Board of directors’ attributes and firm financial performance in the energy industry: Evidence from the developing country

Abstract

Previous studies have examined the effect of the chief executive officer’s (CEO) share-ownership and compensation on firm performance (Elsayed & Elbardan, 2018; Hill, Lopez, & Reitenga, 2016; Vemala, Nguyen, Nguyen, & Kommasani, 2014), however, the interaction effect of board of directors (BOD) share-ownership and compensation on firm performance are still unclear. Further, the incentive of higher financial performance to attract members of the BOD to hold shares in the company is still not adequately investigated by the literature. This study, therefore, aims to fill these gaps. Based on an investigation of 56 company-year observations of the Saudi energy industry for the period 2005–2019, we found that BOD share-ownership has a significant direct and positive effect on BOD compensation as well as on the return on equity (ROE). Moreover, the results indicate that BOD compensation affects the ROE significantly, and partially mediates the relationship between BOD share-ownership and ROE. Finally, the study revealed that the ROE positively and significantly affects BOD share-ownership, indicating that the higher the ROE, the more incentive for BOD members to hold shares in the company. The study provides new insights into the extant literature related to the joint effect of BOD share-ownership and compensation on firm performance, as well as the reverse relationship between BOD share-ownership and firm performance.