ESG Controversies and Financial Performance: Why Does Board Structure Matter? Evidence from African Listed Firms

Document Type

Article

Publication Date

8-2027

Abstract

Although ESG has become a requirement for firms to enhance performance and sustainability, companies may still engage in irresponsible behaviors that can impact their legitimacy and financial performance. Thus, a growing body of research has examined the financial consequences of ESG controversies. Nevertheless, the findings are mixed and mainly focus on developed markets, leaving emerging markets relatively underexplored. Moreover, the moderating role of board structure in shaping this relationship remains unexamined in the African context. Using a dataset of 147 non-financial African-listed firms from 2019 to 2023 and employing a dynamic panel GMM estimator, this study examines the moderating effect of board structure on the relationship between ESG controversies and financial performance. Drawing on legitimacy, resource dependency, stakeholder, and agency theories, results show that ESG controversies have an insignificant direct effect on financial performance. However, when board structure characteristics are included as a moderating variable in the model, ESG controversies show a significant negative effect on financial performance, suggesting that their negative impact becomes evident when board structure is considered. Specifically, board gender diversity, board independence, appropriate board size, and board specific skills have a positive moderating effect, mitigating these negative effects. Therefore, well-structured boards act as the mechanism through which firms can transform legitimacy threats into improved financial performance. The study provides empirical evidence from the African context, which remains underexplored in the ESG and corporate governance research. It further clarifies how board structure characteristics moderate the relationship between ESG controversies and financial performance within a distinct institutional setting. Moreover, the findings offer practical implications for policymakers, managers, and investors regarding the governance mechanisms that may strengthen firms’ resilience to ESG controversies in emerging markets.

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