Environmental Processes

Effect of Board of directors, sustainability incentives and committee on ESG

performance
--Manuscript Draft--

Manuscript Number:

Full Title: Effect of Board of directors, sustainability incentives and committee on ESG
performance

Article Type: Original Research

Funding Information:

Abstract: This paper seeks to fill the gap of environmental, social, and governance (ESG)
performance in the literature by testing the impact of Board Size, Board independence,
Women on the Board, sustainability incentives compensation and Corporate Social
Responsibility (CSR) committee on environmental, social, and governance
performance. Using one of the largest datasets to date, consisting of an unbalanced
panel dataset consisting of 36764 firm-year observations from 6000 listed firms,
covering a period of 16 years (2002–2017) from 60 countries around the world. The
regression analysis shows that the Board of directors, sustainability incentives and
committee are significantly associated with environmental, social, and governance
performance. Our results suggest that board size is positively associated with ESG
performance. Also, we show that the board independence is positively related to the
ESG performance. Moreover, it seen that women impact strongly significant the firm’s
ESG performance. Our results reveal that sustainability incentives compensation has a
positive effect. There is a positive link between ESG performance and CSR committee.
We used the Asset4 dataset and the Thomson Reuters Eikon to collect ESG score and
corporate governance data. The ASSET4 database from Thomson Reuters is utilized
in our research because it is readily available for many investors and scholars.

Corresponding Author: Ali Ahmadi

University of Sfax Faculty of Economics and Management of Sfax: Universite de Sfax
Faculte des Sciences Economiques et de Gestion de Sfax
Sfax, Gafsa TUNISIA

Corresponding Author Secondary

Information:

Corresponding Author's Institution: University of Sfax Faculty of Economics and Management of Sfax: Universite de Sfax
Faculte des Sciences Economiques et de Gestion de Sfax

Corresponding Author's Secondary

Institution:

First Author: Ali Ahmadi

First Author Secondary Information:

Order of Authors: Ali Ahmadi

Mondher Youssef

Abdelfettah Bouri

Order of Authors Secondary Information:

Author Comments:

Suggested Reviewers: Saida Zaidi

zaidi2017fsegs@gmail.com
reasearcher in environment management and CSR

Ibtihel Henchiri
henchiriibtihel159@gmail.com
corporate governance researcher

Maher Garraoui

Powered by Editorial Manager® and ProduXion Manager® from Aries Systems Corporation
 maherfsegs@gmail.com
environmental policy researcher

souhayla Elbehi
souhayla.elbehi95@gmail.com
corporate governance researcher

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Cover Letter

COVER LETTER FOR SUBMISSION OF MANUSCRIPT

Date: January 6th 2021

I am enclosing herewith a manuscript entitled “Effect of Board of directors, sustainability

incentives and committee on ESG performance” submitted for possible consideration and
publication in your honorable journal. The Corresponding author of this manuscript is Dr. Ali
Ahmadi

With the submission of this manuscript I would like to undertake that:

 I read and approved the final version submitted;
 The contents of this manuscript have not been copyrighted or published previously;
 The contents of this manuscript are not now under consideration for publication elsewhere;
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while acceptance by the Journal is under consideration;
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author of this paper.
 Click here to access/download;Manuscript;manuscript.docx

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1 Effect of Board of directors, sustainability incentives and committee on ESG

2
3 performance
4
5
6
7
8
Abstract:
9
10 This paper seeks to fill the gap of environmental, social, and governance (ESG) performance
11
12 in the literature by testing the impact of Board Size, Board independence, Women on the
13
14
Board, sustainability incentives compensation and Corporate Social Responsibility (CSR)
15 committee on environmental, social, and governance performance. Using one of the largest
16
17 datasets to date, consisting of an unbalanced panel dataset consisting of 36764 firm-year
18
19 observations from 6000 listed firms, covering a period of 16 years (2002–2017) from 60
20
21 countries around the world. The regression analysis shows that the Board of directors,
22
23 sustainability incentives and committee are significantly associated with environmental,
24
social, and governance performance. Our results suggest that board size is positively
25
26 associated with ESG performance. Also, we show that the board independence is positively
27
28 related to the ESG performance. Moreover, it seen that women impact strongly significant
29
30 the firm’s ESG performance. Our results reveal that sustainability incentives compensation
31
32 has a positive effect. There is a positive link between ESG performance and CSR committee.
33
34 We used the Asset4 dataset and the Thomson Reuters Eikon to collect ESG score and
35 corporate governance data. The ASSET4 database from Thomson Reuters is utilized in our
36
37 research because it is readily available for many investors and scholars.
38
39
40 Keywords: ESG performance; board of directors, sustainability incentives compensation;
41 CSR sustainability committee
42
43
44 1. Introduction
45
46 A company’s performance essentially depends on the board of directors (Merendino, &
47
48 Melville, 2019), given that they are responsible for approving and overseeing the
49
50 implementation of strategic goals, the system of governance and creating company culture
51
52 (Castellanos, & George, 2020). A successful board of director will also make an emphasis on
53
business ethics and corporate responsibility (Qa’dan, & Suwaidan, 2019). An increasing
54
55 amount of research finds a strong positive relationship between a firm’s sustainability
56
57 performance and profitability: companies with high sustainability ratings significantly out
58
59 perform their counterparts both in terms of stock market value and accounting performance
60
61 (Birindelli et al., 2018). In other terms, adopting environmental, social and governance (ESG)
62
63 best practices leads to a long-term competitive advantage.
64
65
 1 This study contributes both to academic literature and to firm practices in several aspects.
2
3 Firstly, current literature on the topic of relationship between board of directors’
4
5 characteristics, sustainability incentives compensation and CSR committee on the ESG
6 performance in a multinational context. Secondly, to the best of our knowledge, existing
7
8 studies on banks that analyse the relationship between governance variables and ESG
9
10 primarily deal with the ESG disclosure (and not the ESG performance) generally focus on
11
12 developing economies and finally cover an old time interval. Conversely, our empirical
13
14 research covers the years 2002–2017 and analyses a large sample of 6000 listed firms in 60
15
16 countries, from different regions of which economies notably contribute to sustainable
17 development. In general, all our results contribute to the definition of bank best practices,
18
19 especially for the composition of a firm’s board, sustainability incentives compensation and
20
21 CSR committee which are important drivers of ESG score.
22
23 Based on these considerations, this study aims to identify the characteristics of the board of
24
25 directors, which raise environmental social governance performance. More specifically,
26
27 according to the existing literature (Qa’dan, & Suwaidan, 2019; Xie et al., 2019; Arayssi et
28
29 al., 2020; Armstrong, 2020; Harjoto, & Wang, 2020) our analysis examines the impact of a
30
31 board’s characteristics (gender diversity, size, activity, compensation and ESG controversies)
32
33
on ESG performance in a sample of 36.764 observations from 60 countries from 2002 to
34 2017. Our focus on this sample allows for a more homogeneous reference population and is
35
36 important because these high number a firms present one of the main economic drivers in their
37
38 economies which can enhance the transition towards a more inclusive and sustainable economy
39
40 Rajesh, (2020). To proxy a firm’s sustainability performance, we use Thomson Reuters’ ESG
41
42 Asset4 score, a broad and verified measure of CSR performance adopted by scholars both for
43
44
financial (Hübel, & Scholz, 2020; Kiriu, & Nozaki, 2020) and non-financial firms (Jackson
45 et al., 2020; Beretta et al., 2020; Hedqvist, & Larsson, 2020; Jahmane, & Gaies, 2020;
46
47 Arayssi et al., 2020).
48
49
50
Our main empirical evidence shows that there is a linear relationship between board of
51 directors’ characteristics, compensation policy and CSR committee and a firm’s ESG
52
53 performance. Interestingly, the link between the dependent and independent variables is
54
55 linear confirming that board characteristics’, compensation policy and CSR committee are
56
57 positively impact a firm’s ESG performance. Therefore, we do support the critical theory for
58
59 firms’ stricto sensu, meaning that after reaching large Board Size, high level of Board
60
61
independence, increasing presence of female directors in Board, the adoption sustainability
62 incentives compensation and an implementation of CSR committee necessarily have a
63
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 1 positive impact on firm’s ESG (Qa’dan, & Suwaidan, 2019; Arayssi, et al., 2020; Wong et
2
3 al., 2020, Plastun et al., 2020; Alessandrini, & Jondeau, 2020; Ng et al., 2020).
4
5 The remainder of the paper is organized as follows. Section 2 presents the literature review
6
7 and the research hypotheses. Section 3 discusses the research method, including the
8
9 sampling procedure, the measurement of dependent and independent variables and the
10
11 methodology used. Section4shows and discusses the results, and finally, Section5presents
12 the conclusions.
13
14
15 2. Literature Review and Hypotheses Development
16
17 The variables most widely used in the literature to describe the impact of board size, gender
18
19 diversity, board independence, sustainability incentives compensation and CSR committee
20
21 on ESG performance. In the sub-sections below, we develop our hypotheses for each of
22
23 these characteristics of corporate governance.
24
25 Board Size
26
27 Board size has mostly been studied as to its relationship to firm performance. Empirical
28
29 studies can be classified into two categories: a first stream of research is in favour of smaller
30
31 boards, whereas a second school of thought advocates larger boards. Since the firms in our
32
33 sample are listed, and are therefore large and complex financial institutions that work in a
34
35 context of intense regulation, we expect that larger boards will be more efficient, especially
36
37
in terms of workload and responsibility allocation, and of greater diversity in terms of
38 stakeholder representation, when and improving ESG performance (Albitar et al., 2020;
39
40 Zubeltzu‐ Jaka et al., 2020; Arayssi et al., 2020). Our hypothesis agrees with the findings of
41
42 previous studies that show a positive relationship between board size and the breadth of
43
44 sustainability practices (Baraibar-Diez, & Odriozola, 2019; Harjoto, & Wang, 2020; Albitar
45
46 et al., 2020). Based on these considerations, the following hypothesis is proposed for testing:
47
48 Hypothesis 1. Board size affects positively the ESG performance.
49
50 Board Independence
51
52
53 Under the use of ESG score for impression management, in this paper, we examine the
54
55
existence of internal control mechanisms of corporate governance that constrain those
56 discretionary ESG score that influence stakeholders’ perceptions about the sustainable
57
58 performance of a firm. Since the firms in our sample work in a dynamic business
59
60 environment, which requires increased meeting frequency to ensure legitimacy, legitimacy
61
62 theory provides the basis for proposing a positive relationship between board meeting
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 1 frequency and ESG performance. Our hypothesis aligns with the studies that find a positive
2
3 relationship between the board independence and ESG performance (Arayssi et al., 2020;
4
5 Merendino, & Melville, 2019; Harjoto, & Wang, 2020). Concretely, and taking into
6 consideration the main role of board independence on sustainable transparency some authors
7
8 have examined the role of board independence and ESG score. Several examples, analysing
9
10 a sample of firms, Qa’dan, & Suwaidan, (2019); Merendino, & Melville, (2019); Ismail et
11
12 al., (2019) evidence high impression management in stronger boards of directors associated
13
14 with greater independence of their members. Recently, (Arayssi et al., 2020; Shahbaz et al.,
15
16 2020; Zhang et al., 2020; Harjoto, & Wang, 2020; García Martín, & Herrero, 2020)
17 document that impression management depends on board characteristics, which influence the
18
19 optimistic tone in ESG performance and the subsequent performance. Based on the previous
20
21 considerations, the following hypothesis is tested:
22
23 Hypothesis 2. The share of board independence affects positively the ESG performance.
24
25
26 Women on the Board
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28 Interpretations of the relationship between women on the board and ESG performance are
29
30 connected to the various features of the women themselves. There seems to be a general
31
32 consensus in the literature regarding the positive impact of female directors on sustainability
33
34 performance. More in detail, women on boards positively impact the firm’s charitable
35 contributions (Bettinelli et al., 2019; Furlotti et al., 2019; Abd Rahman et al., 2019),
36
37 apprehension for climate change (Birindelli, et al., 2019) and reputation-based CSR
38
39 measures (Ajaz, et al., 2020). Similarly, many studies find that board gender diversity
40
41 increases the extent of social and environmental reporting and decreases environmental
42
43 lawsuits (Yuan et al., 2019; Peng, 2020). A likely explanation of these inconsistent results
44
45 could be the presence of a non-linear relationship between board gender diversity and social
46 and environmental performance. Based on their findings, some studies such those of
47
48 (Birindelli et al., 2019; Furlotti et al., 2019; Ajaz et al., 2020; Peng, 2020) point out that a
49
50 high level of presence of women on the board improve the ESG performance. In
51
52 consideration of these evidences, we advance the following hypothesis:
53
54 Hypothesis 3. A high level of gender diversity affects positively the ESG performance
55
56
57 Executive compensation and carbon performance
58
59 The corporate governance is identified as a determinant of managerial incentives for social
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61 performance several recent studies examines the role of executive compensation contracts
62
63 that explicitly incentivise managers for CSR. Indeed, the moderating effect of ESG-based
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 1 sustainable compensation policy. The provision of ESG sustainable compensation policy is
2
3 likely to play a critical role in motivating corporate executives to undertake carbon
4
5 initiatives, which can in turn enhance the organizational legitimacy. As part of sustainable
6 corporate strategies, corporations are increasingly using sustainable compensation policy to
7
8 motivate executives to pursue social and environmental projects. For example, (Oh, et al.,
9
10 2016) ; Velte, 2016 ; Birindelli, et al., 2018 ; Baraibar‐ Diez et al., 2019) find that
11
12 sustainable compensation schemes reduce the environmental exposure premium component
13
14 of CEO compensation in different contexts. We argue, therefore, that in the presence of a
15
16 sustainable compensation policy, the board of directors and the compensation committee of
17 the board might be in a better position to evaluate the carbon risks of a firm to design a more
18
19 effective executive compensation scheme, which may enhance corporate ESG (Qian and
20
21 Schaltegger, 2018 Birindelli, et al., 2018. Baraibar‐ Diez et al., 2019; Zhang, et al., 2020). In
22
23 consideration of these evidences, we advance the following hypothesis;
24
25 Hypothesis 4: Ceteris paribus, greater firms adopt ESG sustainable compensation
26
27 incentives, greater for process-oriented ESG performance.
28
29 CSR Sustainability Committee
30
31
32 In recent years, companies are more frequently choosing to establish a CSR committee to
33
34 handle important sustainability duties. According to stakeholder theory, such committees
35 typically assist the board of directors in overseeing the company’s responsibility practices,
36
37 but they can also play a key role in monitoring and assessing the firm’s CSR performance by
38
39 ensuring compliance with ESG goals and strategies (Baraibar-Diez, & Odriozola, 2019;
40
41 Castellanos, & George, 2020; Alessandrini, & Jondeau, 2020; Shahbaz, et al., 2020; Zhang,
42
43 et al., 2020). Indeed, the board can design and implement CSR projects through a CSR
44
45 committee ensuring the enhancement of ESG performance (Peng, 2020; Castellanos, &
46 George, 2020; Alessandrini, & Jondeau, 2020). Moreover, the CSR committee is responsible
47
48 for the reporting procedures of environmental and social information: it reports periodically
49
50 to the board of directors on sustainability matters affecting the company, while also
51
52 managing the public disclosure on sustainability issues. For these reasons, creating a CSR
53
54 committee is seen as an important mechanism for an organization to maximize opportunities
55
56
for sustainable development. Recent studies such those, Qa’dan, & Suwaidan, 2019; Yuan, et
57 al., 2019; Alessandrini, & Jondeau, 2020; Shahbaz, et al., 2020; Zhang, et al., 2020) suggest
58
59 that the existence of CSR committees is significant and positively connected in achieving
60
61 higher levels of ESG performance. For these motivations, we posit the following hypothesis:
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 1 Hypothesis 5. The establishment of a CSR sustainability committee has a positive effect on
2
3 ESG performance.
4
5 3. Research Methodology
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7
8
a. Sample Selection and Data Sources
9
10 Our initial sample was based on the availability of ESG data in the Thomson Reuters Asset4
11
12 database and Thomson Reuters Eikon. We started with all the available sample of 42500
13
14
firm-year observations from nonfinancial firms listed on the main stock exchanges of 60
15 countries included in the panel A of table 1. We then removed 5736 observations with
16
17 missing firm-level data relating to the dependent or independent variables used in our
18
19 explanatories models. Our final sample is based on an unbalanced panel dataset consisting of
20
21 36764 firm-year observations from 6000 listed firms, covering a period of 16 years (2002–
22
23 2017). Table 1 shows the annual- and country-wise distribution of the sample. We used the
24
Asset4 dataset and the Thomson Reuters Eikon to collect ESG score and corporate
25
26 governance data. The ASSET4 database from Thomson Reuters is utilized in our research
27
28 because it is readily available for many investors and scholars.
29
30
31
Table 1. Sample distribution
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33 Panel A. Distribution of the sample by country
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35
Firms Number of observations per country Percent (%) per country
36 Argentina 28 0,07616%
37
38
Australia 2337 6,35676%
39 Austria 162 0,44065%
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41
Bahrain 6 0,01632%
42 Belgium 249 0,67729%
43 Bermuda 561 1,52595%
44
45 Brazil 556 1,51235%
46 Canada 2134 5,80459%
47
48 Chile 187 0,50865%
49 China 640 1,74083%
50
51 Colombia 69 0,18768%
52 Cyprus 17 0,04624%
53
54 Czech Repu 29 0,07888%
55 Denmark 302 0,82146%
56
57 Egypt 73 0,19856%
58 Finland 317 0,86226%
59
60 France 1002 2,72549%
61 Germany 928 2,52421%
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63 Greece 224 0,60929%
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 1 Hong Kong 470 1,27842%
2
3 Hungary 33 0,08976%
4 India 652 1,77347%
5
6 Indonesia 237 0,64465%
7 Ireland 327 0,88946%
8
9 Italy 468 1,27298%
10 Japan 4687 12,74888%
11
12
Jordan 9 0,02448%
13 Kazakhstan 9 0,02448%
14
15
Kuwait 49 0,13328%
16 Luxembourg 81 0,22032%
17
Malaysia 361 0,98194%
18
19 Malta 2 0,00544%
20 Mauritius 10 0,02720%
21
22 Mexico 226 0,61473%
23 Morocco 18 0,04896%
24
25 Netherland 474 1,28930%
26 New Zealand 222 0,60385%
27
28 Nigeria 8 0,02176%
29 Norway 198 0,53857%
30
31 Oman 25 0,06800%
32 Peru 38 0,10336%
33
34 Philippines 131 0,35633%
35 Poland 196 0,53313%
36
37 Portugal 116 0,31553%
38 Qatar 36 0,09792%
39
40 Saudi Arab 67 0,18224%
41 Singapore 379 1,03090%
42
43 South Africa 667 1,81427%
44 South Korea 716 1,94756%
45
46 Spain 504 1,37091%
47 Sri Lanka 8 0,02176%
48
49
Sweden 572 1,55587%
50 Switzerlan 655 1,78163%
51
52
Taiwan 855 2,32564%
53 Thailand 221 0,60113%
54 Turkey 199 0,54129%
55
56 United Arab Emirates 35 0,09520%
57 United Kingdom 2919 7,93983%
58
59 United States 10055 27,35013%
60 Zimbabwe 8 0,02176%
61
62 Total 36764 100%
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 1 Panel B. Distribution of the sample by geographic area
2
Number observations geographic Percent (%)geographic
3 Continent
4 area area
5 Africa 711 2,217%
6
7 America 13255 40,103%
8 Asia 9469 22.142%
9
10
Australia 2559 7,851%
11 Europe 10770 27,686%
12
13
Total 36764 100,00%
14
15
16 b. Dependent Variable
17
18
19 To test our hypotheses, we used data on ESG performance (ESG SCORE) from Asset4. This
20
score is based on three dimensions: environmental, social and corporate governance. ESG
21
22 performance measures a company’s capacity to reduce environmental emissions, to
23
24 efficiently use natural resources in the production processes and to support the research and
25
26 development of eco-efficient products and services. Social performance measures a company’s
27
28 capacity to generate trust and loyalty in its workforce, to respect the fundamental
29
30 conventions on human rights, to be a good citizen, to protect public health, to respect
31 business ethics and to create value-added products and services.
32
33
34 Following the literature Dalal, & Thaker, (2019); Eliwa et al., (2019); Lopez de Silanes et
35
36 al., (2019) our study measures the level of ESG performance by calculating the arithmetic
37 mean of the three scores: social, environmental and corporate governance. The overall ESG
38
39 SCORE is expressed as a percentage ranging from 0 to 100 percent. In an attempt to capture
40
41 the impact of board characteristics on ESG performance with time for the effects to appear
42
43 and lessen endogeneity problems, governance variables of any year are related to the ESG
44
45 measure of the following year.
46
47 c. Independent Variables
48
49
The independent variables included in our econometric models are the board size, Board
50
51 independence, the share of women on the board of directors, Sustainable Compensation
52
53 incentives and CSR sustainability committee.
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55
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57
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60
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 1 Table 2 shows a summary of the measurement and the expected relationship with
2
3 ESGSCORE
4
5 Expected
6 Variable Measurement sign with
7
8 ESG SCORE
9 ESG performance This score is based on three dimensions: environmental, Dependent
10 (ESGSCORE) social and corporate governance variable
11 Board size
12 Total number of directors on the bank’s board Positive
13 (BOARDS)
14 Board
Percentage of independent board members as reported by
15 independence Positive
16 the company (variable Independent Board Members)
(BINDEP)
17
18 Gender diversityTotal number of women on the board of directors divided
Positive
19 (GENDERD) by the total number of board members
20 Dummy variable (yes = 1/no = 0) responding either the
21 Sustainable
question “Does the Company have and extra‐ financial
22 Compensation
23 performance oriented compensation policy” or “Is the Positive
incentives
24 senior executive's compensation linked to CSR
(SCINCENTIVES)
25 Sustainability target”.
26 CSR sustainability Dummy variable (yes = 1/no = 0) responding the question
27
28 committee “Does the company have a CSR Sustainability committee
29 (CSRSUSTCOMM) or team?” Positive
30
31
32 The next section will test the hypotheses regarding the effect of the board characteristics on
33
34 the ESG SCORE, using panel data analysis. We estimate the following models to measure
35
36 the relationship between ESG performance and independent variables:
37
38 ESGSCORE it = β0 + β1 BOARDS +β2 BINDEP +β3 GENDERD +β4 SCINCENTIVES +
39
40 β5 CSRSUSTCOMM + ε
41 4. Empirical Results and Discussion
42
43 a- Descriptive Statistics
44
45
46 The Panel A of table 3 illustrates the descriptive statistics for both the dependent and
47 independent variables. The descriptive statistics table includes the minimum, maximum,
48
49 mean and standard deviation. The average level of ESG performance (ESG SCORE) of firm
50
51 analysed is 50,86%, with a maximum equal to 98%. This reveals that the firms’ sustainability
52
53 performance for the period 2002–2017 was very satisfactory by the standards of the score
54
55 definition. The board size is 10.38562 with a minimum of one member to forty-four
56
57
directors. Equally, the average of board independence seems inadequate, considering that
58 some firm boards have no independent director (a maximum of the 100% with a minimum
59
60 value is equal to zero %). Similarly, the women mass (the proportion of female gender on the
61
62 board) reaches an average value of (11%) and the maximum value is 100%, seems it still low
63
64
65
 1 but suggesting that there are firms of which board members are all women. Equally, the
2
3 average of adoption of Sustainable Compensation incentives seems weak considering that
4
5 16% of our observations have a Sustainable Compensation incentives. In addition, around
6 46% of firms have adopted a sustainable compensation policy.
7
8
9 The correlation matrix (Panel B Table 3) highlights very important relationships between the
10
11 main variables of the study. More specifically, ESG SCORE is found to be positively
12 associated with CSR sustainability committee, sustainability incentives compensation, board
13
14 size, and gender diversity. These relationships show that more ethical and responsible firms
15
16 tend to appoint more women to their boards, more frequently a high level on independence
17
18 of board of directors, adopted sustainability incentives compensation and create a CSR
19
20 sustainability committee dedicated solely to sustainability. Interestingly, a high proportion of
21
22 board independence and CSR sustainability committee are positively associated with
23 sustainability incentives compensation, suggesting that firms of which boards are served by a
24
25 high level board independence and created a CSR sustainability committee adopted a
26
27 strategy of sustainability incentives compensation. Contrary, the share of board
28
29 independence is negatively correlated to the board size.
30
31 Table 3. Summary statistics of ESG SCORE and explanatory variables.
32
33
34 Panel A. Descriptive statistics
35 Variable Obs Mean Std. Dev. Min Max
36
37 ESGSCORE 36764 50.86226 17.84807 6.042121 98.01675
38 BOARDS 36764 10.38562 3.72292 1 44
39
BINDEP 36764 54.54049 28.78914 0 100
40
41 GENDERD 36764 11.12622 14.64738 0 100
42 SCINCENTIVES 36764 .1615983 .3680869 0 1
43
44 CSRSUSTCOMM 36764 .4607496 .4984638 0 1
45 Panel B. Metrix of correlation
46
47
ESGSCORE BOARDS BINDEP GENDERD SCINCENTIVES CSRSUSTCOMM
48 ESGSCORE 1.0000
49 BOARDS 0.2087 1.0000
50
51 BINDEP 0.1507 -0.1268 1.0000
52 GENDERD 0.3273 0.0035 0.1014 1.0000
53
SCINCENTIVES 0.2491 0.0171 0.1837 0.0627 1.0000
54
55 CSRSUSTCOMM 0.5484 0.1474 -0.0111 0.1746 0.2299 1.0000
56 This table shows the summary statistics of ESG SCORE and explanatory variables. The number of firm-year
57 observations is 36.764 for all the variables. Data source: Thomson Reuters Asset4 and Datastream.
58
59 b- Regression results and discussion
60
61 Table 4 shows the estimation results of Equation (1) which can address our hypotheses
62
63
64
65
 1 relating to the impact of board composition, Activity and Compensation on ESG
2
3 performance of a sample of 36.764 observations from 60 countries. Hypothesis 1 predicts
4
5 that a board size has a positive effect on a firm’s ESG performance. In our Model (Table 4),
6 BOARDS is significant and positively related to ESG performance for the full set of sample
7
8 and for all the different geographic area. When interactions are involved, the final sign of the
9
10 effect of a predictor is immediately readable from an estimation table. Indeed, the
11
12 coefficients related to the BOARDS present significant effects an increasing board size
13
14 exerting a positive effect on ESG performance this result is in line with the studies of
15
16 (Baraibar-Diez, & Odriozola, 2019; Harjoto, & Wang, 2020; Albitar et al., 2020). It is more
17 likely that larger boards are served by directors with different skills and attitudes, including
18
19 directors characterized by a strong propensity towards a culture of sustainability. Therefore,
20
21 this result does corroborate Hypothesis 1.
22
23 Hypothesis 2 predicts a relationship between independent number of meetings board and
24
25 ESG performance, even though the sign is certain. In other terms, according to existing
26
27 literature, the number of meetings positively affects the ESG performance. Our results show
28
29 a positive relationship: the coefficient related to BINDEP is positive and significant in all
30
31 geographic areas. This result is in line with the studies of (Qa’dan, & Suwaidan, (2019);
32
33
Arayssi et al., 2020; Shahbaz et al., 2020; Zhang et al., 2020; Harjoto, & Wang, 2020; García
34 Martín, & Herrero, 2020) It is likely that an excessive number of meetings of board of
35
36 directors act as improving components increasing the firm’s ESG performance. Therefore,
37
38 this result does corroborate Hypothesis 2.
39
40 Hypothesis 3 predicts a positive relationship between gender diversity and ESG
41
42 performance. In this case, the hypothesis seems to be confirmed. In all Models presented in
43
44 the (Table 4), GENDERD is significant and positively related to ESG SCORE. Hence,
45
46 consistent with correlation results (see Table 4), the econometric model indicates that the
47
48 high shares of female in the board are associated with better sustainability performance. This
49
50
positive effect is broadly consistent with the findings of (Birindelli et al., 2019; Furlotti et al.,
51 2019; Ajaz et al., 2020; Peng, 2020). It is more likely that higher share of gender diversity
52
53 are served by female with different skills and attitudes, including directors characterized by a
54
55 strong propensity towards a culture of sustainability. Therefore, this result does corroborate
56
57 Hypothesis 3.
58
59 According the prediction of our Hypothesis 4, which predicts a positive relationship between
60
61 the executive compensation and the extent of sustainability performance, the findings of our
62
63 regression results shows a positive and significant coefficient for the variable
64
65
 1 SCINCENTIVES. The hypothesis 4 is verified very strongly (Oh, et al., 2016) ; Velte, 2016 ;
2
3 Birindelli, et al., 2018 ; Qian and Schaltegger, 2018 Birindelli, et al., 2018. Baraibar‐ Diez et
4
5 al., 2019; Baraibar‐ Diez et al., 2019; Zhang, et al., 2020). We argue, therefore, that in the
6 presence of a sustainable compensation incentive, the board of directors and the
7
8 compensation committee of the board might be in a better position to evaluate the carbon
9
10 risks of a firm to design a more effective exacutive compensation scheme, which may
11
12 enhance corporate ESG performance. Therefore, any symbolic sustainability incentives
13
14 compensation, without requiring explicit guidelines and mandatory emission reduction
15
16 targets, might enhance process-oriented ESG performance.
17
18 Finally, Hypothesis 5 is verified very strongly: the establishment of a CSR committee seems
19
20 to positively impact a firm’s ESG performance (see Table 4). According to stakeholder
21
22 theory, this result confirms that a CSR committee helps banks build credibility for
23 sustainability issues and gain legitimacy of all stakeholders. This occurs because the
24
25 members of such committees have the experience, skills and knowledge specialized in CSR
26
27 issues. Regarding this variable (see Table 4), in line with several studies, it is interesting to
28
29 point out that it have a positive and significant impact on ESG performance. These findings
30
31 show that better sustainability performance is particularly achieved by larger and more
32
33
profitable firms (Qa’dan, & Suwaidan, 2019; Yuan, et al., 2019; Baraibar-Diez, & Odriozola,
34 2019; Castellanos, & George, 2020; Alessandrini, & Jondeau, 2020; Shahbaz, et al., 2020;
35
36 Zhang, et al., 2020). Moreover, providing this information, the frim demonstrates
37
38 compliance with higher corporate governance principles for firms, which urge these financial
39
40 intermediaries to assure their boards are served by individuals with a wide range of
41
42 knowledge, experience and variety of backgrounds to promote diversity of views, higher-
43
44
quality debate and to avoid a conflict of interests.
45
46 Our sample covers firms belonging to five different regions. For this reason, we conduct a
47
48 test of hypotheses for a sub-sample of firms from continent separately each to other to
49
50
ascertain our empirical findings and to ensure that the relationship between board pf
51 directors’ characteristics, sustainability incentives compensation, CSR committee and ESG
52
53 performance is not affected by the specificity of certain regions. The estimates of these
54
55 additional regressions are consistent with our main analysis. Each column of Table 4 shows
56
57 that the relationship between ESG performance and independent variable is linear and that
58
59 ESG performance is statistically positively connected with board size, board independence,
60
61
the share of board diversity; CSR committee, sustainability incentives compensation and
62 CSR committee, confirms their positive impact remains significant.
63
64
65
 1 Table 4. Results of regression models of ESG SCORE
2
3
4 Panel regression models of ESG SCORE by geographic area
5 ESGSCORE Full set
6 Africa America Asia Australia EU countries
7
8
9 37.91*** 9.10*** 25.19*** 3.43*** 21.82*** 25.20***
10 BOARDS (.7417379) (1.441503) (1.107434) (.08749) (2.702409) (.8212392)
11
12 24.35*** 5.10*** 21.57*** 8.55*** 20.24*** 25.28***
13 BINDEP (.0666698) (.1435749) (.1364692) (.038479) (.2042467) (.1248584)
14 53.79*** 2.52** 16.59*** 93.19*** 9.35*** 2.06**
15
GENDERD (.2687777) (.1548652) (.1618966) (.6098995) (.1590065) (.0199053)
16
17 21.99*** 7.90*** 14.55*** 0.35 7.06*** 12.10***
18 SCINCENTIVES (4.498195) (8.406084) (4.561186) (.2148649) (3.741659) (4.375989)
19
20 109.34*** 7.25*** 66.04*** 49.30*** 21.81*** 51.48***
21 CSRSUSTCOMM (16.5463) (11.88949) (17.05706) (11.55212) (11.77062) (14.65256)
22 Total 36764 711 13255 9469 2559 10770
23
24 F 4271.32 56.28 1503.46 3429.98 455.77 975.44
25 Prob > F 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
26
R-squared 0.4108 0.3242 0.4051 0.6850 0.5173 0.3522
27
28 Adj R-squared 0.4107 0.3184 0.4048 0.6848 0.5161 0.3519
29
This table shows the results regression for all set of a sample of 33764 observation and those by geographic
30
areas. Data source: Thomson Reuters Asset4 and Datastream. Significant coefficients are indicated by the usual
31
significance levels: ***, 1%; **, 5%; *, 10%
32
33
34 Conclusion
35
36 Based on prior literature demonstrating that boards play a key monitoring role in financial
37
38 institutions, this study investigates the relationship between board composition (size, activity,
39
40 gender diversity and compensation) and ESG performance in a large sample of 36.764
41
42
observations for 6000 listed firms for the period 2002–2017.
43
44 Main findings reveal that size, independence, gender diversity, compensation and CSR
45
46 committee are positively impacts a firm’s ESG performance for all models regression for the
47
48
whole the sample full set either for each geographic area. For this reason, we support the
49 critical perspective that emphasizes board characteristics, such as board size, share of board
50
51 independence, proportion of women in the board, executive sustainability incentives
52
53 compensation and CSR committee are very important to enhancing a firm’s ESG
54
55 performance. The empirical results of this research present a significant effect of ESG
56
57 controversies on the ESG performance. This shows that the importance of this variable on
58
59
ESG performance would be even more pronounced if the region were to implement stronger
60 corporate governance measures. Since this variable is significant in forming a good
61
62 reputation and encouraging the firm to be more involved in societal, environmental and
63
64
65
 1 governance activities and performance, firms should strive to increase their ESG score.
2
3 This study has important implications, especially for managers and regulators. From a
4
5 managerial point of view, our work suggests that managers and CEOs should pay more
6
7 attention to the board size and gender diversity, and independence of their boardrooms. Also,
8
9 to enhance ESG performance, it is important to appoint a CSR committee and ensure a high
10
11 level of sustainability incentives compensation. Since larger boards positively influence ESG
12 performance, firm managers should select both male and female directors to increase board
13
14 size. Similarly, our study suggests evidence to support the effect of sustainability incentives
15
16 compensation for all geographic areas as a strategic tool that demonstrates the firm’s strong
17
18 commitment toward ESG performance. Our study investigate the CRS committee, the ESG
19
20 score, the empirical evidence for our sample of study shows that a CSR committee is more
21
22 effective in improving a firm’s corporate social responsibility when it is characterized by a
23 larger proportion of independent directors, by a female. Furthermore, having a CSR
24
25 sustainability committee, who works with the CSR committee, could represent another
26
27 strategic tool for maximizing a firm’s sustainability opportunities.
28
29 For regulators, our results reveal the need to strengthen corporate governance principles for a
30
31 sample of firm from multinational contexts in order to focus especially on a board
32
33 composition, executive sustainability incentives and a CSR committee. However, our study
34
35 presents some limitations. Our empirical analysis relies on the assumption that ESG
36
37 performance is an effective measure of the sustainability performance for sample of study. It
38
39
would be interesting to analyze the same relationship by adopting other measures of ESG
40 performance, like the Bloomberg ESG score. To date, however, availability of data continues
41
42 to be an issue for these investigations.
43
44
45
46
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