1. Introduction

The relationship between board composition, ESG integration, and board dynamics in shaping company performance and risk management is a complex and multifaceted area of study. Existing literature has explored various aspects of this relationship, including the roles and responsibilities of boards, the impact of diversity on board effectiveness, and the influence of governance practices on firm outcomes. Researchers have analyzed the relationship between characteristics of the board and performance, including aspects such as gender, professional experience, and independence to determine how boards can enhance performance and how they impact value creation. Furthermore, ESG factors included in the board oversight have become one of the critical components of modern governance, and such an approach reflects increased attention to values such as sustainability and ethical standards as the key drivers of firm resilience and success. Nevertheless, complex interactions between these components have been given a limited amount of attention regarding differences in cultures and the economy and changes in time. This literature review aims to review the current knowledge make a recommendation of what literature could be used to fill the gap, and offer a starting point for elaborating on how these factors interrelate with one another in determining the risk management and performance of firms under varying contexts. In doing so, it aims to underline the necessity for improved coordination in examining corporate governance, board activities, and their functions about ever-developing ESG standards and pressures exerted by various countries with diverse cultural and economic backgrounds.

2. Board functions

2.1. Functions and responsibilities

Management, particularly directors of the board, is significant to the achievement of any organizational goals in the provision of strategic direction and control, who plays the role of an entrepreneur and ensures that resources are properly directed towards the achievement of strategic objectives [1]. Through endorsing and approving key strategies, the board can guarantee that the actions of the organization align with the vision of the organization. Moreover, the board can monitor the implementation of these strategies to guarantee the organization's goals and objectives.

Risk management is another key activity for the board of directors, who plays a crucial role which include identification, evaluation and control of risks which are detrimental to the organization by ensuring reduced chances of losses and maximizing profits. Beasley et al. [2] noted that the board of directors plays a critical role of formulating policies that help to manage risk. The board of directors is responsible for controlling the financial risk, operational risk and reputational risk to ensure all process in an organization are running smoothly. The board ensures that there are proper measures in place that help in dealing with these risks. This proactive approach to risk management is beneficial to the company because it prevents losses and supports the company’s steady growth.

The board of directors also are responsible in implementing the correct and effective Succession planning. Succession planning is important in any organization because it ensures continuity and stability of the institution. Board of directors can also provide training and development activities to the successors. Through this the board of directors ensures they maintain organizational stability and performance, especially during periods of transition. The board of directors regularly assess the current executives and ensure there is a strong pool of capable individuals ready to step into leadership roles as needed. By effectively managing succession planning, the board of directors positions the organization for long-term success by proactively preparing for future leadership changes.

2.2. Factors affecting the functions and effectiveness of board of directors

The composition of the board of directors is a crucial factor that affects its functions and responsibilities. A well-composed board, which includes a mix of skills, experiences, and backgrounds, is better equipped to provide strategic guidance and effective oversight. Individuals with different professional backgrounds can bring the board a wealth of information regarding different aspects of the business, whether it is financial, operational, marketing, or technological. Furthermore, the involvement of both, executives and non-executive directors enables the board of a company to have inside information for the management decision making, and at the same time, independency for the necessary monitoring.

Moreover, gender and ethnic diversity, as well as the age and international experience of the members of the board of directors, improves the board’s deliberations and governance capability. According to Adams and Ferreira [3], diverse boards are more likely to propose diverse solutions, resulting in better strategic management outcomes. Diversity can also help the board to get better insights about its customers and its markets particularly due to globalization. In addition, Conger et al. [4] posited that boards with diverse compositions can capture the demographic profile of the organization’s stakeholders, which can turn around to improve the company’s image and increase employees, customers and investors’ confidence. Thus, this diversity benefits not only the board’s discussions but also the assessment and mitigation of risks.

Furthermore, the working relationships that board members have and the board’s relationship characteristics affect the board’s functions and duties. And boards should improve cooperation and respect for effective meetings and decision-making. Moreover, Schwartz-Ziv & Weisbach [5] found that the actual ability to voice and critically evaluate the provided information by other board members results in deeper analysis and superior decision-making outcomes. On the other hand, hostile interpersonal relations including conflict and lack of trust negatively impact the overall performance of the board and its ability to make sound decisions promptly. Board dynamics are also determined by the chairperson who has the responsibility of making sure all the members of the board are encouraged to participate. Accomplished board dynamics provide the board with the capability to perform optimally as it executes its core tasks of monitoring and providing direction and leadership, managing risks, and developing talent.

Lastly, Minichilli et al. [6] have pointed out that the quality of board processes, the number of board meetings per year, the quality of information shared and received, and the level of participation of the board are also influential in the effectiveness of the board. COLES et al. [7,8] noted that when the board has structured and frequent meetings it is in a position to talk about strategic matters relating to the firm, review the performance of the management and evaluate important risks in the company. Thus, proper governance and timely flow of appropriate information are vital for the board to make informed decisions. High-qualified and engaging board members contribute to the high quality of the meetings and the overall effectiveness of the board [9]. Furthermore, employing sub-committees, including audit, risk, and governance committees, enhances the focus in certain areas, which in turn provides the board with additional tools to ensure their duties are executed efficiently.

3. The impact of a board's composition and diversity on firm performance

The board of directors consistently affects a firm’s performance depending on the composition and diversity. Research on board of directors’ diversity in terms of gender, professional experience, and independence has been conducted and it has been established that diversity has multiple correlations with corporate performance. This section will discuss how these factors affect firm performance, emphasizing the pros and the scenarios where such solutions might work.

3.1. Gender differences and firm performance

Analyses on gender diversity in corporate boards have received much interest in the recent past as organizations, as well as scholars, attempt to establish the implications of the phenomenon on corporate performance. Historically, there has been a very low representation of women on corporate boards and over the recent past there have been efforts to change this trend. The consequences of this transition have been a frequent topic of discussion and further quantitative analysis. Rose [10] using the data of Danish listed firms for the period 1998 to 2001 also failed to discover any positive relationship between the percentage of women directors and firm value by employing Tobin Q as a proxy. Thus, the mere presence of more female directors does not necessarily imply a higher value for the company, potentially indicating that the advantages of diversity can be contextual or that firm and cultural factors are more influential than gender.

Nevertheless, other research has found signs of positive consequences linked to the board membership of females, especially under particular circumstances or certain markets. For instance, Lee and James [11] looked at U. S. investors’ response to the appointment of female CEOs between 1990 and 2000. Their results showed that investors reacted positively to many of these announcements and saw favorable governance mechanisms in female leadership on boards, as well as future value for the firm. This may be a result of the perception that female managers are capable of offering new solutions due to their approaches in management to conform to the numerous and rich customers in the market.

In addition, Carter et al. [12], surveyed 1000 firms selected from the Fortune list and suggested that gender diversity positively impacts board functions such as supervision and efficient decision-making leading to increased value of the firm. Their studies show that women offer diverse perspectives and problem-solving strategies that enrich the boards’ discussions and monitoring activities. Coles et al. [7] also pointed out that while smaller boards have been found to enhance communication and decision-making by being compact, the presence of capable and diverse directors, including females, is equally valuable since they bring broader perspectives and knowledge into their decisions. This broader view-based perspective can be especially helpful in dynamic and unpredictable business contexts where multiple points of view could help in managing risks and finding opportunities.

3.2. Background diversity and firm performance

Beyond gender diversity, the diversity of directors’ professional backgrounds significantly influences firm performance. Based on resource dependence theory, human capital, including directorial skills, professional knowledge and experience, and social capital, comprising networks and relationships also come under board capital. This in turn increases the efficacy of the board to manage and direct the company [8]. When directors come from different functional backgrounds, the possibilities of enhancing decision making by the board increases due to the variety of ideas and experiences that are presented into the board.

Research findings affirm that background diversity enhances firm performance. In the study of Belgium and Dutch IT firms, Boone and Hendriks [13] established that the diversity of the executive team’s functional experience enhanced the decision-making quality, thus the performance. This indicates that it is beneficial to have board members who have prior working experience in different fields including finance, marketing, operations and technology in order for the board to address issues from the different aspects of the business. This diversity of thought is especially important in industries that focus on strategy execution, as it helps minimize the risk of overlooking some aspects.

The concept of CEO career diversity further underscores the importance of diverse experiences. Crossland et al. [14]shows that CEOs with varied career paths, encompassing different industries and roles, bring a dynamic and unique perspective to corporate strategy. Such career diversity is positively correlated with innovative corporate strategies and improved firm performance [14]. CEOs with diverse backgrounds are often better equipped to manage large organizations’ complex information processing needs, leading to more efficient operations and higher overall performance.

Another area of background diversity that was found to have impact on boards is the international experience. International experience is an important human and social capital that directors import for a firm to compete globally and operate efficiently. For instance, Bloom [15] observed that directors with international experience aid organizations in implementing complex technological and management systems leading to increased performance. Similarly, Similarly, Filatotchev et al. [16] highlighted that executives with global experience tend to drive higher levels of product exports, while Giannetti et al. [17] pointed out that directors with international networks facilitate overseas mergers and acquisitions, financing, and exports. These capabilities are of particular importance for the firms that are operating on the international level because these allow for a more efficient management of international business environments.

Directors’ professional backgrounds in finance also play a crucial role in enhancing firm performance. Sisli-Ciamarra [18] identified that directors with commercial banking experience can help to arrange corporate debt financing, enlarge the scale of loans and decrease the cost of borrowing, which are all important aspects for financial flexibility and therefore for growth. Third, according to Burak et al. [19], the investment banking background of directors could assist firms to issue bigger bonds and bolster their capacity to raise capital for strategic investments. The financial know-how is especially important in industries that have significant capital investment or in industries that are experiencing rapid growth because it helps firms to have the financial capacity to fund the opportunities that arise from growth.

3.3. Other relationships between board characteristics and firm performance

The relationship between the board of directors and improvements in financial performance is positive, especially where the board is diverse, independent and assumes an active monitoring role. Boards can deliver efficient corporate governance, in line with the interest of the shareholders as well as directing corporate resources as warranted [7]. This brings out the fact that once a company has a diverse board, it must guarantee that the board members are engaging and independent especially when performing their oversight responsibilities.

Weisbach [5] further claims that firms with a greater absolute number of independent directors tend to perform better because such directors do not have conflicting self-interests and can, therefore, offer impartiality in their supervision. According to Schwartz-Ziv and Weisbach [5] this can be supported by the arguments of the overall literature on corporate governance that underlines the significance of the board of directors independence to safeguard the interests of the shareholders as well as to improve the performance of the firms. Independent director is in general, an individual who does not report to the management, and thus should be able to confront the management when needed and to make sure that the board provides sufficient oversight.

Additionally, Bhagat and Bolton [3] claim that companies with strong governance practices, including effective and well-composed boards, tend to have better financial outcomes, such as higher returns on equity and improved overall financial health. This highlights the importance of effective governance in determining the performance of the firm, thereby affirming that functional boards are significant in realizing enhanced performance. Based on the findings of Bhagat and Bolton [3], it can be argued that effective board governance requires a strong board structure which should be diverse, independent and vigilant.

4. The impact of board effectiveness on firm's risk mitigation with attention to the ESG performance dimension

Decision-making in the board can be considered as one of the key contingency factors influencing risk management and the firm’s cooperation with the board when it comes to implementing ESG strategy. High-performing boards generally display qualities such as good leadership, skills variation among board members, and high board involvement as they look for and deal with threats. Bolton [3] revealed that firms with effective boards have increased capabilities to mitigate corporate risks when benefits from boards focusing on compliance with ESG. Also Zhu et al. [19] noted that board effectiveness and ESG integration agenda enable firms to consider diverse risk aspects linked to environmental sustainability, social impacts, and governance structures. Board incorporation of ESG aspects in their deliberations helps in risk identification and prevention hence increasing firm stability.

Furthermore, according to Zhu et al. [19] ESG performance dimensions serve as a critical moderator in the relationship between board effectiveness and risk mitigation. This is because ESG factors lead to identification of risks that are not easily identifiable from the financial statement analysis like changes in regulations, effects of environment and social issues. According to the findings reported by Bolton [3], on the other hand, integrating the ESG measures into the board-level risk management can enhance the board’s capability of early anticipation of such risks. This enhanced capability stems from the appreciation of ESG-focused boards regarding the internal and external conditions of the firm. Therefore, the boards of firms that integrate ESG factors perform a better risk management to create value and ensure sustainable growth in the future. This underscores the need to develop board effectiveness not only on the aspects of governance and oversight but also on ESG which, when considered together, offer a sound armor for risk management.

5. Research gap and proposing a new question

Board composition, ESG integration, and dynamics have been widely discussed in the literature concerning their impact on firm performance and risk. Nevertheless, there are several important research gaps in this line of literature that need more attention. First, a large amount of research efforts has been devoted to the board of directors’ characteristics like gender, skills, and board experience, and their effect on the firm’s performance, whereas the combined effects of these variables and ESG integration have received limited attention. These factors are often examined in isolation without taking into consideration various contexts in which they might operate and influence corporate performance. This narrow approach limits our understanding of how diverse boards can leverage ESG practices to enhance risk management and overall firm performance.

Secondly, the majority of the prior studies have been done in the limited cultural and economic background and in the developed economies that have relatively strong legal systems for corporate governance. Currently, there is little evidence on how board and ESG characteristics are linked in various cultures and economic contexts and how they affect board functioning, especially in countries that have adopted different approaches to governance. This gap is important because culture and economic condition can affect significantly the corporate governance practices, risk perception, and the strategic choices available. Additionally, the dynamic nature of these factors over time is rarely considered, with most studies providing only a snapshot of the current state without accounting for how these interactions may evolve as firms grow, markets develop, and global pressures change.

Given these gaps, this paper proposes a new research question:

"How do board composition, ESG integration, and board dynamics interact to influence firm performance and risk management in different cultural and economic contexts over time?"

This question is expected to fill several significant gaps in the literature by focusing not only on the relationship between board composition and ESG practices but also on board dynamics taking into account the role of cultural and economic context. In this light, the proposed research aims to offer a better understanding of how these interactions occur over time in the various contexts in order to gain insight on how boards can manage risks and improve on firm performance. This approach recognizes that board effectiveness is dynamic and may be affected by the different external and internal factors which exist and may develop as firms and markets progress. In this regard, filling these gaps will add to the current literature a study that can enhance the understanding of factors influencing good governance and sustainable performance, beneficial for academics, practitioners, and policymakers.

6. Conclusion

This literature review focuses on the complex interactions between the board of directors’ characteristics, ESG integration practices and the board dynamics in explaining firms’ performance and risk management practices. Although notable advancements have been made regarding diverse boards and effective governance practices in terms of their impact on the overall corporate performance, the interactions between these factors have not been investigated in sufficient detail, especially within various cultural and economic environments. Due to the failure to address the changes in the firms’ environment, this review underlines the necessity of adopting the new question that unites the gaps in current research regarding the dynamic aspects of these factors and requires a complex approach to the analysis of the corporate governance. As such, future studies should continue exploring the dynamic relationships between board features, ESG measures, and the external context to obtain a comprehensive appreciation of how all of these factors can affect outcomes in terms of firm performance and risk management over time.