Are Shareholders Environmental Laggards? Corporate Governance and Environmental Firm Performance

Abstract

From a reactive, antagonistic stance towards environmental regulations, many firms have evolved to act in a pro-active fashion to integrate environmental issues into their core strategies. Driving force behind this development is a growing insight that environmental efforts can potentially be a source of value. Yet, while shareholders appear to be laggards with respect to recognizing this potential, managers appear to have a more accurate and acute perception of these possibilities of environmental strategies. Using measures of different corporate governance instruments that proxy for the ability of managers or shareholders to implement their strategic preferences we demonstrate empirically that shareholders are indeed laggards because they lower firm environmental performance while the latter actually has positive effects on firm financial performance. Managers, however, push for better environmental and hence financial performance and thus act against shareholders preferences, but in their interest.

Keywords: Environmental performance, financial performance, corporate governance

JEL Classification: D21, G34