Assured 0.352 0.478 0 1
Fsize 15.559 1.810 10.779 20.762
ROA 0.076 0.124 −0.975 0.881
LEV 0.247 0.164 0 1.326
Intan 0.241 0.321 0 3.075

Sustainability 2023,15, 16142 11 of 24
Table 3. Correlation matrix.
Variables (1) (2) (3) (4) (5) (6) (7)
(1) ESG 1.000
(2) BCD 0.113 *** 1.000
(3) BGD 0.337 *** 0.123 *** 1.000
(4)
CEOpower −0.250 *** −0.079 ** −0.148 *** 1.000
(5) EnvSen −0.106 *** −0.070 ** −0.130 *** −0.022 1.000
(6) Bsize 0.612 *** −0.016 0.170 *** −0.140 *** −0.011 1.000
(7) Bindp 0.431 *** 0.119 *** 0.200 *** −0.641 *** −0.073 ** 0.254 *** 1.000
(8) Acmtt 0.264 *** 0.076 ** 0.049 −0.122 *** −0.076 ** 0.061 * 0.226 ***
(9) Assured 0.635 *** 0.011 0.188 *** −0.103 *** 0.070 ** 0.380 *** 0.212 ***
(10) Fsize 0.671 *** −0.016 0.190 *** −0.238 *** −0.053 * 0.410 *** 0.321 ***
(11) ROA −0.140 *** 0.043 −0.029 0.152 *** −0.153 *** 0.121 *** −0.101 ***
(12) LEV 0.057 * −0.110 *** 0.051 0.012 0.099 *** 0.074 ** −0.004
(13) Intan −0.178 *** −0.077 ** −0.033 0.068 ** −0.151 *** −0.080 ** −0.014
Variables (8) (9) (10) (11) (12) (13)
(8) Acmtt 1.000
(9) Assured 0.100 *** 1.000
(10) Fsize 0.056 * 0.379 *** 1.000
(11) ROA −0.025 −0.063 * −0.229 *** 1.000
(12) LEV −0.113 *** 0.063 * 0.094 *** −0.161 *** 1.000
(13) Intan 0.008 −0.174 *** −0.270 *** 0.153 *** 0.174 *** 1.000
***, **, * represent 1%, 5% and 10% statistical significance levels.
The correlation matrix (Table 3) shows that board diversity (i.e., BCD and BGD) posi-
tively relates firms’ ESG. Environmental sensitivity of firms and CEO power are negatively
associated with firms’ sustainability performance. The low correlations among the ex-
planatory variables and the mean–variance inflation factor (VIF) of 2.69 do not indicate
multicollinearity issues [131].
4.2. Empirical Results—Board Diversity and ESG Performance
Tables 4and 5present the regression results for the study’s models. Based on the
regression model used, Table 4, column 1 shows a significant positive relationship be-
tween BCD and ESG. In detail, the results show that an increase in BCD is associated
with increases in ESG of firms (
β
= 0.091,
p< 0.05
). From Table 5, column 1, the results
project a positive significant association between BGD and ESG. Thus, the results indicate
that increases in BGD are associated with increases in firm ESG performance (
β
= 0.223,
p< 0.00
). These signify the acceptance of Hypotheses 1 and 2, which examine whether
board diversity positively associates with firms’ ESG performance. Thus, assessing board
diversity from gender (BGD) and cultural (BCD) diversities, the results project that board
diversity positively influences firms’ practices of sustainability.
These results align with agency and stakeholder theories as enhanced corporate gov-
ernance mechanisms (i.e., improved board diversity) ensure quality reporting performance.
They support the existing literature that projects BGD to positively influence firms’ dis-
closure quality, e.g., [
11
,
14
,
24
,
25
,
64
,
132
]. With regard to BCD, the study aligned with
studies that project cultural diversity as an essential element that influences boards’ actions,
e.g., [
19
,
33
,
34
,
64
,
83
,
85
]. Although a culturally diverse board is seen as a double-edged
sword that can provide a lift or create a drag [
34
], this study found that BCD provides
a lift in firms’ sustainability performance. From the perspective of social identity theory,
the finding on BCD portrays that firms experience more of the positive externalities of
cultural diversity, leading to improved performance. Generally, the results project that
board diversity is an essential influencer of firm sustainability performance by empirically
providing evidence beyond the usual BGD to BCD.

Sustainability 2023,15, 16142 12 of 24
Table 4. Relationships between board cultural diversity (BCD) and ESG Performance.
DV: ESG
(1) (2) (3) (4) (5) (6) (7)
BCD 0.091 ** 0.158 *** 0.218 **
(0.036) (0.046) (0.11)
EnvSen −0.102 *** −0.085 ** −0.07 *
(0.027) (0.033) (0.039)
BCD ×EnvSen −0.184 **
(0.075)
CEOpower −0.036 ** −0.046 ** −0.058 **
(0.017) (0.023) (0.029)
BCD ×CEOpower −0.093 **
(0.046)
BlauBCD 0.112 ** 0.195 *
(0.052) (0.117)
blauBCD ×EnvSen −0.189 **
(0.086)
blauBCD ×CEOpower −0.116 *
(0.067)
shanBCD 0.089 ** 0.172 *
(0.044) (0.099)
shanBCD ×EnvSen −0.154 **
(0.072)
shanBCD ×CEOpower −0.081 *
(0.046)
BGD 0.223 *** 0.212 *** 0.201 *** 0.212 *** 0.199 *** 0.213 *** 0.199 ***
(0.048) (0.048) (0.049) (0.049) (0.05) (0.049) (0.05)
Bsize 0.618 *** 0.63 *** 0.593 *** 0.617 *** 0.596 *** 0.617 *** 0.598 ***
(0.117) (0.116) (0.117) (0.117) (0.118) (0.117) (0.118)
Bindp 0.134 *** 0.129 *** 0.11 *** 0.132 *** 0.116 *** 0.132 *** 0.116 ***
(0.024) (0.024) (0.026) (0.024) (0.026) (0.024) (0.026)
Acmtt 0.34 *** 0.333 *** 0.353 *** 0.334 *** 0.349 *** 0.334 *** 0.348 ***
(0.059) (0.059) (0.059) (0.059) (0.06) (0.06) (0.06)
Assured 0.106 *** 0.105 *** 0.101 *** 0.106 *** 0.101 *** 0.106 *** 0.101 ***
(0.012) (0.012) (0.012) (0.012) (0.012) (0.012) (0.012)
Fsize 0.017 *** 0.018 *** 0.017 *** 0.018 *** 0.018 *** 0.018 *** 0.018 ***
(0.007) (0.007) (0.007) (0.007) (0.007) (0.007) (0.007)
ROA −0.124 ** −0.118 ** −0.119 ** −0.116 ** −0.117 ** −0.116 ** −0.118 **
(0.052) (0.052) (0.052) (0.052) (0.053) (0.052) (0.053)
LEV 0.092 *** 0.095 *** 0.098 *** 0.093 *** 0.092 *** 0.092 *** 0.092 ***
(0.031) (0.031) (0.031) (0.031) (0.032) (0.031) (0.032)
Intan −0.002 −0.002 −0.001 −0.004 −0.003 −0.004 −0.003
(0.017) (0.017) (0.017) (0.017) (0.017) (0.017) (0.017)
Year effect Yes Yes Yes Yes Yes Yes Yes
Industry effect Yes Yes Yes Yes Yes Yes Yes
Constant −1.959 *** −2.003 *** −1.948 *** −1.975 *** −1.972 *** −1.983 *** −1.998 ***
(0.234) (0.234) (0.238) (0.236) (0.244) (0.237) (0.248)
Adjusted R20.672 0.674 0.673 0.671 0.671 0.671 0.671
F Statistics 51.46 *** 50.31 *** 48.64 *** 49.37 *** 47.84 *** 49.32 *** 47.85 ***
Observations 715 715 715 715 715 715 715
Mean VIF 2.15 2.69 3.02 3.03 3.01 3.05 3.02
The table denotes the regression output of board diversity (i.e., BCD and BGD) on ESG performance. Variables are
winsorized at 1% and 99%, except dummy variables. Robust standard errors are reported in parentheses. ***, **,
* denote 1%, 5% and 10% statistical significance levels.
Focusing on BCD, the finding supports the view that culturally diverse boards improve
firms’ performance [
19
,
29
,
64
,
86
–
88
]. It follows Harjoto, Laksmana and wen Yang [
88
], who
concluded that a conscious increase in BCD leads to increases in firms’ corporate social
responsibility. However, the findings contradict those of Wang and Clift [
89
], García-
Meca, García-Sánchez and Martínez-Ferrero [
90
], and Zaid, Wang, Adib, Sahyouni and
Abuhijleh [
9
]. On financial performance, Wang and Clift [
89
] conclude that BCD has no
significant effect on firms’ financial performance, while García-Meca, García-Sánchez and
Martínez-Ferrero [
90
] indicate BCD inhibits banks’ performance. This study, however,
examined BCD and sustainability performance, not financial performance. Zaid, Wang,
Adib, Sahyouni and Abuhijleh [
9
], on the other hand, examined BCD and sustainability

Sustainability 2023,15, 16142 13 of 24
performance but focused on culturally and traditionally inclined developing countries to
conclude a non-significant relationship between BCD and the sustainability performance of
firms. This study focused on a cosmopolitan developed economy and a matured exchange
to establish a positive significant effect between BCD and firms’ ESG performance. Thus,
the results empirically position BCD as an essential diversity instrument that can be used
to promote quality disclosure in the field of sustainability.
Table 5. Relationships between board gender diversity (BGD) and ESG Performance.
DV: ESG
(1) (2) (3) (4) (5) (6) (7)
BGD 0.223 *** 0.268 *** 0.609 ***
(0.048) (0.056) (0.119)
EnvSen −0.1 *** −0.07 * 0.265
(0.032) (0.041) (0.202)
BGD ×EnvSen −0.134 **
(0.061)
CEOpower 0.086 *** 0.126 *** 0.57 ***
(0.02) (0.03) (0.164)
BGD ×CEOpower −0.255 ***
(0.068)
BlauBGD 0.337 *** 0.702 ***
(0.063) (0.131)
blauBGD ×EnvSen −0.178 *
(0.093)
BlauBGD ×CEOpower −0.291 ***
(0.078)
shanBGD 1.404 *** 3.102 ***
(0.337) (0.696)
shanBGD ×EnvSen −1.136 **
(0.558)
shanBGD ×CEOpower −1.532 ***
(0.461)
BCD 0.091 ** 0.086 ** 0.098 *** 0.072 * 0.087 ** 0.085 ** 0.096 ***
(0.036) (0.037) (0.036) (0.037) (0.037) (0.037) (0.037)
Bsize 0.618 *** 0.605 *** 0.577 *** 0.594 *** 0.568 *** 0.593 *** 0.571 ***
(0.117) (0.117) (0.116) (0.117) (0.116) (0.119) (0.118)
Bindp 0.134 *** 0.13 *** 0.106 *** 0.124 *** 0.102 *** 0.142 *** 0.112 ***
(0.024) (0.024) (0.025) (0.024) (0.025) (0.024) (0.025)
Acmtt 0.34 *** 0.336 *** 0.321 *** 0.327 *** 0.311 *** 0.313 *** 0.314 ***
(0.059) (0.059) (0.059) (0.059) (0.059) (0.06) (0.059)
Assured 0.106 *** 0.107 *** 0.102 *** 0.105 *** 0.101 *** 0.105 *** 0.1 ***
(0.012) (0.012) (0.012) (0.012) (0.012) (0.012) (0.012)
Fsize 0.017 *** 0.017 *** 0.018 *** 0.018 *** 0.019 *** 0.019 *** 0.018 ***
(0.007) (0.007) (0.006) (0.007) (0.006) (0.007) (0.007)
ROA −0.124 ** −0.121 ** −0.108 ** −0.128 ** −0.115 ** −0.147 *** −0.136 ***
(0.052) (0.052) (0.052) (0.052) (0.052) (0.053) (0.053)
LEV 0.092 *** 0.092 *** 0.095 *** 0.086 *** 0.089 *** 0.08 ** 0.09 ***
(0.031) (0.031) (0.031) (0.031) (0.031) (0.031) (0.031)
Intan −0.002 −0.002 −0.006 0 −0.005 0 −0.004
(0.017) (0.017) (0.017) (0.017) (0.017) (0.017) (0.017)
Year effect Yes Yes Yes Yes Yes Yes Yes
Industry effect Yes Yes Yes Yes Yes Yes Yes
Constant −1.959 *** −1.935 *** −1.956 *** −1.955 *** −2.022 *** −2.341 *** −2.895 ***
(0.234) (0.234) (0.233) (0.234) (0.234) (0.259) (0.332)
Adjusted R20.672 0.673 0.680 0.675 0.681 0.669 0.676
F Statistics 51.46 *** 49.94 *** 49.94 *** 50.13 *** 49.97 *** 48.84 48.66 ***
Observations 715 715 715 715 715 715 715
Mean VIF 2.15 2.88 3.02 3.09 3.07 3.11 3.10
The table denotes the regression output of board diversity (i.e., BCD and BGD) on ESG performance. Variables are
winsorized at 1% and 99%, except dummy variables. Robust standard errors are reported in parentheses. ***, **,
* denote 1%, 5% and 10% statistical significance levels.
However, comparing the effects of BGD and BCD, BGD has a better influence on ESG
than BCD. Thus, on average, a 1% increase in BGD increases ESG by 22.3%, whereas BCD

Sustainability 2023,15, 16142 14 of 24
increases ESG by 9.1% (Tables 4and 5, columns 1). This difference can be linked to the
continuous attention on BGD over other diversity indicators.
The results relating to control variables also align with the literature. Board size,
independence, and audit committee independence are positively and significantly related
to firms’ ESG performance. The results on the assurance of corporate sustainability reports
also align with the literature as a positive significant association is established between
assured ESG and firms’ ESG performance [
133
,
134
]. Firm size and leverage are positively
related to ESG. This aligns with the literature that asserts that politically visible firms are
prone to quality disclosure to avoid too much public scrutiny [15,135].
4.3. Interaction Effect of CEO Power
In line with the agency theory, CEOs are important individuals with lots of power
within organizations, as shareholders are scattered across with less individual power
compared to the CEO [
58
]. With such power, they (CEOs) can be self-seeking by negatively
impacting the monitoring capacity of boards [
41
] to the detriments of quality disclosure
and the positive effects of board diversity. Powerful CEOs can also use this influence
positively on boards for effective board functioning, thereby enhancing the performance of
firms [
45
–
47
]. The moderating role of CEO power on board diversity and sustainability
performance is thus tested (Hypotheses 3 and 4).
The results in Tables 4and 5, columns 3, suggest that the presence of powerful CEOs
reduces the positive effect of board diversity on firms’ sustainability performance. Specifically,
the results in Table 4, column 3 indicate that the interaction variable (
BCD ×CEOpower
)
negatively associates firms’ ESG performance at a 5% significance level (
β
=
−
0.093,
p< 0.05
).
The results of Table 5, column 3 show that the moderating variable (
BGD ×CEOp
ower)
negatively and significantly impact firms’ ESG performance at a 1% significance level
(
β=−0.255
,p< 0.01). These results show that irrespective of the measures of board
diversity (i.e., BCD or BGD), the presence of CEO power significantly reduces the positive
significant effect of board diversity on firms’ sustainability performance.
These outcomes align with the literature that shows that powerful CEOs inhibit the
monitoring abilities of boards [
41
] and those that suggest that powerful CEOs dictate the
direction of firms and can abuse it for their opportunistic gain [
3
,
4
]. The results, how-
ever, contradict the stream of literature that views CEO power as beneficial, e.g.,
[44–47]
.
Thus, the results contradict the stream of literature that projects that the presence of
powerful CEOs leads to strict monitoring of managerial activities for improved firm per-
formance
[45–47]
. The findings rather support the economic and agency theories that
postulate that powerful CEOs create agency problems and have negative consequences on
firms’ performance [3,39–43].
Although board diversity is meant to advance board monitoring capacity and curtail
excesses of the executive, including the CEO [
35
], the results suggest that the presence of a
powerful CEO can negatively influence the monitoring capacity of boards to the detriment
of sustainability performance [
3
,
41
,
93
,
95
]. This further aligns with Baldenius, Melumad
and Meng [
94
] and Pathan (2009) [
92
], who opine that powerful CEOs have subtle means of
entrenching themselves and securing authority for personal ambitions. These results affirm
that CEO power matters to the board diversity and sustainability performance nexus.
4.4. Interaction Effect of Firms’ Environmental Sensitivity
The study further tests the interaction effect of firms’ environmental sensitivity on the
board diversity and ESG nexus (i.e., Hypotheses 5 and 6). This is based on the assump-
tion that environmentally sensitive industries are prone to issues of sustainability, and
their survival is hinged on a better engagement with society in line with the stakeholder
theory [49–52]. Moreover, the value of diversity centres on the firms’ industry type [29].
Based on the results (Tables 4and 5, columns 2), the interaction variables (i.e., BCD*EnvSen
and BGD*EnvSen) were found to negatively impact board diversity and firms’ sustainability
performance nexus (
β
=
−
0.184, p< 0.05 and
β
=
−
0.134, p< 0.05, respectively for BCD and

Sustainability 2023,15, 16142 15 of 24
BGD). This suggests that environmentally sensitive firms weaken the significant positive
association between board diversity and ESG performance. This finding is robust for the
two measures of board diversity used and signifies the acceptance of Hypotheses 5 and 6,
The results align with the view that environmentally sensitive firms exhibit more
significant negative consequences on the environment [
8
,
110
], and their sustainability
disclosure quality keeps declining overtime [
52
,
108
,
109
]. It, however, contradicts the
section of the literature that views environmentally sensitive firms as superior in their
sustainability disclosures due to the stricter scrutiny they are subjected to [7,101].
The findings further support the assertions of Cumming and Leung [
29
], Lu and
Herremans [
8
], and Helfaya and Moussa [
110
] that industry context is essential in assessing
the effect of diversity on sustainability performance. Thus, the study empirically proves
that environmental sensitivity matters to the board diversity and sustainability relationship,
even with the two measures of board diversity (i.e., BCD and BGD).
4.5. Further Analysis
For the robustness of the findings, the study uses alternative measures of board
diversity (i.e., Blau and Shanon indexes of diversity), lead–lag analysis, and three-stage least-
squares regression (3SLS) to deal with potential issues of endogeneity and to substantiate
the results.
4.5.1. Alternative Measures of Board Diversity
Following the literature, the Blau index and Shannon index of BCD and BGD are used
to alternately measure board diversity [
9
,
127
,
128
] for a robust assessment of the findings.
From Table 4(columns 4–7), the results show qualitatively and quantitatively similar
findings to the initial relationships between BCD and ESG performance. Thus, the findings
portray that BCD measured by the Blau index positively relates firms’ ESG performance at
a 5% significance level (
β
= 0.112, p< 0.05—column 4) and that of Shanon index at the 5%
significance level (β= 0.089, p< 0.05—column 6). Similar results are reported for the Blau
index of BGD and the Shanon index of BGD on firms’ sustainability performance (Table 5).
Thus, a positive relationship is established between the Blau index of BGD and firms’ ESG
performance at a 1% significance level (
β
= 0.337, p< 0.01—column 6), and that of Shanon
index of BGD at a 1% significance level (β=1.404, p< 0.01—column 6).
The interaction effects of CEO power and firms’ environmental sensitivity are also
affirmed for both the Blau index and the Shannon index of BCD and BGD. In line with the
initial results, the interaction effects of CEO power recorded a significant negative effect
on firm ESG performance for both Blau and Shannon indexes of diversity (
β
=
−
0.116,
p< 0.10,
β
=
−
0.081, p< 0.10, respectively, for the Blau and Shanon index of BCD in
Table 4and
β=−0.291
,p< 0.01,
β
=
−
1.532, p< 0.01, respectively, the for Blau and Shanon
index of BGD in Table 4). The interaction effects of firms’ environmental sensitivity also
recorded similar results to the initial findings. Thus, the moderation effect of environmental
sensitivity and Blau and Shanon indexes of BCD (Table 4) recorded a significant negative
relationship of
−
0.189 and
−
0.154, all at a 5% significance level, respectively, for Blau and
Shanon indexes of BCD. Those of Blau and Shanon indexes of BGD recorded
−
0.178 and
−1.136, at 10% and 5% significance levels for Blau and Shanon indexes of BGD.
The results consistently affirm the findings of the study that board diversity (i.e.,
BCD and BGD) positively influences firms’ sustainability performance, while the presence
of CEO power and firms’ environmental sensitivity weakens the board diversity and
sustainability performance relationship.
4.5.2. Three-Stage Least-Squares Regression (3SLS)
For the nature of inference in this study, issues of endogeneity may be of concern (e.g.,
simultaneity and correlated omitted variables) [
14
,
136
,
137
]. This study employs a lead–lag

Sustainability 2023,15, 16142 16 of 24
analysis and a three-stage least-squares regression in line with the literature [
8
] based on
the models below to address issues of endogeneity.
ESGit =b0+a1BDi t−1+c2ESGit−1+y4Qit +εit (6)
BDi t =b0+a1ESGi t−1+c2BDit−1+y4Qit +εit (7)
where
ESG
is firms’ ESG performance, BD is board diversity (i.e., BCD and BGD), and
Q
denotes all control variables.
The 3SLS simultaneously runs the models, treating the dependent variables ESG and
BD as endogenous variables [
8
,
138
]. From Table 6, the results corroborate the study’s initial
findings. Thus, the results show a significant positive relationship between BCD and ESG
(
β
= 0.314, p< 0.00—column 1) and a significant positive relationship between BGD and
ESG (
β
= 0.677, p< 0.00—column 3). The interaction effect of CEO power on the board
diversity and ESG relationship also recorded negative significant effects of
−
0.797 (BCD)
and
−
2.113 (BGD), all at a 1% significance level (Table 6, columns 2 and 4). The moderation
effect of firms’ environmental sensitivity on the board diversity and ESG performance was
also affirmed (i.e.,
β
=
−
0.323, p< 0.00 and
β
=
−
0.494, p< 0.00, respectively, for BCD,
column 1 and BGD, column 3).
Table 6. Three-stage least-squares regression (3SLS).
DV: ESG
Board Cultural Diversity Board Gender Diversity
BCD 0.314 ***
(0.07)
1.598 ***
(0.354)
0.067 *
(0.039)
0.042
(0.058)
BGD 0.209 ***
(0.05)
0.145 **
(0.058)
0.677 ***
(0.09)
0.415 ***
(0.492)
EnvSen −0.093 ***
(0.03)
−0.016
(0.037)
BCD ×EnvSen −0.323 ***
(0.094)
CEOpower −0.203 ***
(0.044)
−0.565 ***
(0.07)
BCD ×CEOpower −0.796 ***
(0.189)
BGD ×EnvSen −0.494 ***
(0.106)
BGD*CEOpower −0.2.113 ***
(0.264)
Bsize 0.697 ***
(0.124)
0.697 ***
(0.138)
0.578 ***
(0.123)
0.552 ***
(0.181)
Bindp 0.094 ***
(0.025)
0.049
(0.03)
0.076 ***
(0.026)
0.007
(0.041)
Acmtt 0.336 ***
(0.063)
0.401 ***
(0.07)
0.354 ***
(0.063)
0.173 *
(0.096)
Assured 0.098 ***
(0.012)
0.077 ***
(0.014)
0.101 ***
(0.012)
0.093 ***
(0.018)
Fsize 0.014 **
(0.007)
0.015 **
(0.007)
0.015 **
(0.007)
0.018 *
(0.01)
ROA −0.140 **
(0.054)
−0.178 ***
(0.061)
−0.129 **
(0.055)
−0.084
(0.081)
LEV 0.105 ***
(0.033)
0.099 ***
(0.036)
0.098 ***
(0.03)
0.046
(0.049)
Intan −0.005
(0.017)
−0.003
(0.019)
−0.009
(0.017)
−0.046 *
(0.026)
Year effect Yes Yes Yes Yes

Sustainability 2023,15, 16142 17 of 24
Table 6. Cont.
DV: ESG
Board Cultural Diversity Board Gender Diversity
Industry effect Yes Yes Yes Yes
Constant −2.097 ***
(0.253)
−2.442
(0.306)
−1.889 ***
(0.248)
−2.51 ***
(0.373)
R20.6773 0.6117 0.6609 0.2745
Chi21332.77 1119.43 1317.35 667.32
Prob. > Chi20.0000 0.0000 0.0000 0.0000
Observations 627 627 627 627
The table denotes the 3SLS regression output of board diversity (i.e., BCD and BGD) on ESG performance.
Variables are winsorized at 1% and 99%, except dummy variables. Robust standard errors are reported in
parentheses. ***, **, * denote 1%, 5% and 10% statistical significance levels.
4.5.3. Lead–Lag Analysis
The lead–lag principle alleviating concerns of endogeneity, hinges on the assumption
that ‘Y
t
cannot explain X
t–10
to ‘exogenise’ the endogenous explanatory variable [
68
,
139
].
Following the literature, the study further employs the lead–lag analysis to further address
any issues of endogeneity [
139
,
140
]. The results, as shown in Table 7, affirm the initial results
of the study that board diversity positively associates firms’ sustainability performance. It
further affirms that both CEO power and environmental sensitivity matter to the board
diversity and sustainability performance nexus.
Table 7. Lead–lag analysis.
DV: ESG
Board Cultural Diversity Board Gender Diversity
Lagged BCD 0.154 ***
(0.051)
0.190 **
(0.093)
Lagged BGD 0.285 ***
(0.058)
0.638 ***
(0.134)
EnvSen −0.125 ***
(0.028)
−0.114 ***
(0.033)
Lagged BCD ×EnvSen −0.176 **
(0.083)
CEOpower −0.032 *
(0.017)
−0.082 ***
(0.021)
Lagged BCD ×CEOpower −0.058 ***
(0.018)
Lagged BGD ×EnvSen −0.165 *
(0.093)
Lagged BGD ×CEOpower −0.259 ***
(0.076)
BCD 0.091 **
(0.039)
0.102 ***
(0.038)
BGD 0.224 ***
(0.051)
0.214 ***
(0.051)
Bsize 0.606 ***
(0.121)
0.560 ***
(0.122)
0.619 ***
(0.123)
0.587 ***
(0.122)
Bindp 0.101 ***
(0.025)
0.085 ***
(0.027)
0.114 ***
(0.025)
0.090 ***
(0.026)
Acmtt 0.341 ***
(0.063)
0.356 ***
(0.063)
0.340 ***
(0.063)
0.339 ***
(0.063)
Assured 0.103 ***
(0.012)
0.100 ***
(0.012)
0.103 ***
(0.012)
0.098 ***
(0.012)

Sustainability 2023,15, 16142 18 of 24
Table 7. Cont.
DV: ESG
Board Cultural Diversity Board Gender Diversity
Fsize 0.017 **
(0.007)
0.017 **
(0.007)
0.015 **
(0.007)
0.016 **
(0.007)
ROA −0.111 **
(0.052)
−0.110 ***
(0.053)
−0.136 **
(0.055)
−0.115 **
(0.054)
LEV 0.105 ***
(0.033)
0.109 ***
(0.033)
0.109 ***
(0.033)
0.108 ***
(0.033)
Intan −0.005
(0.017)
−0.006
(0.017)
−0.010
(0.017)
−0.013
(0.017)
Year effect Yes Yes Yes Yes
Industry effect Yes Yes Yes Yes
Constant −1.888 ***
(0.248)
−2.795 ***
(0.249)
−1.891 ***
(0.248)
−1.912 ***
(0.247)
Adjusted R20.6661 0.6662 0.6627 0.6691
F Statistics 44.95 *** 43.50 *** 44.70 *** 44.47 ***
Observations 640 640 640 640
The table denotes the regression output of lagged board diversity (i.e., BCD and BGD) on ESG performance.
Variables are winsorized at 1% and 99%, except dummy variables. Robust standard errors are reported in
parentheses. ***, **, * denote 1%, 5% and 10% statistical significance levels.
5. Conclusions
The essence of board diversity is seen in the increasing number of publications in
the field. However, while the type of diversity is essential to the benefits of diversity,
the literature has so far mainly focused on BGD with less emphasis on BCD. Culture, as
a double-edged sword, can potentially influence one’s actions and decisions, including
board effectiveness. Additionally, although the call for evidence on the effects of diversity
has yielded ample research into board diversity and sustainability performance, the role
of powerful CEOs and industry types in this nexus is missing in the literature. The
literature largely links boardroom diversity to advancing board monitoring ability, board
effectiveness, and reducing managerial power. Nonetheless, the presence of CEO power
hinders board monitoring ability or advances board effectiveness, while industry type is an
essential factor in the effects of diversity. Notwithstanding, the effects of CEO power and
industry type on the board diversity and sustainability performance nexus are missing.
This study contributes to the literature on diversity and antecedents of corporate
sustainability performance by assessing whether CEO power and firm environmental
sensitivity matter to the board diversity (i.e., BCD and BGD) and corporate sustainability
performance relationship. It further assesses the effect of board diversity beyond the BGD
to BCD.
Using the S&P/ASX300 firms for a period of ten years (2011 to 2020), the findings
of the study project that both BCD and BGD are essential antecedents for corporate sus-
tainability performance. It concludes that BCD and BGD positively associate firms’ ESG
performance. However, the effect of BGD significantly influences ESG better than BCD,
possibly explaining the focus of the literature and practice on BGD. On the moderation
effects, the study further concludes that CEO power and industry type (environmental
sensitivity) matter to the board diversity and sustainability performance relationship. It
found that CEO power and environmental sensitivity moderate the board diversity and
sustainability performance nexus. In detail, the study established that CEO power and
environmental sensitivity negatively moderate diversity and sustainability performance
relationships. This aligns with the view of the literature that projects that powerful CEOs
create agency problems and mostly use this power for their opportunistic gains, which
is detrimental to the board diversity and sustainability performance nexus. Concerning
firms’ environmental sensitivity, the conclusion aligns with the view that environmentally

Sustainability 2023,15, 16142 19 of 24
sensitive firms are more prone to negative sustainability and essential to the effects of board
diversity.
The findings of the study make three important contributions to the literature, practice,
and policy. First, it extends the board diversity literature beyond BGD to BCD. It, however,
affirms that BGD has more influence on ESG than BCD. Regardless, the positive influence
of BCD on ESG advances the essence of BCD, hence the need for all stakeholders to pay
attention to boardroom cultural diversity. Second, it brings attention to the effect of the
presence of powerful CEOs on effective corporate governance. It shows that the presence
of powerful CEOs negatively affects board monitoring ability, leading to a reduction in the
positive effect of board diversity on firms’ sustainability performance. Third, it projects that
firms’ industry type affects the effects of boardroom diversity. This is essential for every
policy targeting mandating or encouraging board diversity quotas. The findings provide
business practitioners, investors, and policymakers with valuable empirical evidence
regarding other factors that may hinder the positive links between board diversity and
corporate sustainability performance. The results are essentially interesting regarding
factors to ensure effective corporate governance practices and the differences in effects with
respect to industry type.
Although the contributions are essential, some limitations exist. This is a single-
country study and, hence, may lack detailed cultural group representations, limiting the
generalizability of the findings. Multiple-country studies are expected to advance the
findings, generalizability of results and expand the literature. Additionally, the operational-
isation of the adopted board cultural diversity may be limited, and future studies may
adopt other extensive measures to advance the literature. Further studies can also consider
more extensive industry classifications to ascertain specific industry effects on the board
diversity and corporate sustainability performance association. Other scholars may also
consider the different elements of sustainability performance (i.e., environmental, social
and governance pillars) to advance the literature, and other estimating models may also
enhance the methodology and enrich the findings of this study.
Author Contributions:
Conceptualization, A.D.; Methodology, A.D.; Validation, T.T. and H.G.D.;
Formal analysis, A.D.; Investigation, A.D.; Resources, H.G.D.; Data curation, A.D.; Writing—original
draft, A.D.; Writing—review & editing, T.T. and H.G.D.; Visualization, A.D. and T.T.; Supervision,
T.T. and H.G.D.; Project administration, T.T. and H.G.D. All authors have read and agreed to the
published version of the manuscript.
Funding: This research received no external funding.
Institutional Review Board Statement: Not applicable.
Informed Consent Statement: Not applicable.
Data Availability Statement: Data are contained within the article.
Conflicts of Interest: The authors declare no conflict of interest.
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