Essays in Corporate Governance and ESG

Abstract

Corporate governance plays a crucial role in shaping firms’ strategic priorities, particularly in the realm of environmental, social, and governance (ESG) responsibilities. As firms face increasing pressure from investors, regulators, and stakeholders to incorporate sustainability into their business models, the effectiveness of ESG governance mechanisms has become a critical research question. My dissertation explores this issue through two interrelated studies that examine the role of board directors’ ESG expertise (Chapter 1) and sustainability-linked executive compensation (Chapter 2) in influencing corporate ESG outcomes.Chapter 1 investigates whether the ESG-related skill sets of board directors enhance firms’ ESG performance. Based on a main dataset of S&P 1500 firms from 2009 to 2022, I analyze whether directors with ESG expertise influence corporate ESG outcomes, particularly through their role in shaping CEO compensation structures. While prior literature suggests that directors’ expertise can improve firm performance, I find no consistent evidence that directors with ESG skill sets enhance corporate ESG performance. Instead, my findings reveal a potential ESG-washing phenomenon—where firms that appoint ESG-skilled directors appear to signal commitment to sustainability but fail to translate these governance changes into meaningful ESG improvements. However, I do find that directors with ESG expertise increase the likelihood of ESG targets being incorporated into CEO compensation contracts, particularly in S&P 500 firms, suggesting that these directors influence the formalization of ESG-related incentives at the executive level. Chapter 2 extends the analysis to examine whether sustainability-linked executive compensation effectively drives improved ESG outcomes. This study focuses on Fortune 250 firms, particularly those in the oil and gas sector, and explores how firms structure sustainability goals in CEO annual incentive plans (AIPs). I find that while sustainability-linked compensation is relatively uncommon—appearing in only 8% of firms as recently as 2020—it is most prevalent in high-polluting industries such as oil and gas. My analysis reveals that sustainability-linked incentive plans only improve environmental outcomes (e.g., CO2 emissions and regulatory penalties) for firms with a history of high pollution. However, for firms without a prior record of environmental misconduct, these incentives show no significant effect on sustainability performance. This suggests that ESG-linked CEO pay may function as a corrective measure for firms with poor environmental track records, rather than a proactive tool for enhancing corporate sustainability across all firms