Diversity, size, and pay: key drivers of ESG performance in Iberian companies

Purpose This study examines the impact of board characteristics on Environmental, Social and Governance (ESG) performance in Iberian companies. Design/methodology/approach Using a sample of 181 listed Iberian companies from 2013 to 2023, we apply the generalized method of moments (GMM) to control for heterogeneity and endogeneity issues in panel data. Findings Our results provide robust evidence on how specific board characteristics influence ESG performance. Gender diversity positively influences ESG performance, suggesting that greater female representation on boards enhances sustainability-oriented decision-making. Cultural diversity shows a mixed effect: while it enhances social performance, it negatively impacts overall ESG scores and environmental initiatives, possibly due to coordination challenges or conflicting strategic priorities. Executive compensation and pay gaps are negatively associated with ESG performance, indicating that inequitable or financially driven incentives may hinder long-term sustainability goals. CEO duality has contrasting effects: it improves environmental performance but weakens governance quality. Board size shows a non-linear relationship, with larger boards only improving ESG performance beyond a certain threshold. Practical implications Our findings suggest actionable insights: policymakers should support gender diversity legislation; investors may benefit from screening firms with low pay disparity and balanced leadership structures; companies should reassess compensation schemes to better align with ESG objectives. Originality/value This study offers a theoretically grounded and methodologically rigorous contribution by exploring the nuanced effects of board composition on ESG performance in the underexplored Iberian context. It also integrates agency theory and resource dependence theory to explain the mechanisms linking governance structures to ESG outcomes.