Strategic Sustainability Initiatives and the Circular Economy: Insights From Firm-Level Targets, Board Dynamics, Stakeholder Pressure, and Digital Transformation

Abstract

This study contributes to the literature on sustainability, innovation, and corporate governance by advancing the understanding of the circular economy (CE) through an analysis of firm-level sustainability targets, board dynamics, stakeholder pressure, and digital transformation within firms in the MENA region. Drawing on resource-based, stakeholder, and innovation theories, we developed models linking sustainability targets and board dynamics to CE performance, with stakeholder pressure as a mediator and digital transformation as a moderator. We tested these hypotheses using data from 647 publicly listed manufacturing companies in the MENA region, spanning 2010–2022. By employing robust econometric techniques, we found strong evidence that embedding sustainability incentives in executive compensation and implementing structured sustainability initiatives significantly enhance CE performance. Additionally, effective boardroom characteristics positively influence CE adoption, while stakeholder pressure mediates the relationship between sustainability targets, board dynamics, and CE performance. Similarly, digital transformation reinforces sustainability governance, strengthening the role of board dynamics and sustainability targets in driving CE adoption. Finally, our findings highlight regional and performance-based differences in how MENA firms implement sustainability targets and board dynamics to influence CE outcomes. The results remain consistent after multiple robustness tests, including rolling window analysis, sensitivity analysis, and endogeneity tests. The findings emphasize the need for incentive-driven policies that integrate CE principles into corporate governance, promote sustainability-linked executive compensation, enhance board diversity, and support digital transformation initiatives. Policymakers should also standardize CE reporting frameworks to align with global sustainability commitments, ensuring transparency, accountability, and long-term sustainability adoption.