Corporate Governance and Greenwashing: The Moderating Role of Political Connection and Sensitive Industries

Abstract

Since 2016, the Malaysian Stock Exchange has mandated sustainability reporting for publicly listed firms, requiring them to disclose their environmental impact and sustainability efforts. However, to meet these expectations, some firms may overstate their achievements to gain a competitive edge, a practice known as greenwashing. This highlights the critical role of corporate governance, particularly the board of directors, in ensuring transparency and accountability. This study aims to examine the impact of corporate governance on greenwashing and examines whether political connections and environmentally sensitive industries moderate this relationship. Using an unbalanced panel dataset of 988 firm-year observations from 2016 to 2023, the study employs a fixed effects model to analyse the data. The findings indicate that board independence and gender diversity are the most significant governance factors in curbing greenwashing. Additionally, political connections and industry sensitivity partially moderate the governance-greenwashing relationship. By investigating the interaction of corporate governance and greenwashing in an emerging market, this study provides novel insights into corporate sustainability. It also provides valuable implications for managers and policymakers, highlighting the need for stronger governance frameworks to mitigate greenwashing risks.