The Nexus Between Board Diversity and Sustainability Reporting: The Moderating Role of Supervisory Effectiveness and Quality in a Two-Tier Board System

Abstract

This study aimed to investigate how Board of Director (BOD) diversity affected sustainability reporting in Islamic banks in Indonesia. The effectiveness of three supervisory bodies, namely the Board of Commissioners (BOC), the Audit Committee (AC), and the Sharia Supervisory Board (SSB), was explored to determine their ability to enhance sustainability performance. The study was based on a sample of 13 Islamic banks listed with the Financial Services Authority between 2012 and 2021. Moderated Regression Analysis was applied to test the hypotheses. It was found that board diversity had a positive influence on sustainability reporting. The regression results for all three moderation variables showed positive and significant findings, indicating that the interactions between the BOC, the AC, the SSB, with the BOD played an effective role in enhancing sustainability disclosure. board ’diversity’s importance and supervisory boards’ effectiveness. This study fills a research gap on the relationship between corporate governance and sustainability disclosure, especially in developing countries that adhere to a dual board governance system, specifically Islamic banks that comply with Sharia governance. The research results underscore the need for a diverse board of directors and the effectiveness of the supervisory board as the party responsible for meeting stakeholder demands through its role in encouraging companies to be actively involved in sustainability performance.