Exploring the Impact of CEO Characteristics and Board Characteristics on Firm Profitability

Abstract

This study examines how board characteristics and CEO attributes jointly influence firm profitability in an emerging economy. While prior research on governance-performance relationships has concentrated on developed markets, limited evidence exists for developing contexts such as Pakistan, where institutional voids and governance challenges are more pronounced.We analyze a panel of 180 non-financial firms listed on the Pakistan Stock Exchange from 2016–2021, generating 1,074 firm-year observations. Firm profitability is measured using return on assets (ROA). Board size, board independence, and gender diversity serve as governance indicators, while CEO experience and tenure act as moderators. Models are estimated using Feasible Generalized Least Squares (FGLS) and validated with Prais–Winsten Panel-Corrected Standard Errors (PW-PCSE) to address heteroscedasticity, cross-sectional dependence, and serial correlation.Results reveal that board size and board independence are positively associated with firm profitability, while gender diversity exhibits a negative effect. CEO experience and tenure show direct positive associations with ROA. However, their interaction terms with board size and board independence are significantly negative, suggesting that experienced or long-tenured CEOs may weaken the positive role of board structures. Interestingly, CEO tenure positively moderates the relationship between gender diversity and profitability, while CEO experience does not. Overall, explanatory power is modest (R² = 0.08–0.12), but models are statistically significant.By integrating agency and upper echelons theories, this study highlights the conditional nature of governance effects in emerging markets. CEO attributes can either reinforce or constrain board effectiveness, offering a nuanced contribution to governance literature.The findings underscore the importance of balancing board design with CEO oversight in developing economies. Regulators and firms should strengthen governance practices to mitigate entrenchment risks while leveraging CEO tenure to unlock the benefits of board diversity.