Co‐opted board, environment, social and governance

Abstract

AbstractThe ultimate goal shared by society is sustainable development, a process of addressing current needs without sacrificing resources of future generations. To achieve sustainability, companies should consider of environmental, social, and governance (ESG) in their stakeholder engagement process. Investment in ESG activities is unavoidably decided at the board, making board characteristics become crucial for sustainability. We explore the effect of co‐opted directors, appointed after the incumbent CEO assumes office, on corporate ESG performance. Our findings show that firms with co‐opted directors tend to have poorer ESG performance. Investing in ESG is a long‐run corporate policy. Consistent with the managerial myopia hypothesis, the co‐opted directors, representing weaker governance mechanisms with ineffective monitoring roles, provide managers fewer incentives to invest in the long run. We address endogeneity concerns by conducting instrumental variable analyses.