The moderating role of independent directors: how increases in monitoring and advisory presence shape earnings persistence in Saudi Arabia

Purpose This study aims to investigate how a higher proportion of independent directors in monitoring and advisory roles moderates the relationship between current and future earnings in Saudi Arabia (KSA) following the revision of Corporate Governance Regulations in 2017. Design/methodology/approach The author estimated the fixed-effects panel regressions with interaction terms between the current earnings and four moderators: the proportion of independent directors on the board, on the monitoring committees, in advisory roles and with financial expertise on the monitoring committees. The analysis used panel data from nonfinancial firms listed on the Saudi Stock Exchange (Tadawul) between 2017 and 2021. To address potential dynamic endogeneity arising from lagged dependent variable, the study applied the generalized method of moments (GMM) as a robustness check. Findings The author found that an increasing presence of independent directors in both monitoring and advisory roles weakens the earnings persistence, challenging assumptions about their governance benefits. Similarly, a higher proportion of financially expert independent directors on the monitoring committees reduces the link between current and future earnings, contradicting the predictions of the agency theory. These results align with the stewardship and resource dependence theories, which caution against excessive formal oversight in collectivist contexts. Practical implications The findings recommend that the Capital Market Authority move beyond formal independence criteria and adopt context-specific measures – such as excluding directors closely tied to controlling shareholders or founding families, promoting competence and cultural fit, enhancing transparency and mandating lead independent directors. Investors should consider how the board composition affects earnings forecasts, while boards and directors would benefit from targeted training and trust-based practices. Overall, culturally adaptive governance aligned with Vision 2030 is essential to strengthening the earnings quality. Originality/value This study is the first to examine how distinct monitoring and advisory roles of independent directors affect the earnings persistence in the KSA, offering insights into culturally adaptive governance aligned with Vision 2030.