How Corporate Governance and Powerful CEOs Can Affect Environmental Performance

An interesting, recent study has investigated how the relationships between company’s owners, its managers and boards of directors may influence its environmental performance.

Today, many companies want to make a positive impact on their stakeholders, including the public, and the environment through Corporate Social Responsibility (CSR) programs, and some include social impacts in their corporate goals.

While internationally recognized voluntary initiatives, such as the UN Global Compact and International Corporate Governance Network, encourage companies to include social goals into their governance agenda, only few of these schemes offer any detailed guidance on how to build socially accountable governance structures.

 

The researchers chose to focus on the environmental aspects of social responsibility.

Their approach can be defined as “fact-based research“, which may eventually provide the groundwork for the development of new theories about the relationship between governance structure and social and environmental impacts.

The study is based on analysis of governance and environmental performance of 313 companies listed in an index of the USA’s top publically traded companies between the years 1997-2005.

 

Companies were from industries with a large environmental impact such as food; chemicals; machinery; electronics and instruments; and electric, gas and sanitary services.

Overall, the governance structure seemed to have an important but complex relationship with the environmental results. Environmental performance was, in fact, influenced by how boards of directors were set-up, how companies were managed and how they were owned.

The researchers measured their environmental performance in terms of ecological strengths (strategies introduced to improve environmental performance) and environmental concerns (incorporating pollution).

 

Chief executives had a key influence, and especially companies with powerful CEOs, who were also chairpersons on their board of directors, had more environmental strengths.

This finding contradicts current thinking about financial performance, which indicates that it is beneficial to separate the roles of CEO and chairperson of the board, and maintain an independent board of directors.

The results, therefore, hint that the type of governance structure that maximizes profits is not necessarily one that will benefit social and environmental aims.

 

Another important aspect was long-term investment. Previous research has often tended to assume that long-term investors encourage companies to take their environmental responsibilities more seriously.

However, this study suggests that this is only true in companies with boards that include outside members, and this demonstrates that investors are willing to wait for ecological benefits, as long as independent monitoring exists.

Certainly, this fact-based approach research represents a first step towards understanding the relationship between corporate governance and environmental performance.

 

Information Source: European Commission, DG Environment.

 

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