Abstract
Public listed companies in Malaysia have been pressured tremendously to accept the engagement of Environment, Social and Governance (ESG), but the engagement is still low based on previous studies. ESG will enhance company financial performance, image as well as the ability to attract and retain the workplace which contributes to the market value in the economy. This shows that ESG engagement improve company brand image and reputation, increase customer loyalty and sales as well as productivity. Corporate governance is seen to be the key role to ensure that companies engage with ESG practices since it can enhance the value creation and improve financial performance. Even the present investors are bound to look for non-financial performance elements like corporate governance and environmental, social and governance (ESG) practices that the company engaged since it is an evidence of effective corporate governance. Based on today’s global and innovation-driven economy which also include social and environmental matters consisting of welfare distribution and growth, it is said that countries need to be more efficient in finding new ways to enhance the environmental policy promoting greater change and dynamics. Thus, they must find new ways to develop an innovation policy to emphasise the knowledge-driven economy on the capacity to adapt and adopt best practices, create, diffuse and transform innovation and knowledge. The absorptive capacity will recognise the ability of the individual and company in adopting the innovation which play an essential part in determining the characteristics of good corporate governance to ensure best ESG practices in the company. This paper examines the relationship between board capabilities and ESG practices through the mediating role of absorptive capacity. Board size, board diversity and board independent are the board capabilities that the paper investigates. Collection of information and data was from company's listed in FTSE4Good Bursa Malaysia from the year 2012 to 2016. The results from the regression analysis show that ESG practices have a significant relationship with board size, board diversity, board independence and absorptive capacity. On top of that, absorptive capacity is perceived to have influence on board diversity and board independence towards ESG practices. The results provide empirical evidence and guidance in identifying areas of problems in the current policy and amend it for a better policy in promoting sustainability.
Highlights
Investors act as a risk adverse and are more likely to invest at the lowest level of risk but expecting to get high returns
This study reviewed the connection between corporate governance in terms of board capabilities which consists of board size, board diversity and board independence with the ESG practices among the selected companies
There are many studies on corporate governance and ESG practices which looked into the same factors, many of them did not look into the sample of FTSE4Good of Bursa Malaysia and did not test the mediating effect of absorptive capacity
Summary
Investors act as a risk adverse and are more likely to invest at the lowest level of risk but expecting to get high returns. According to Said, Hj Zainuddin, and Haron (2009), Dato’ Seri Najib Tun Razak, the former Prime Minister of Malaysia state that engagement with sustainability initiatives will enhance the company financial performance, image as well as the ability to attract and retain the workplace which contributes to the market value in the economy during the Corporate Social Responsibility Conference on 21 June 2004. This shows that companies that engage with sustainability initiatives. The takeaway from those incidents is that the ability of the firm to compete is determined by the firmness of governance mechanism especially in environmental circumstances (Lawal, 2012)
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