Corporate governance and environmental performance and disclosures

Corporate Governance and Environmental Performance: Is there really a link?

Judith L. Walls John Molson School of Business, Concordia University CIRANO & l'École Polytechnique de Paris

Pascual Berrone IESE Business School, University of Navarra

Montréal November 12, 2010

Phillip H. Phan Carey School of Business, Johns Hopkins University

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

Interactions

Environmental Performance

Methodology • Reviewed literature on governance and CSR – Selected independent variables based on past research – Shareholders • • • •

Institutional owners (TF/Reuters) Investor turnover (TF/Reuters) Investor activism (RiskMetrics) Investor concentration (TF/Reuters)

– Board • • • •

Independence (RiskMetrics) Environmental committee (DEF 14-A) Diversity (RiskMetrics) Size (RiskMetrics)

– Managerial • CEO duality (ExecuComp) • Managerial control (ExecuComp) • CEO salary, bonus and options compensation (ExecuComp)

Methodology • Dependent variable: environmental performance – KLD environmental strengths (beyond compliance) – KLD environmental concerns (failure to comply)

• Control variables (Compustat) – – – – – – – – –

Financial performance (ROA) Firm size Leverage Sales growth R&D intensity Capital intensity Advertising intensity Year effects (dummies) Industry effects (dummies)

Methodology • Sample & estimation technique – – – –

313 firms over 9 years (1997-2005) S&P500, polluting industries (primary & manufacturing) Unbalanced panel of 2002 firm-years OLS panel regression, transformed DV

Results – Main effects (owners) Constant (s.e.) Firm Performance Firm Size Sales Growth Leverage Cap Intensity R&D Intensity Advg Intensity Year Dummies Industry Dummies Institutional Owners

ENVT STR -0.456* (0.183) -0.015 (0.064) 0.101** (0.017) -0.004 (0.021) 0.167* (0.077) 0.281* (0.140) -0.097 (0.097) 0.784 (0.564) incl incl

Investor Turnover Environmental Proxies Investor Concentration Overall R-Square Two-tailed t-tests: ** p