Renewable Governance: Good for the Environment?

Abstract

Given the mismatch between investors’ desires and firm’s choices regarding environmental performance, we hypothesize that to change firm policies, investors will need board renewal mechanisms powerful enough to renew the thinking of the board. We identify the adoption of majority voting and the introduction of a female director as corporate governance mechanisms potentially strong enough to accomplish this. Using a sample of 3,293 firms from 41 countries, we find that three years after board renewal via either majority voting or adding a female director, environmental performance levels are 19% greater relative to the year before board renewal. Board renewal improves environmental performance even when a country’s institutions are weak. Quasi-exogenous shocks to these board renewal mechanisms support the interpretation that governance improvements drive environmental performance and suggest that the ability of investors to renew the board and replace directors is a powerful mechanism to influence corporate outcomes around the world.

Keywords: Environmental performance, Ownership structure, Sustainability, Corporate social responsibility, ESG, Corporate governance

JEL Classification: G15, G23, G32