Renewable Governance: Good for the Environment?

• Published date: 01 March 2023
• Author: ALEXANDER DYCK,KARL V. LINS,LUKAS ROTH,MITCH TOWNER,HANNES F. WAGNER
• Date: 01 March 2023
• DOI: http://doi.org/10.1111/1475-679X.12462

DOI: 10.1111/1475-679X.12462

Journal of Accounting Research

Vol. 61 No. 1 March 2023

Printed in U.S.A.

Renewable Governance: Good for

the Environment?

ALEXANDER DYCK,∗KARL V. LINS,†LUKAS ROTH,‡

MITCH TOWNER,§AND HANNES F. WAGNER∗∗

Received 21 December 2020; accepted 29 September 2022

ABSTRACT

We conjecture that board renewal mechanisms—those substantive enough

to renew the thinking of the board—are required before investors can ad-

dress the mismatch between their preferences regarding environmental sus-

tainability and what insiders at firms are actually doing. We identify the adop-

tion of majority voting for directors and the introduction of a female direc-

tor as two corporate governance mechanisms potentially strong enough to

∗University of Toronto; †University of Utah; ‡University of Alberta; §University of Arizona;

∗∗Bocconi University

September 16, 2022

Accepted by Luzi Hail. We thank two anonymous referees and the associate editor for valu-

able comments and suggestions. We also thank Bo Becker,Douglas Cumming, Shaun Davies,

Xavier Giroud, Dirk Jenter, Adair Morse, Laura Starks, seminar participants at the Develop-

ment Bank of Japan, Hong Kong Baptist University, Temple University, University of Alberta,

University of Arizona, University of Geneva, University of Illinois at Chicago, University of Ne-

braska, University of Bern, University of Neuchatel, and participants at the 2019 American

Finance Association Meeting, 2019 International Workshop on Financial System Architecture

and Stability, 2019 Telfer Conference on Accounting and Finance, 2019 Queens Conference

on Green Finance: New Directions in Sustainable Finance Research and Policy, 2019 ECGI

and Bar Ilan University Conference on Executive Compensation and on Sustainability, 2018

Swedish House of Finance Conference on Sustainable Finance, 2018 UN PRI Academic Net-

work Conference, and 2018 University of Tennessee Smokey Mountain Finance Conference

for helpful comments and suggestions. We are grateful to the Social Sciences and Humanities

Research Council of Canada for financial support. Lukas Roth gratefully acknowledges finan-

cial support from the Winspear Endowed Roger S. Smith Senior Faculty Fellowship. None

of the authors has a conflict of interest to declare. An online appendix to this paper can be

downloaded at https://www.chicagobooth.edu/jar-online-supplements.

279

© 2022 The Authors. Journal of Accounting Research published by Wiley Periodicals LLC on behalf of The

Chookaszian Accounting Research Center at the University of Chicago Booth School of Business.

This is an open access article under the terms of the Creative Commons

Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium,

provided the original work is properly cited, the use is non-commercial and no modifications or

adaptations are made.

280 a. dyck et al.

renew a board’s thinking on sustainability.Using a sample of 3,293 firms from

41 countries, along with quasi-exogenous shocks to board renewal mecha-

nisms in Canada and France, we find that both board renewal mechanisms are

associated with significantly higher future environmental performance. Fur-

ther tests provide suggestive evidence that board renewal is more strongly as-

sociated with environmental performance in settings with better institutions

and more motivated institutional investors. These results suggest the impor-

tance of board renewal for alignment of firm policies with investor prefer-

ences around the world.

JEL codes: G15, G23, G32, M49, Q50

Keywords: environmental performance; ownership structure; sustainabil-

ity; corporate social responsibility; ESG; corporate governance

“Given the groundwork we have already laid engaging on disclosure, and

the growing investment risks surrounding sustainability, we will be increas-

ingly disposed to vote against management and board directors when com-

panies are not making sufficient progress on sustainability-related disclo-

sures and the business practices and plans underlying them.”

—Larry Fink, CEO of Blackrock, January 14, 2020

1. Introduction

Institutional investors are increasingly concerned about environmental sus-

tainability and a lack of action by some firms to address it. In the insti-

tutional investor survey of Krueger, Sautner, and Starks [2020], investors

state that environmental risks have financial implications for their portfo-

lio firms and that these risks have begun to materialize. These investors also

state that engagement is important to address these risks, and more so than

divestment. This gap between the thinking of investors and boards is fur-

ther highlighted in a KPMG survey of board members and executives from

41 countries, which finds that although major investors continue to empha-

size the link between Environmental, Social, and Governance (ESG) issues

and long-term firm performance, less than half of those surveyed believed

that a focus on ESG issues improves company performance, and only 11%

said their board oversight of ESG-related risks and opportunities was robust

(KPMG [2018], p. 2).

A typical investor approach to improve sustainability is to request im-

provements in environmental performance directly and/or improvements

in environmental disclosures (see Christensen, Hail, and Leuz [2021] for a

comprehensive literature review). However, both the quotation cited above

by the world’s largest investor and the extensive international corporate

governance literature show that such an approach may not be enough. Al-

though better information allows outsiders to be more focused in the spe-

cific actions they demand, investors need effective governance mechanisms

before boards will act on their requests.

renewable governance 281

We conjecture that board renewal mechanisms—those substantive

enough to renew the thinking of the board—are required before investors

can address the mismatch between their preferences regarding sustainabil-

ity and what insiders at firms are actually doing. Replacing existing board

members with new board members that reflect the mindset of a firm’s

investors is an integral component of activist campaigns (e.g., Brav et al.

[2008], Becht et al. [2017]). Also, as noted by Bebchuk and Hamdani

[2017], investor-friendly changes to the voting process force existing board

members to pay greater attention to investors’ preferences, as investors

can more easily vote them out. In these papers, the demanded governance

changes are driven by general investor desires to fix suboptimal firm poli-

cies, rather than specific concerns about environmental performance.

In our paper, we use a sample of 3,293 firms from 41 countries to test the

hypothesis that board renewal is fundamental for improving environmental

performance. We focus on two mechanisms powerful enough to renew the

thinking of the board for which enough data are available globally and

quasi-exogenous variation is available in our sample period.

The first mechanism is the adoption of majority voting rules. With ma-

jority voting, a board member needs to receive more than 50% of the votes

cast to be elected, giving outside investors the power to prevent insiders’

candidates from joining the board.1This increase in investor power to

shape firms’ decisions is associated with improved financial performance

(e.g., Cuñat, Gine, and Guadalupe [2012], Ertimur, Ferri, and Oesch

[2015], Doidge et al. [2019]). Absent majority voting rules, plurality voting

rules generally apply. Under plurality voting, investors only vote “for” direc-

tors or “withhold” their vote. Thus, the opening quotation from Blackrock

would have little impact absent majority voting, as they and other investors

could not vote “against” directors, and if they “withhold” their votes, such

votes simply would not be counted.

Our second mechanism is a proxy for forced board renewal, coming from

regulators, investors, or societal pressures. A significant example of forced

board renewal around the world is the concerted effort to increase female

board representation. Using Norwegian data, Ahern and Dittmar [2012]

find that female board members are less likely than male board mem-

bers to be insiders (and thus more independent). Several countries im-

posed minimum quotas for female board representation during our sample

period.

To test whether board renewal mechanisms are related to future envi-

ronmental performance, we use ASSET4 ESG (now Refinitiv ESG), which

offers comprehensive coverage of firms worldwide for a long time se-

ries. The line items in ASSET4 include CO2emissions, renewable en-

ergy use, waste recycling ratios, and so forth. Given extant measurement

1The majority voting rule we study is distinct from a majority-of-minority voting standard

that has been studied within China by Chen, Ke, and Yang [2013] and within India by Li

[2021].