Co-opted directors and greenhouse gas emissions: Does ESG compensation matter?

Abstract

Greenhouse gas (GHG) emissions pose a serious threat to human habitats because they are the cause of the increasing number of ecological problems and adverse weather events blighting our planet. Considering the rising trend in environmental concerns and the critical role of the board of directors in strategic corporate decisions, this paper examines the impact of co-opted boards on GHG emissions and the moderating effect of environmental, social, and governance (ESG) performance-based compensation on the relationship. Using a sample of US firms from 2002 to 2018, the results show a significant negative relationship between co-opted directors and total GHG emissions, i.e., an increase of one standard deviation in the proportion of co-opted directors reduces GHG emissions by 0.27. Additional analysis reports that an increase of one standard deviation in co-opted boards reduces direct and indirect GHG emissions by 0.37 and 1.3, respectively. This implies that firms with co-opted boards ensure the sustainability of their own operations while also making their partner firms environmentally sustainable. Further analysis documents that the influence of co-opted directors on GHG emissions is more pronounced for firms that tie executives’ compensation with ESG performance. Our study provides policy implications for regulators against a background of public outcry and stakeholder pressure on firms to mitigate environmental damage and implement environmentally sustainable business practices.