The mediator effect of financial performance on the relationship between board of directors’ size and corporate social responsibility disclosure: a case study of Palestinian listed companies

Tarda, Omar; Haron, Hasnah; Ramli, Nathasa; Salleh, Supiah Article The mediator effect of financial performance on the relationship between board of directors’ size and corporate social responsibility disclosure: a case study of Palestinian listed companies Cogent Economics & Finance Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Tarda, Omar; Haron, Hasnah; Ramli, Nathasa; Salleh, Supiah (2024) : The mediator effect of financial performance on the relationship between board of directors’ size and corporate social responsibility disclosure: a case study of Palestinian listed companies, Cogent Economics & Finance, ISSN 2332-2039, Taylor & Francis, Abingdon, Vol. 12, Iss. 1, pp. 1-16, https://doi.org/10.1080/23322039.2024.2420213 This Version is available at: https://hdl.handle.net/10419/321642 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Economics & Finance ISSN: 2332-2039 (Online) Journal homepage: www.tandfonline.com/journals/oaef20 The mediator effect of financial performance on the relationship between board of directors’ size and corporate social responsibility disclosure: a case study of Palestinian listed companies Omar Tarda, Hasnah Haron, Nathasa Ramli & Supiah Salleh To cite this article: Omar Tarda, Hasnah Haron, Nathasa Ramli & Supiah Salleh (2024) The mediator effect of financial performance on the relationship between board of directors’ size and corporate social responsibility disclosure: a case study of Palestinian listed companies, Cogent Economics & Finance, 12:1, 2420213, DOI: 10.1080/23322039.2024.2420213 To link to this article: https://doi.org/10.1080/23322039.2024.2420213 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group Published online: 25 Oct 2024. Submit your article to this journal Article views: 1105 View related articles View Crossmark data Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oaef20 GENERAL & APPLIED ECONOMICS | RESEARCH ARTICLE The mediator effect of financial performance on the relationship between board of directors’size and corporate social responsibility disclosure: a case study of Palestinian listed companies Omar Tarda, Hasnah Haron, Nathasa Ramli and Supiah Salleh Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia (USIM), Nilai, Negeri Sembilan, Malaysia ABSTRACT The Board of Directors (BOD) is responsible for making strategic decisions within a company and holds significant influence over corporate social responsibility (CSR) policies and their disclosure. Furthermore, financial performance plays a vital role in this relationship, as a strong financial performance can impact a company’s ability to allocate resources towards social responsibility and, consequently, affect its CSR disclosure. The previous studies have not examined financial performance as a mediating variable between BOD size and CSR disclosure. This article aims to examine the level of CSR disclosure in Palestine, analyze the impact of BOD size on CSR disclosure and financial performance, and assess the extent to which financial performance acts as a mediating variable between BOD size and CSR disclosure. The study employs panel data analysis using a sample of 31 companies listed on the Palestine Stock Exchange from 2012 to 2021. The Baron and Kenny approach will be used to examine the mediating effect of financial performance between BOD size and CSR disclosure. The theoretical framework of resource dependence theory will be adopted to understand the relationship between the variables under investigation. The results of this study reveal that the CSR disclosure rate was 29.5% among the companies included in the sample. Additionally, the results show a significant positive direct relationship between BOD size, CSR disclosure, and financial performance. Furthermore, the results indicate that financial performance partially mediates the association between BOD size and CSR disclosure in Palestinian companies. IMPACT STATEMENT The research paper “The Mediator Effect of Financial Performance on The Relationship between Board of Directors’Size and Corporate Social Responsibility Disclosure: A Case Study of Palestinian Listed Companies”investigates the relationship between BOD size, CSRD, and financial performance in Palestinian companies. By examining this relationship, the study contributes to the growing body of literature on BOD size and CSR in emerging economies, specifically in the context of Palestine. The significance of this work lies in its potential to inform policymakers, corporate leaders, and stakeholders about the importance of large boards of directors as a means to enhance CSR practices and financial performance in Palestinian companies. Furthermore, this research addresses a gap in existing literature by investigating the mediating role of financial performance in the relationship between BOD size and CSR disclosure. ARTICLE HISTORY Received 26 November 2023 Revised 2 September 2024 Accepted 18 October 2024 KEYWORDS Board of directors size; corporate social responsibility disclosure; financial performance; Palestinian companies; resource dependence theory SUBJECTS Business, Management and Accounting; Accounting; Corporate Governance; Corporate Social Responsibility & Business Ethics; Economics; Business, Management and Accounting; Finance 1. Introduction The concept of corporate social responsibility (CSR) has become an important topic among researchers. Many concepts that have emerged conflict with the idea that the responsibility of companies is limited only to achieving the largest possible amount of profit (Saleh et al., 2021). Corporate social responsibility disclosure (CSRD) is a revelation of the company’s activities and policies for the benefit of society and CONTACT Omar Tarda [email protected] Faculty of Economics and Muamalat, Universiti Sains Islam Malaysia (USIM), Bandar Baru Nilai, 71800 Nilai, Negeri Sembilan, Malaysia ß2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this article has been published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent. COGENT ECONOMICS & FINANCE 2024, VOL. 12, NO. 1, 2420213 https://doi.org/10.1080/23322039.2024.2420213 the environment in its financial reports (Saleh et al., 2021). Through CSRD, firms may improve their corporate image and improve the transparency and accountability of the companies’activities and thus enhance the confidence of all interested parties’financial reports (Ananzeh, 2022). Globally, with the advent of globalisation and the increasing integration of economies between countries, companies have faced greater pressure to disclose their societal contribution (Ananzeh, 2022). Therefore, the concept of CSR and CSRD is a strategic concept for companies worldwide, as CSRD is considered a Western phenomenon. Many developed countries have implemented procedures to encourage companies to disclose their CSR strategies and practices. For example, in the United States, there have been several social indexes since 1990 (Domini Social Index); the European Commission announced that CSRD should be implemented in European countries from 2005 onwards (Barakat et al., 2015). In addition, with the advent of the Sustainability Development Goals (SDGs) in 2015 in the United States, most countries, especially developed ones, have moved towards achieving the SDGs in their countries and Sustainability Disclosure (SRD) by disclosing incidents of non-discrimination and information related to society, the economy, the environment, and child labour. However, there are no similar initiatives in developing countries. In most Arab countries, such as Qatar, Kuwait, Saudi Arabia, Bahrain, Oman, the United Arab Emirates, Syria, Jordan, and Palestine, CSRD is low (Ananzeh, 2020). Moreover, CSRD in these developing countries is confined to specific dimensions and does not fully adhere to global reporting initiative. In addition to focusing on some programs and assistance, aspects of improving products to satisfy customers and insufficient attention to aspects of environmental disclosures and human resources have been a matter of concern (Ananzeh, 2020). This may be a result of the latter being a lower economic development, weaker legal systems, corporate governance being a new concept or the low demands of stakeholders. The absence of legislative and regulatory frameworks in Palestinian firms hinders the development of a complete and integrated understanding of social responsibility within these organisations. Saleh et al. (2021) highlight the absence of developed governing bodies responsible for regulating social responsibility and the lack of government oversight and laws that mandate Palestinian companies to allocate a portion of their budget towards social responsibility activities. The significance of corporate governance (CG) has gained global prominence in recent decades. Its objective is to safeguard the interests of all relevant stakeholders while ensuring the company’s economic efficiency and long-term sustainability (Naciti et al., 2022). Dwekat et al. (2022) and Huynh (2019) underscores that strong CG practices raise awareness of societal responsibility, enabling companies to earn the trust of stakeholders and achieve optimal performance. Besides that, numerous studies have demonstrated the direct correlation between BOD size and CSRD (Nwude & Nwude, 2021; Orazalin, 2019; Alia & Mardawi, 2021; Alshbili et al., 2019; Coffie et al., 2018; Fuente et al., 2017; Cuadrado-Ballesteros et al., 2017). However, the results of these studies have not always been consistent. In addition, studies have been conducted to examine the direct impact of BOD size on the financial performance of companies (Abdeljawad & Masri, 2020; Khatib & Nour, 2021; Singhal et al., 2021; Waheed & Malik, 2021; Warrad & Khaddam, 2020). These investigations have also yielded inconsistent results. Financial performance can be defined as the level of business performance and success over a specified period (Kayani et al., 2024). Evaluating business financial performance allows decision-makers to evaluate the results of business strategies and activities, financial health, and comparisons between companies in order to make decisions objectively from a critical perspective (Kayani et al., 2024). The management is concerned with evaluating the opportunities and return on investment. In contrast, the creditors are concerned with the company’s ability to pay and focus on cash flows for evaluating the company’s liquidity (Ba  Gci & Kaygin, 2022). Kayani et al. (2024) pointed out that companies with good financial performance are less exposed to risks and legal litigation, in addition to a positive relationship between financial performance and the growth of companies. Wahyudi (2018) and Nawaiseh (2015) examined the direct relationship of financial performance on CSRD, and they showed a positive impact of financial performance on CSRD. Nawaiseh (2015) pointed out that when a company’s financial performance is good, it has more resources at its disposal. This enables the company to invest in social responsibility initiatives and allocate funds to CSR activities without putting pressure on its financial stability. In addition, stakeholders tend to view financially successful 2 O. TARDA ET AL. companies as having the ability and responsibility to contribute to society and to meet these expectations, as well as maintain a positive reputation, whereby companies seek more disclosure about their social activities (Wahyudi, 2018). Moreover, positive financial performance allows companies to invest in sustainable operations, develop environmentally friendly products, support community initiatives, and participate in charitable causes (Nawaiseh, 2015). The weakness of the CSRD in Palestinian companies and the contradictory findings of previous research on the relationship between BOD size on the CSRD and financial performance exemplify the problem of the study. In addition, previous studies did not take into account the mediating effect of financial performance between BOD size and CSRD. This study aims to examine the level of CSRD in Palestinian publicly listed companies on the Palestine Stock Exchange. It will also examine the relationship between the BOD size on CSRD and financial performance. Furthermore, this also aims to examine whether financial performance will have a mediating effect on the relationship between BOD size and CSRD. This study reveals the gap in the available literature regarding the relationship between BOD size and CSR disclosure, especially when financial performance is considered as a mediating variable. By filling this gap, this study contributes to identifying the strengths and weaknesses of previous research and providing deep insights into this complex relationship. The research study has a number of implications for regulatory bodies, policymakers, and company management. In addition, studying CSRD is important in Palestine, where social contributions of Palestinian companies are considered important for overcoming political, social, and economic challenges, achieving stability, and improving people’s quality of life. Additionally, CSRD leads to the establishment of a positive reputation and the improvement of the image of Palestinian companies among customers and investors. It also enhances competitive capabilities, and as a result, improves long-term financial performance (Mondal & Sahu, 2023; Orazalin, 2019). To the regulators and policymakers such as Palestine Exchange (PEX) and Corporate Governance National Committee, the study is expected to provide them with some useful feedback on the extent of how the CSRD disclosure can be increased in Palestinian companies and the aspects relevant to corporate governance effectiveness. In addition, This study also contributes to guiding business practices and managerial decision-making on how to promote BOD size and develop evidence-based social responsibility policies. The study also contributes to increasing awareness and knowledge among researchers and practitioners in the field of BOD size and CSRD. In addition, new findings from the study may provide a basis for future and continuing research in this area. This study will also apply resource dependence theory to explain the relationship between the variables studied. This article consists of five sections, including an introduction, a literature review and hypothesis development, a proposed conceptual framework, research design and methodology, empirical results, and a discussion and conclusion, respectively. 2. Literature review and hypothesis development 2.1. Corporate social responsibility disclosure (CSRD) The decision-making process primarily relies on the provision of financial and non-financial information. Information pertaining to the social activities undertaken by companies towards society constitutes one of the fundamental pillars for users of financial statements in the decision-making process (Alia & Mardawi, 2021). Moreover, the disclosure of social responsibility in financial reports serves as a means of accountability to society, contributing to the legitimacy of a company’s activities and its existence (Orazalin, 2019). Failure on the part of an organisation to fulfil its social and environmental responsibilities can have negative repercussions, impacting its reputation with stakeholders (Rashid, 2018). The phenomenon of CSRD is commonly perceived as being prevalent in Western societies, as many developed countries actively advocate for the transparency of firms’social practices. For example, Bhatia and Makkar (2019) showed a CSR disclosure rate in UK companies of 98% and 85% in US companies. Alkayed and Omar (2023) indicated that social responsibility and its disclosure in financial reports have increased over time in developed countries in response to many factors, for example, social awareness and an increase in legislation. COGENT ECONOMICS & FINANCE 3 Alkayed and Omar (2023) mention that values and cultures may affect the perception of corporate social responsibility and its disclosure. For example, in Arab countries, religious values and social traditions may have a significant impact on the concept of social responsibility, while in Western countries, they are more influenced by commercial principles, environmental laws, and workers’rights (Divan & Rosencranz, 2022). As Alkayed and Omar (2023) indicate in their study, there is strict and binding legislation that requires companies to comply with social and environmental standards in developed countries, while in developing countries, this legislation may be less enforced and may rely on voluntary directives. In addition, companies in developed countries mostly communicate with governmental institutions, the local community, and non-governmental associations to ensure that their activities meet the needs and aspirations of society. In contrast, in developing countries, there are problems in communication between companies and the local community, and community participation in decision-making may be less common (Alia & Mardawi, 2021). The level of CSRD in developing countries is, in general, low and unsatisfactory compared to developed countries such as the UK and the US countries. For instance, El-Halaby and Hussainey (2015) indicated that the average CSR disclosure rate for 25 developing countries was 26%. In addition, Ananzeh (2020) pointed out that the CSRD in Egypt and Jordan is merely descriptive. In Palestine, there is a semi-consensus that the concept of CSRD is still below the required level (Alia & Mardawi, 2021; Alsenawi & Banat, 2014; Barakat et al., 2015; Zaid et al., 2019). However, there is some indication of the existence of social responsibility practices by companies that think they are practising social responsibility through some programs and assistance. According to Alia and Barham (2022), the CSRD rate for 41 Palestinian companies between 2012 and 2017 was 28.1%. Another study by Barakat et al. (2015) was conducted for 46 firms in Palestine and 55 firms in Jordan. They showed that CSR disclosure is low in both countries, where the percentages of disclosure in Palestine and Jordan are 33% and 50%, respectively. Clearly, the CSR disclosure rate in Palestine is low compared to Jordan and developed countries as well, where Palestine suffers from a lack of developed bodies working to regulate social responsibility, the absence of a government oversight role, and the absence of laws compelling Palestinian companies to allocate a portion of their budget towards social responsibility activities (Saleh et al., 2021). 2.2. BOD size and CSRD The size of the BOD plays a significant role in addressing CG issues (Dwekat et al., 2020; Fuente et al., 2017). Researchers hold different opinions regarding the effectiveness of larger versus smaller boards. Alia and Mardawi (2021) suggested that larger boards may lead to an increase in conflicts of interest. Conversely, other studies, such as Akbar et al. (2019), advocate for a larger number of experienced directors on the board, as it can enhance effectiveness by organising various functions within the company, establishing strategies, and providing monitoring and constructive advice within the board of directors. The Code of Corporate Governance in Palestine (Palestinian Code of Corporate Governance, PCCG) specifies that the board of directors should comprise five to eleven members (PCCG, 2009). Zaid et al. (2019), as well as Alia and Mardawi (2021), affirmed that the average board size of Palestinian companies consists of seven to eight members, aligning with the PCCG guidelines. The resource dependence theory mentions that larger boards are believed to have a positive impact on corporate reporting practices due to the diverse values, information, ideas, and perspectives that board members bring to the organisation (Pfeffer & Salancik, 2003). This perspective is supported by several previous studies, such as Nwude and Nwude (2021), Yameen et al. (2019), and Khatib and Nour (2021), which argue that larger boards attract talented, experienced, and knowledgeable individuals who can facilitate accurate learning, make better decisions, and ultimately contribute to improved CSRD. Moreover, Dias et al. (2017) proposed that the inclusion of larger board sizes can provide significant economic resources, information, skills, expertise, and recommendations to facilitate the organisational development of enterprises. Additionally, they serve as intermediaries between the organisation and external entities. Nwude and Nwude (2021) pointed out the significance of larger boards inside enterprises, consisting of persons possessing broad skills and the ability to mobilise resources from several dimensions. Such organisations are more effectively positioned to optimise the allocation and utilisation 4 O. TARDA ET AL. of resources towards CSR initiatives. Nwude and Nwude (2021) found a significant positive relationship between BOD size and the level of CSRD. Adnan et al. (2018), Coffie et al. (2018), Fuente et al. (2017), and Dias et al. (2017) corroborate this finding. However, Cuadrado-Ballesteros et al. (2017) found that a larger BOD size has a significant negative impact on CSRD, while Alshbili et al. (2019) and Orazalin (2019) found no impact of BOD size on CSRD. Studies conducted in Palestine have also yielded mixed findings. Alia and Barham (2022), Zaid et al. (2019), and Barakat et al. (2015) found a positive and significant relationship between BOD size and CSRD. On the contrary, Alia and Mardawi (2021) discovered a significant negative relationship between BOD size and CSRD. Based on the resource dependence theory and the findings of the majority of previous studies, which suggest that larger boards are more obligated to engage in CSRD, this study hypothesises a positive relationship between BOD size and CSRD. H1: BOD size has a positive and significant impact on the level of CSR disclosures in Palestinian companies 2.3. BOD size and financial performance Corporate BOD is a vital factor in the success of companies. The BOD does a strategic job by defining the goals of the organisation and providing a clear vision for the company, as well as mechanisms for evaluating performance. Kanakriyah (2021) indicated that setting the strategic objectives of the company is the responsibility of the BOD. Hence, the size of the BOD has a substantial influence on shaping the long-term financial and non-financial outcomes of corporations. These arguments are supported by resource dependence theory. Akbar et al. (2019) suggest that a significant component of corporate governance is the presence of large BODs comprising individuals with the necessary expertise and experience to oversee risks pertaining to all shareholders. These BODs are equipped to offer management valuable insights and effective strategies for mitigating risks that could potentially impact a company’s financial performance. The existing literature on the relationship between BOD size and financial performance has yielded inconsistent findings. Khatib and Nour (2021), Waheed and Malik (2021), Akbar et al. (2019), Kanakriyah (2021) and Mondal and Sahu (2024) found that BOD size has a positive and significant relationship with financial performance. Singhal et al. (2021) conducted a study and discovered a negative and statistically significant relationship between the size of the BOD and financial performance. The findings of research conducted on the topic of Palestinian studies exhibit a range of outcomes. According to the findings of Saleh and Islam (2020) as well as Saleh et al. (2021), there exists a statistically significant and positive correlation between the size of the BOD and financial performance. However, Abdeljawad and Masri (2020)foundanegative relationship between the size of the BOD and the financial performance of firms in Palestine. According to Saleh et al. (2021), the presence of a larger board of non-executive and independent directors contributes to enhanced monitoring and the successful acquisition of essential resources by leveraging their expertise. Consequently, the presence of a diverse BOD yields advantageous outcomes for firms, including the incorporation of a wide range of valuable perspectives, expertise, and assets, significantly impacting the financial success of those companies. Hence, it can be inferred that the size of the BOD is expected to have a favourable influence on the financial performance. Based on the resource dependence theory and the findings of the majority of previous studies, this study hypothesises a positive relationship between BOD size and financial performance. H2: BOD size has a positive and significant impact on the financial performance of Palestinian companies 2.4. The mediating role of financial performance (ROA) Return on assets (ROA) is one of the most important return on investment measures, which measures a company’s profits in relation to its total assets. This ratio indicates the quality of business performance by linking the return that companies achieve to the invested capital and how to use financial resources COGENT ECONOMICS & FINANCE 5 by the companies (Khatib & Nour, 2021). Wahyudi and Abidin (2023) pointed out that the ROA can change significantly for public companies due to the company’s management of its assets. As discussed above, prior research has investigated the direct correlations between BOD size, CSRD, and financial performance. In addition, there is a direct relationship between financial performance and CSRD. However, the existing literature has not sufficiently examined the phenomenon of the interconnection of board characteristics and has overlooked the potential mediating factors that could establish a link between board characteristics and firm outcomes (Post & Byron, 2015). However, it was recently discussed (Mukhtaruddin et al., 2019). This study assumes that having financial performance, in particular, may partly mediate the relationship between BOD size and CSRD. Thus, the size of the board of directors may have direct and indirect effects on CSRD. Musibah and Alfattani’s(2014) study indicates that financial performance (ROA, ROE) was found to be a significant mediating factor for the relationship between Shariah Supervisory Board Effectiveness and Capital Employed Efficiency. Wahba and Elsayed (2015) study indicates that financial performance mediates the relationship between social responsibility and ownership structure. Fahimi and Fakhari’s(2017) study shows that there is no mediating effect of financial performance in the relationship between intellectual capital and market share. Aini and Faisal (2021) show that financial performance is not proven as a variable that mediates the effect of environmental performance on firm value. However, previous studies neglected the study of financial performance as a mediating variable between board size and CSRD. Carroll (2015) confirms the importance of the firm’s economic responsibility, as it is connected to all other business responsibilities since they become debatable considerations. Handayati et al. (2022) claim that the BOD may exhibit a preference for disclosing social responsibility, while shareholders may prioritise the accumulation of wealth. However, shareholders may not demonstrate a significant concern for social responsibility as long as companies generate profits. Hence, the magnitude of the profits will impact the disclosure of social responsibility (Handayati et al., 2022). This study assumes that having financial performance, in particular, may mediate the relationships between BOD size and CSRD. Thus, the BOD size may affect CSRD through financial performance. H3: Financial performance mediates the relationship between BOD size and CSRD in Palestinian companies 3. Proposed conceptual framework As explained in the literature review, this study employs resource dependence theory to explain BOD size in relation to CSRD and financial performance. Figure 1 depicts the theorised relationships between study variables. Figure 1 presents BOD size as the independent variable, CSRD as the dependent variable, and financial performance as the mediator variable. In contrast, firm size, leverage, type of industry, and firm age are the control variables. Figure 1. Conceptual framework. 6 O. TARDA ET AL. 4. Research design and methodology 4.1. Sample and data collection The selection process is outlined in Table 1. 4.2. Data analysis This study utilises secondary data obtained from the annual financial reports of publicly listed Palestinian companies, which are accessible on the PEX Palestine website or the respective corporate web pages. The statistical software application STATA is utilised for data analysis and hypothesis testing. The association between the variables is investigated in this study using a panel data research methodology and the Ordinary Least Square (OLS) regression estimation method –fixed and random effect model regression. This study examines the mediating effect of financial performance on the relationship between BOD size and CSRD, utilising the causal step technique developed by Baron and Kenny (1986). A variable is said to be a mediator, in accordance with Baron and Kenny (1986), if it meets three requirements. First, the dependent variable (CSRD) should be significantly impacted by the independent variable (BOD size). Second, it is expected that the independent variable will have a significant effect on the mediator variable, in this case, the ROA. Third, when both the independent and mediator variables are included in a model, the mediator variable should be significant, while the absolute value of the independent variable should decrease. In the third step, the type of mediation can be determined. If the independent variable has an insignificant impact on the dependent variable, researchers report that the mediator fully or completely mediates the relationship. If there is still a significant impact, researchers report that the mediator partially mediates the relationship (Iacobucci, 2012). Figure 2, adapted from Hayes (2009), illustrates the framework for a simple mediation model. The framework illustrated in Figure 2 considers X as the independent variable (BOD size), Y as the dependent variable (CSRD), and M as the mediating variable (ROA). Paths a and b represent indirect effects, while path c represents the direct influence of X on Y after controlling for the mediator. The top portion of the figure displays c as the total impact of the independent variable (X) on the dependent variable (Y). Table 1. Process of selecting the sample. 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