ANALYZING THE ROLE OF CORPORATE GOVERNANCE

STRUCTURES, BOARD DIVERSITY, EXECUTIVE COMPENSATION

INCENTIVES, AND SHAREHOLDER ACTIVISM IN DRIVING ESG
PERFORMANCE AND LONG-TERM VALUE CREATION
Introduction:

As per shareholders’ approach, corporate governance mechanism is set of rules and regulations

aimed at protecting shareholders’ interests. The strict observance of corporate governance

enables the firm to reduce principal-agent problem. Managerial signaling theory implies that

firms who comply with code of corporate governance convey an optimistic sign in the market in

order to encourage the participants regarding the better governance structure of the firm. The

study of Waheed and Malik illustrates in high demand for the stocks of the firm in the market

and hence leads to higher stock prices that translate into increased shareholders’ wealth. In view

of the implications of agency theory (Waheed & Malik, Board characteristics, ownership

concentration and firms’ performance: A contingent theoretical based approach, 2019)

compliance with code of corporate governance creates efficient monitoring and improves

managerial activities that in turn reduce the chances of principal-agent conflict of interests. Such

compliance with code of corporate governance results in reducing agency costs and improves

firm performance (Akbar, Hussain, Ahmad, & Hassan, 2019).

Corporate governance (CG) practices have garnered significant attention on the global stage,

reflecting the critical role of effective governance in shaping economic outcomes and investor

confidence (Sun, Agyemang, & Wiredu, 2023). The intricate relationship between corporate

governance practices and firm value (FV) is paramount in navigating the complexities of today’s

business landscape. Moreover, Environment, Social, and Governance (ESG) considerations are
emerging as key factors influencing FV, further emphasizing the importance of governance in

driving sustainable outcomes (Zhou, Saeed, & Agyemang, 2024).

The development of financial institutions, the continuous worldwide financial crises, and the

quick expansion of businesses have all contributed to the advancement of CG practices. In order

to improve a company’s reputation, increase shareholder trust, and reduce the likelihood of

fraudulent activity, good CG is crucial (Osei, 2019). Moreover, effective CG supports the formal

decision-making to reduce risks, controls hazards, and aids businesses in achieving their

objectives (Orazalin, Ntim, & Malagila, 2024). Similarly, ESG criteria measure an organization’s

ethical behaviour, social responsibility, and environmental effect, demonstrating its dedication to

sustainability and stakeholder satisfaction. These elements now play a crucial role in determining

investment choices, shareholder activism, and public opinion of firms. Additionally, it has been

shown There is a pressing need to understand how the rapidly evolving ESG landscape,

characterized by a diverse range of environmental, social, and ethical considerations, interacts

with established CG structures and subsequently influences FV in developing countries

(Mahmood, Khan, & Mahmood, 2023).

However, there is still limited consensus in this field. The majority of previous studies relied on

theories like agency, legitimacy, and resource dependence and focused their studies on Board

characteristics and company value, CG and firm performance (Board gender diversity attributes

and firm performance and board structural attributes and firm continuity) (Zhou, Saeed, &

Agyemang, 2024). Additionally, prior studies have neglected the potential moderating influence

of ESG performance in this dynamic. None the theoretical frameworks nor the empirical studies

have examined how the three strands of CG including diversity, structural and process attributes

influence FV and the potential role of ESG performance on this link. The closest study examined
the impact of technology on CG and firm performance within the context of the least developed

nations (Chang, Agyemang, Saeed, & Adam, 2024). Hence, this research explores how the

strands the role of corporate governance structures, board diversity, executive compensation

incentives, and shareholder activism in driving ESG performance and long-term value creation

while considering the potential role ESG performance plays in this association. Specifically, the

study will seeks to achieve the following objectives.

Research Objectives

(1) To examine the role of corporate governance structure in activism in driving ESG

performance and long-term value creation in Pakistan firms.

(2) To explore the impact of board diversity and board structural attributes on firm value.

(3) To investigate the impact of shareholders’ activities in driving environmental social

governance performance.

(4) To examine the role of ESG performance on the link between CG and firm value.

This study relies on the stakeholder and legitimacy theoretical framework to examine this nexus

due to its offers a robust framework that recognizes the multifaceted interests of stakeholders

beyond shareholders. A study, enabling a comprehensive analysis of how CG practices, ESG

performance, and FV interplay in developing country contexts, thereby providing invaluable

insights for sustainable growth strategies (Alatawi, Ntim, Zras, & Elmagrhi, 2023). The

motivation of the study stems from the pressing need to comprehensively examine the

intertwined dynamics of ESG performance, corporate governance, and FV in Pakistani firms,

where sustainable growth strategies are paramount for both economic development and social
progress. By uncovering the moderating effect of ESG performance in this association, the study

will aim to provide actionable insights that empower stakeholders to navigate the complexities of

governance and sustainability, driving positive impacts on financial performance and societal

well-being in emerging market contexts.

The study of CG and its impact on FV is of paramount importance in today’s dynamic business

landscape, particularly in the context of developing nations (Orazalin, Ntim, & Malagila, 2024).

Over the past few decades, developing countries have experienced rapid economic growth and

expansion, accompanied by significant changes in regulatory frameworks, market dynamics, and

investor expectations. As a result, understanding the intricacies of CG mechanisms and their

implications for firm performance has become increasingly crucial for policymakers, investors,

and corporate leaders alike (Akbar, Hussain, Ahmad, & Hassan, 2019). In recent years,

developing countries have witnessed a surge in CG reforms aimed at enhancing transparency,

accountability, and investor protection. These reforms have been driven by a growing

recognition of the importance of good governance practices in fostering investor confidence,

attracting foreign investment, and promoting sustainable economic development (Chang,

Agyemang, Saeed, & Adam, 2024). Governments and regulatory authorities have implemented

various measures, such as enacting new laws, establishing regulatory bodies, and promoting CG

codes, to strengthen the governance framework and align it with international best practices

(Alatawi, Ntim, Zras, & Elmagrhi, 2023). Moreover, the global shift towards ESG considerations

has placed additional pressure on firms to integrate sustainability principles into their CG

practices (Zhou, Saeed, & Agyemang, 2024). Increasingly, investors, consumers, and other

stakeholders are demanding greater transparency and accountability regarding environmental and

social issues, as well as ethical business conduct (Sun, Agyemang, & Wiredu, 2023).
Significance of the Study

The present study will addresses gaps in existing literature by providing a comprehensive

analysis of the relationship between corporate governance, ESG performance, and long-term

value creation in the Pakistani context. Pakistan's unique socio-economic and regulatory

environment requires tailored research to understand how corporate governance mechanisms

influence ESG outcomes. Corporate governance, board diversity, executive compensation

incentives, and shareholder activism play crucial roles in shaping the Environmental, Social, and

Governance (ESG) performance and long-term value creation of corporations. Analyzing these

factors in the context of Pakistan holds significant importance due to several key reasons.

Findings from the study will inform policy-making aimed at enhancing corporate sustainability

practices in Pakistan. As the research by (Khan & Wang, 2023) emphasizes the role of

shareholder activism in promoting corporate sustainability, which can guide policymakers in

crafting regulations to encourage shareholder engagement for ESG improvement. Moreover,

corporations in Pakistan could be beneficial for insights into effective governance,

compensation, and diversity practices that drive ESG performance and long-term value creation.

The study will also demonstrate the link between executive compensation and environmental

sustainability, providing a basis for corporations to align compensation incentives with ESG

goals. Investors are increasingly considering ESG factors in their investment decisions.

Understanding the impact of governance, diversity, compensation, and activism on ESG

performance can enhance investor confidence and guide investment strategies. It is also

noteworthy that the role of corporate governance structures, board diversity, executive

compensation incentives, and shareholder activism in driving ESG performance and long-term

value creation in Pakistan will also be significant for advancing academic knowledge, informing
policy, guiding corporate practices, and supporting sustainable investment decisions. It will fill

research gaps, provides insights into local dynamics, and contributes to both scholarly and

practical advancements in the field.

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