ESG
Study finds that board renewal can benefit the environment
Hannes Wagner, Bocconi University Milan, finds that governance mechanisms that help align the interests of investors and board members enhance the environmental performance of firms. This is true also if a woman is appointed to a previously all-male board
Peer-Reviewed PublicationVIDEO: HANNES WAGNER, BOCCONI UNIVERSITY, MILAN, FINDS THAT GOVERNANCE MECHANISMS THAT HELP ALIGN THE INTERESTS OF INVESTORS AND BOARD MEMBERS ENHANCE THE ENVIRONMENTAL PERFORMANCE OF FIRMS. THIS IS TRUE ALSO IF A WOMAN IS APPOINTED TO A PREVIOUSLY ALL MALE BOARD. WAGNER’S INVESTIGATION IS JOINT WITH HIS COAUTHORS ALEXANDER DYCK (UNIVERSITY OF TORONTO), KARL V. LINS (UNIVERSITY OF UTAH), LUKAS ROTH (UNIVERSITY OF ALBERTA), AND MITCH TOWNER (UNIVERSITY OF ARIZONA). THE AUTHORS IDENTIFIED TWO POTENTIAL BOARD RENEWAL MECHANISMS: THE ADOPTION OF MAJORITY VOTING AND THE INTRODUCTION OF A FEMALE DIRECTOR. MAJORITY VOTING FOR BOARD MEMBERS IS DIFFERENT FROM PLURALITY VOTING. IT GIVES INVESTORS MORE POWER. “AND WHAT WE SHOW IS THAT MAJORITY VOTING RULES LEAD TO BETTER ENVIRONMENTAL PERFORMANCE,” PROFESSOR WAGNER SAYS. SO, GIVING INVESTORS MORE POWER, AND IMPROVING CORPORATE GOVERNANCE LEADS TO ANOTHER OUTCOME, WHICH IS IMPROVING ENVIRONMENTAL PERFORMANCE OF A FIRM. THIS IS VERY IMPORTANT FOR A LOT OF INVESTORS, SINCE WHILE THEY CARE ABOUT FINANCIAL PERFORMANCE, MANY OF THEM INCREASINGLY CARE ABOUT THESE OTHER NON-FINANCIAL ASPECTS OF THE PERFORMANCE OF A FIRM. THE APPOINTMENT OF A FEMALE DIRECTOR TO AN ALL-MALE BOARD HAS AN EVEN STRONGER EFFECT. “WE ANALYZE IN DETAIL HOW FEMALE BOARD MEMBERS DIFFER IN THEIR CHARACTERISTICS FROM MALE BOARD MEMBERS, SINCE WE KNOW FOR EXAMPLE THAT FEMALE DIRECTORS TEND TO HAVE HIGHER EDUCATION LEVELS,” WAGNER EXPLAINS. “WHAT IS INTERESTING IS THAT ONCE WE CONTROL FOR ANY DIFFERENCES SUCH AS EDUCATION AND PRIOR EXECUTIVE EXPERIENCE, THE FEMALE EFFECT CONTINUES TO SHOW UP. SO, APPOINTING FEMALE DIRECTORS TO ALL-MALE BOARDS IMPROVES ENVIRONMENTAL PERFORMANCE AND THIS IS DIRECTLY RELATED TO GENDER.” view more
CREDIT: BOCCONI UNIVERSITY, MILAN
In an age when environmental awareness is widespread among investors, board renewal mechanisms that better align investors’ and directors’ interests can enhance a firm’s environmental performance, according to a new study by Hannes Wagner (Bocconi University, Milan). Interestingly, the study also finds a positive relation between the appointment of female directors and environmental performance.
Wagner’s investigation is joint with his coauthors Alexander Dyck (University of Toronto), Karl V. Lins (University of Utah), Lukas Roth (University of Alberta), and Mitch Towner (University of Arizona). It is titled “Renewable Governance: Good for the Environment?”, and it is forthcoming in the Journal of Accounting Research.
The authors identified two potential board renewal mechanisms: the adoption of majority voting and the introduction of a female director. Under majority voting, directors must obtain more than half of the votes cast by shareholders to be elected. Without it, directors only need a plurality of the votes cast. Thus, majority voting gives investors the ability to vote against directors, rather than just withhold their votes.
The paper finds that the introduction of majority voting is correlated to a significant increase in a firm’s environmental performance. In recent years investors have been pushing for firms to focus on environmental, rather than just financial, performance. Majority voting ensures a greater alignment between the interests of investors and directors.
The findings are even stronger when considering the relation between environmental performance and the appointment of a female director in the board. Most interestingly, the coefficients are still significant when controlling for board member characteristics such as education and experience. This suggests that the improvement in environmental performance is a direct effect of gender itself rather than of characteristics of female directors.
“The key contribution of our work is providing a roadmap for investors,” Professor Wagner said. “We show that if they want to increase environmental performance, they should not only monitor sustainability metrics, but also take action ‘upstream’, at the board level, where changes that produce such improvements are decided.”
The authors exploit quasi-exogenous shocks in different countries as a testing field for their hypotheses. These shocks are useful as they cause a change in one of the two variables investigated in the paper (female presence in the board or majority voting) without specifically intending to address firms’ environmental performance.
To evaluate the effect of appointing a female director, the authors analyzed countries that introduced compulsory gender quotas for boards. The results show that firms that introduced a female board member for the first time environmentally outperformed firms that did not by 8%, on average.
“Currently, regulatory efforts are aimed at increasing gender equality in boards. As an interesting and welcome side effect, these measures appear to also improve environmental performance of firms,” Prof. Wagner commented.
As for majority voting, the authors exploited the pressure from a campaign conducted by a large investor group in Canada. In this case, too, firms that switched to majority voting after the campaign exhibited a significant improvement in environmental performance measures.
Finally, the link between board renewal mechanism and environmental performance was stronger in countries with better investor protection laws and stricter disclosure requirements. But that is not all. The same (stronger link) was true also for firms having a more “motivated” shareholder base. This result reinforces the hypothesis that investors use board renewal to align the boards’ interests with their own.
“As ever more shareholders look for sustainability when making investment choices,” Prof. Wagner concluded, “investigating the drivers of environmental performance at the board level is something that can produce meaningful and tangible results. As so often, academic research can help better decision making”.
Alexander Dyck, Karl V. Lins, Lukas Roth, Mitch Towner, Hannes Wagner, “Renewable Governance: Good for the Environment?”, forthcoming in Journal of Accounting Research. DOI: https://doi.org/10.1111/1475-679X.12462.
JOURNAL
Journal of Accounting Research
ARTICLE TITLE
Renewable Governance: Good for the Environment?
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