Board of Directors Network Centrality and Environmental, Social and Governance (ESG) Performance

Abstract

Drawing from social capital, social network theory of stakeholder influence, and stakeholder management, this study examines the relationship between board network centrality and firms’ environmental, social and governance (ESG) performance. Using social network analysis, we construct five board network centrality, namely degree centrality (the number of connections), closeness centrality (distance among firms), eigenvector centrality (the quality of connections), betweenness centrality (how often a firm sits between two other firms), and the information centrality (the speed and reliability of information), as measures of board access for social capital and timely information. Using a sample of non-financial firms listed in the UK FTSE 350 index from 2007 to 2018, we find that board networks, measured by degree, closeness, eigenvector, betweenness, and information centrality, have positive influence on firms’ environmental, social and governance (ESG) performance. Furthermore, our findings show that there is a non-linear relationship between board networks and ESG performance and this relationship is stronger in the sectors where firms that have high product market concentration and high percentage of women board members.This study unveils that strong board network centrality brings higher social (reputational) capital and information advantages to the firm to effectively, timely, and accurately deal with the pressures from stakeholders (stakeholder management), which leads to better environmental, social, and governance (ESG) performance.

Keywords: Board network centrality, social network analysis, stakeholder management, ESG performance, non-linear

JEL Classification: M14, L14, G3