Corporate Governance and Environmental Performance: Is there really a link? Judith L. Walls John Molson School of Business, Concordia University Pascual Berrone IESE Business School, University of Navarra Phillip H. Phan Carey School of Business, Johns Hopkins University CIRANO & l'École Polytechnique de Paris Montréal November 12, 2010
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Corporate governance and environmental performance and disclosures
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Corporate Governance and Environmental Performance: Is there really a link?
Judith L. WallsJohn Molson School of Business, Concordia University
Pascual BerroneIESE Business School, University of Navarra
Phillip H. PhanCarey School of Business, Johns Hopkins University
CIRANO &l'École Polytechnique de Paris
MontréalNovember 12, 2010
Motivation• Corporate governance is cause celebre
– Explosion of research– Emphasis on financial performance
• Corporate scandals– Debate: should social issues be included in strategic
agenda?
• Corporate governance and CSR– Only handful of academic research– CSR is a very broad topic– No dominant theoretical paradigm– Often in “vacuum” (shareholders or boards or management)– Contradictory results
Our approach• Phenomenon-driven research (Hambrick, 2007)
– Surprising and previously undocumented– Associational pattern– Temporal order is clear– Outcome variable is important– Sample is large and carefully constructed– Obvious covariates have been controlled for– Effect size is big
• All three levels of corporate governance
• Tightly focused– Environmental performance
Broad research questions
Institutional Ownership
Board of Directors
Managerial Incentives
Environmental Performance
Broad research questions
Institutional Ownership
Board of Directors
Managerial Incentives
Environmental PerformanceInteractions
Methodology• Reviewed literature on governance and CSR
– Selected independent variables based on past research– Shareholders
Discussion• Agency theory: predicts no attention to long-term strategic
issues (EP)– Managerial discretion should be only determinant due to agency
gap– Board protects interest of shareholders and should side with them
• Phenomenon-driven approach shows:– Institutional investors are involved:
• investors engage in activism if “bad” EP• higher investor activism helps “good” EP, especially when CEO is powerful• when institutional investors control the firm, EP is worse
– Board structure can contribute to:• “bad” EP, especially if independent, large and lacking in diversity
– Managerial incentives:• largely irrelevant, except higher salary when “bad” EP• higher managerial control allows for better EP, especially if investor oversight is
minimal• when CEO has too much discretion (bonus, duality), then EP tends to be worse
Discussion• Resource-dependence theory: predicts that board provides
access to external resources– Boards play important role for long-term strategic goals– Support managers’ by giving access to critical expertise, skills, and