Impact of corporate governance mechanisms on environmental, social and governance (ESG) performance

Abstract

This thesis contains three research papers on the impact of corporate governance mechanisms on Environmental, Social and Governance (ESG) performance using international evidence of top multi-national entities (MNEs) along with an introductory and concluding chapter. The essays present interconnected studies on; (i) the impact of board composition on ESG performance; (ii) corporate governance drivers of environmental performance; and (iii) impact of board diversity on ESG performance in the millennium development goals (MDGs) and sustainable development goals (SDGs) eras. The first research paper investigates the association between board composition and ESG performance. We test the impact of five board composition elements on ESG performance, notably board independence, CEO duality, board gender diversity, interlocking directorship, and ESG committee, whilst controlling for other corporate governance variables, firm-level attributes, and country-level governance factors. Panel quantile regression (PQR) was applied to analyse data covering a 15-year period (2006–2020) from 336 top MNEs, operating in 42 non-financial industries, located in 32 countries and 5 geographical regions. Fixed effect regression (OLS), multiple discriminant analysis, two-stage least squares (2SLS), and propensity score matching (PSM) regression analysis were used to analyse data. Whereas results from linear models show that board independence, board gender diversity, and existence of ESG committee are positively associated with ESG performance, PQR reveals that the relationship is curvilinear. Linear models show that CEO duality has no significant impact on ESG performance, but PQR reveals that sustained CEO duality erodes ESG performance. Furthermore, whilst linear models show that interlocking directorship has negative impact on ESG performance, PQR reveals that the presence of interlocking directors with vast cross-directorship experience enhances ESG performance. The second research paper examines the extent to which corporate governance (CG) mechanisms affect corporate environmental performance (CEP). The study tested the impact of seven key CG mechanisms on CEP, broadly categorised into board structure and operations (board meeting, board independence and CEO duality), board diversity (board gender diversity and board nationality diversity), and ESG structure (ESG committee and ESG-linked compensation). Panel quantile regression (PQR) was applied to analyse data covering a 15-year period (2006-2020) from 244 top multinational entities operating in 30 environmentally sensitive industries located in 31 countries distributed across 5 geographical regions. Binary logistic regression, two-stage least squares regression (2SLS)/ instrumental variables (IV) regression and propensity score matching (PSM) regression analysis were applied to assess the robustness of result. Result shows that at the aggregate/ combined level for all countries, board gender diversity and presence of ESG committee are the strongest drivers of CEP. However, when disaggregated into geographical regions, the impact of CG mechanisms on CEP is contextual and varies across jurisdictions. Following from the positive impact of board gender diversity and board nationality diversity on CEP, to strengthen board effectiveness and environmental sustainability performance, board nomination committees should select or recommend for selection director nominees that strengthen gender diversity and nationality diversity. The third research paper investigates the impact of board diversity (namely board nationality diversity, board gender diversity, and board skills diversity) on ESG performance using a sample of Forbes 500 top multinational entities (MNEs), spanning 45 industries, 36 countries and 5 geographical regions, covering a 15-year period (2006-2020) of the millennium development goals (MDGs) era and sustainable development goals (SDGs) eras. Fixed effect linear regression, two-stage least squares (2SLS)/ instrumental variable (IV) regression, and propensity score matching regression were used to analyse data. Results show that at the aggregate level, board nationality diversity, board gender diversity, and board skills diversity are positively associated with ESG performance, with board nationality diversity emerging as the foremost determinant. When disaggregated into industries, the impact of board nationality diversity and board skills diversity on ESG performance is greater in the non-financial industry, whereas the impact of board gender diversity is more in the financial industry. When assessed from the standpoint of the MDGs/SDGs era, board nationality diversity and board skills diversity have greater impact on ESG performance in the MDGs era (2006-2015), whilst the impact of board gender diversity is more in the SDGs era (2016-2020). Overall, the study concludes that board diversity is an effective strategy for improving ESG performance.

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Identifiers

ORCID for Babajide Michael Oyewo: orcid.org/0000-0002-4499-601X

ORCID for Ven Tauringana: orcid.org/0000-0002-1433-324X

ORCID for Ishmael Tingbani: orcid.org/0000-0002-4012-1224

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