Meditating Effect of Firm Performance on the Relationship Between Board Independence and ESG Disclosure in Selected Developing Countries

Abstract

This study explores how firm performance influences the relationship between board independence and Environmental, Social, and Governance (ESG) disclosure among nonfinancial listed firms in selected developing countries. Grounded in agency theory and slack resources theory, the research addresses ongoing debates and inconsistent findings in previous studies about whether and how board independence affects ESG disclosure, particularly in the context of developing economies. Using a purposive sample of 282 firms drawn from the Refinitiv database over 10 years, starting from 2012, the study measures ESG disclosure through ESG scores, while board independence and firm performance are captured using well-established indicators, specifically Tobin’s Q, ROA, and ROE, all sourced from Refinitiv. Data analysis was conducted using Structural Equation Modelling (SEM) and MedSEM techniques in STATA. The results show a significant positive link between board independence and ESG disclosure. Importantly, firm performance partially mediates this relationship, accounting for a modest but statistically significant portion of the total effect across the full sample. Further analysis by sub-samples revealed differences in the mediation effect depending on both the proxy used for firm performance and the regional context. In some cases, partial mediation was observed; in others, full mediation emerged. These findings remained robust even after accounting for the potential effects of the COVID19 pandemic. Overall, the results provide empirical support for the idea that corporate governance mechanisms such as having an independent board can enhance ESG transparency, in part by improving firm performance. The study makes a valuable contribution to the ESG literature in developing economies and lends support to both agency theory and slack resources theory as explanations for firms' non-financial disclosure behaviour. The findings also offer practical insights for policymakers, regulators, and corporate leaders, emphasising the importance of governance reforms and performance driven strategies to strengthen ESG practices in emerging markets.