Green is the New Gold: The Role of Professional Manager Compensation in Enhancing Environmental Responsibility in State-Owned Enterprises

Abstract

Significant reforms within Chinese state-owned enterprises (SOEs), implemented about a decade ago, shifted the authority for appointing top managers from the government to the board of directors, allowing for market-oriented compensation for these managers. In light of this unique framework, this study aims to explore the impact of the professional managerial compensation system on the environmental responsibility performance of Chinese SOEs over the period spanning from 2011 to 2020. The empirical findings of this study reveal a positive association between the implementation of the professional managerial compensation system and the environmental responsibility performance of SOEs. This positive influence can be attributed to two primary mechanisms: the reduction of agency costs through improved governance and resource allocations, and the attraction of green investors through effective signalling. Furthermore, the beneficial effect of a professional managerial compensation system on environmental responsibility is enhanced in SOEs with more analyst coverage, equity incentives, operations in heavily polluting industries, or when professional managers hold top-tier positions like CEOs and CFOs. Moreover, the study establishes a positive correlation between environmental responsibility performance and enhanced firm value. These findings hold significant implications for managerial decision-making within the context of SOEs.

Keywords: Executive Compensation, Professional managerial compensation system, Environmental responsibility performance, SOEs