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14 J. Mgmt. & Sustainability 1 (2024)

handle is hein.journals/jms14 and id is 1 raw text is: Journal of Management and Sustainability; Vol. 14, No. 1; 2024 ISSN 1925-4725 E-ISSN 1925-4733 Published by Canadian Center of Science and Education Does Financial Performance in Firms Benefit from Sustainability Performance? The Mediating Effect of Governance on Firm Performance of Listed Firms in Canada Muhammad Moaz Tariq Bajwa1, Michael O. Wood1 & Horatiu Rus2 School of Environment, Enterprise and Development (SEED), Faculty of Environment, University of Waterloo, Canada 2 Department of Economics and Department of Political Science, University of Waterloo, Canada Correspondence: Muhammad Moaz Tariq Bajwa, School of Environment, Enterprise and Development (SEED), University of Waterloo, 200 University Ave W, Waterloo, ON, N2L 3G1, Canada. Received: August 28, 2023 Accepted: November 2, 2023 Online Published: November 23, 2023 doi:10.5539/jms.v14n1pl URL: https://doi.org/10.5539/jms.v14n1pl Abstract Relying on dynamic agency and stakeholder perspectives as theoretical underpinnings, this paper analyzes the mediating effect of board governance and operational governance in the relationship between sustainability and financial performance of firms. Using a sample of 224 large and actively traded Canadian firms listed on the Toronto Stock Exchange, the authors use the partial least squares-structural equation modeling (PLS-SEM) approach to analyze the data. The results show that there is a good fit between the data for both the measurement and structural equation models, and they further reveal partial mediation effects of board governance and operational governance singly and jointly as full mediation in the relationship between sustainability and financial performance of firms. The results are robust to controlling for various factors that affect firms' sustainability and financial performance, such as firm type, firm age, and other industry-specific characteristics. This study provides valuable insights for corporate governance and sustainability scholars and practitioners that may allow them to link governance structures with sustainability for better financial performance outcomes, as well as to include an integrated sustainability focus into their competitive strategies. Keywords: corporate governance, corporate financial performance, corporate sustainability performance, board governance, operational governance 1. Introduction Academics have long been interested in corporate governance (CG), as competent management is essentially what makes firms successful (Pasko et al., 2022; Zaman et al., 2022). CG permeates all aspects of business; therefore, governance structures make decisions about corporate sustainability as part of their processes (Cosma et al., 2018). Without a doubt, the interaction between governance and sustainability plays a critical role in determining how well firms function (Bhagat & Bolton, 2008; Michelon & Parbonetti, 2012). This linkage is critical for firms to develop sustainability initiatives. Firms must define sustainability measures and strategies due to the urgent nature of CG challenges (Sancha et al., 2022). Nonetheless, achieving sustainability goals is not always straightforward, as firms frequently fail to implement their sustainability initiatives. As an example, Volkswagen purposefully interfered with its emissions testing system, switching the engine to a low emission mode, and later ordered the recall of around 500,000 vehicles (Bhaskaran & Bandyopadhyay, 2018). To achieve better environmental and social outcomes, firms must optimize their governance structures, which requires CG to play an essential role in implementing sustainability goals and achieving superior sustainability performance (Dandan et al., 2021). It is unfortunate that there is a lack of research on how CG mechanisms and sustainability goals are reconciled. This paper aims to fill that gap in the research and employs the corporate governance and sustainability (CGS) perspective to investigate this interaction. As it encompasses both traditional sustainability indicators (i.e., social and environmental) as well as governance elements, the term CGS refers to the financial and non-financial considerations that firms should take into account in the pursuit of sustainability (Bleischwitz, 2007; Phan et al., 2020). CGS performs a variety of activities to address social, environmental, and governance issues, including proposing and updating a code of ethics, evaluating resource allocation, observing business operational activities, and monitoring results of social and economic development (Du, 2018). In addition, CGS is mandated to address issues such as stakeholder 1

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