An examination of corporate governance structure and corporate environmental performance: is there value in lower layers?

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An examination of corporate governance

structure and corporate environmental

performance: is there value in lower layers?

Master Thesis

MSc Supply Chain Management

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Abstract

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1.Introduction

In recent years, there have been increasing concerns from environmental scientists about the risk of climate change. Accordingly, there are continuous pressures for nations to take action for global warming. A recent example is the Paris Agreement which obligates countries to determine, plan and regularly report on the contribution that they undertake to mitigate global warming, with the ultimate goal to keep the increase in global average temperature to well below 2 °C (UNFCCC, 2016). To this end, the corporate world face growing demands for sustainable development from governments, NGO’s and the society.

Corporate governance (CG) is “a system by which business corporations are directed and controlled (…) and specifies the distribution of rights and responsibilities among different participants in the corporation” (OECD, 2004). It has come to the center of attention because it can integrate environmental elements as part of a firm’s strategic agenda resulting in long-term sustainability (Walls, Berrone, & Phan, 2012). Among others, corporate governance plays a pivotal role in firms’ environmental performance. Firstly, because high financial investments and long-term strategic implications are needed to initiate an environmental program (Hart and Ahuja, 1996). Consequently, it involves high risk and tremendous amounts of impact on a firm’s financial status. Secondly, the firm’s supply chain and different stakeholders are involved in this process, resulting in extensive coordination across multiple levels within the organization that only a firm’s top management can deal with (Roome, 1992). This study will delve into different corporate governance structures and their influence on firms’ environmental performance.

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link. Burke, Hoitash, & Hoitash (2019) found that the appearance of these committees is gradually increasing through the years, they are highly diversified and the commodity is to focus on two stakeholder groups. Furthermore, their study supports the mixed conflicting evidence in the associated literature i.e. the sustainability committees are effective in environmental strengths but not particularly prosperous to relevant concerns. Along with the previous, BOD’s characteristics such as independence, age, CEO duality are also a focused subject on CG literature (Finegold, Benson & Hecht, 2007).

After an extensive review of the literature, it can be seen that the dominant body of research in corporate governance - environmental performance nexus is the board of directors. Most scholars examine the BOD as the solely accountable body for the environmental performance of the firm and focus on its characteristics (e.g. de Villiers, Naiker, & van Staden, 2011; Naciti, 2019; Pucheta-Martínez & Gallego-Álvarez, 2019). This fact has also acknowledged by Lau, Lu & Liang (2016), who argue that the role of top management teams (TMT) regarding the environmental performance of a firm has been neglected to a great extent. In addition to TMT, lower managers can also have a vital role in enhancing the environmental performance of a firm because of their position, which is closer to the firm’s daily activities and procedures compared with the board of directors. Therefore, this neglection of these corporate governance bodies’ (i.e. TMT, lower managers) roles for better environmental performance is considered a gap in the literature. Additionally, related literature mostly considers environmental performance as environmental management performance, which only includes activities that are focusing on disclosure and reduction initiatives, instead of actual and quantifiable outcomes (Haque, 2017). Concluding, there is a gap in the literature regarding how top management teams or lower managers affect the actual environmental performance of a firm.

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the surveys of the Carbon Disclosure Project (CDP), a non-governmental organization that supports companies to disclose the environmental impact. CG structure will be measured as where is the responsibility of climate change within the company (i.e. BOD, TMT or lower manager/others) and environmental performance using actual GHG emissions from the dataset.

This paper makes several important contributions to the literature on corporate governance and environmental performance. First, the shift from the traditional CG focus on the BOD for the accountability of environmental performance will lead to new theoretical and practical implications for researchers and practitioners respectively. With the use of the appropriate theoretical lens, such as agency theory and stakeholder theory, this study will be able to explain whether it is more valuable for corporations to pass on the responsibility for environmental sustainability to lower layers of corporate governance. Second, this study will investigate the CG structure's influence on exclusively practical measures. Many studies have shown mixed results due to the multidimensional construct of corporate environmental performance (Trumpp, Endrikat, Zopf, & Guenther, 2013). Considering the emerged concerns of climate-related risks, it is crucial to have an empirical framework on the causes of actual carbon performance (Haque, 2017). Third, to the best of my knowledge, this study is among the firsts to examine the influence of the top management team on a firm’s environmental operational performance. Previous studies have focus on environmental performance in terms of implementing sustainability policies (Naranjo-Gil, 2016), triple bottom line (TBL) performance (Henry, Buyl, & Jansen, 2018), environmental information disclosure (Ma, Zhang, Yin, & Wang, 2019) and Rankins Ratings (RKS) i.e. ratings from China’s capital market that include CSR disclosure quality and CSR performance (Shahab, Ntim, Chengang, Ullah, & Fosu, 2018; Lau et al. 2016). Thus, it is safe to say that further research is appropriate for this topic.

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the findings of the analysis are elaborated, followed by the conclusions and implications of the linkage between the two variables.

2. Literature Background and Hypothesis

2.1 Corporate environmental performance and

corporate

governance

Three decades ago, there was a worldwide agreement that the global temperature was rising (climate change) and this caused by human activities such as greenhouse gas emissions (GHG), i.e. carbon dioxide, methane, nitrous oxide and fluorinated gases (EPA, 2019). The great need for GHG emissions to be controlled led to a formal policy agreement in Kyoto in 1997 known as the “Kyoto protocol”. The countries that have ratified the protocol are required to implement the necessary regulations and control to minimize GHG emission as well as enhance energy efficiency. As a result, firms around the world must comply with regulations and adopt various carbon-related strategies (Haque & Ntim, 2018). Nevertheless, GHG emissions are not the only criteria for environmental performance that firms must take into account. The most comprehensive and widely applicable framework is the global reporting initiative GRI (Caniato, Caridi, Crippa, & Moretto, 2012); which includes performance indicators such as materials use and recycling, energy consumption, water use, size of land owned in biodiversity-rich habitats area and more (GRI, 2016).

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dimensions of the construct are acknowledged, this study will examine corporate environmental performance with the meaning of operational performance, as the measure is GHG emissions. Hence, the definition of Clemens and Bakstran (2010) “output of a firm’s management of the environmental impacts” seems more appropriate to the scope of the study. As stated before, the present research paper aims to elucidate the effect of corporate governance on corporate environmental performance.

The concept of corporate governance is very broad. This is caused partly due to the different national legal systems that firms are engaged with (La Porta, Lopez-de-Silanes, & Shleifer, 1999). Different forms of industrial organization and political systems, differences in cultural, moral and religious beliefs and models are also accountable for the diversities of corporate governance (Zalewska, 2014). Carlock & Florent-Treacy’s (2002) has defined corporate governance as ‘‘an umbrella term that defines the processes, relationships, and interactions that develop between a firm’s senior management, its board of directors, and its shareholders (…) corporate governance is a joint decision-making process about the business’s strategy and policies.’’ A similar definition was provided by ASX (2010) which concludes that corporate governance encompasses the mechanisms by which companies, and those in control, are held to account and influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimized.

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It is highly noticeable in the literature that corporate governance influences firm environmental performance. Claessens and Yurtoglu (2013) concluded that good corporate governance can lead to a firm’s better access to finance, lower cost of capital, better performance and better treatment of all stakeholders. Hussain, Rigoni, & Orij, (2018) found that various characteristics of CG (e.g. higher proportion of independent directors, CEO duality) play an important role in enhancing a firm’s sustainability performance. Also, research has shown that sometimes GC and more specifically the board of directors, even at expense of shareholders, enhance the environmental performance by prioritizing legislators and community pressure groups (Walls, et al, 2012). Additionally, Naciti (2019) resulted that diversity on the board and separation between chair and CEO roles show higher sustainability performance. Moreover, Elsayih, Tang & Lan (2018), in their study concluded that CG practices that emphasize on board diversity and independence seem encouraging an environment friendly decision-making and increases environmental performance by means of carbon reduction initiatives.

According to the previous, firms must pursue good corporate governance in order to improve their strategy and achieve better environmental performance. As stated by Aras & Crowther (2008), there are four principals in order to do so; transparency, accountability, responsibility and fairness. These principles are highly influential on the environmental performance of companies (Fernandes, Bornia, & Nakamura, 2018). This study will focus on the accountability principle and specifically in which body of the corporate governance structure is accountable for the environmental performance of the firm. Namely, these bodies are the board of directors, the top management team and lower managers or others.

2.1.1 Board of directors

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to managers’ acts (Mizruchi,1983). Fama and Jensen (1983) see the board of directors as an information system that the owners of large corporations could use to monitor the opportunism of the top management team. Moreover, the BOD improves the legitimacy of the company, bears up the rational use of resources and it is responsible for disclosure strategies and issuing corporate reports (Goodstein, Gautam & Boeker,1994; Habbash, 2016; Westphal & Zajac, 1997)

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(Pucheta-Martínez & Gallego-Álvarez, 2019). They explain that deviation is because independent directors do not play an effective role in supervising insiders. As pointed by Post et al, (2011) BODs that have a higher proportion of directors with a Western European education are more likely to attribute positively to firms’ environmental performance. Finally, Haque (2017) studied board characteristics’ correlation in both dimensions of CEP. In terms of environmental management performance, he resulted that board independence and board gender diversity have positive associations with carbon reduction initiatives. Interestingly, related to the environmental operational performancehe found that the board characteristics variable has no relationship with GHG indicating that CG has no influence in actual carbon emission. This study challenges these results.

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was that environmental actions were performed by firms to gain competitive advantage and/or repair the bad reputation of poor practices instead of actual environmental contribution.

2.1.2 Top Management Team

The definition of top management team is a vast topic for discussion in management research (Patzelt, Zu Knyphausen-Aufseß, & Nikol, 2008). Some researchers focus on top-level executives including CEO while others (e.g. Finkelstein & Hambrick, 1990; Norburn, 1989) also include directors and non-executive board members. Although, it seems odd to put top managers and board in the same team, as not only assume distinct roles but maintain competing goals and agendas (Fama, 1980). Thus, as in the seminal work of Hambrick & Mason (1984), this study will also refer to TMT as the top executives; not directors, lower-level managers, the broader workforce, or other individuals not holding a senior management office. Essentially, TMT consists of those senior managers who hold executive power passed to them by the board of directors and/or the shareholders of the firm. Also, the term “team” is referring to the group of top executives and not necessarily to a “team-like” behavior (Hambrick, 1994). An appropriate definition of TMT that was provided by Amason (1996) and used widely in the literature (e.g. Simons, Pelled, & Smith, 1999; Papadakis & Barwise, 2002; Collins and Clark, 2003) is: “Top managers involved in strategic decision making identified by the CEO”. It is crucial to investigate the top management as a group instead of e.g. the CEO alone because organizational outcomes can be better predicted (Finkelstein 1988).

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Nevertheless, little has been said about TMT characteristics on corporate environmental performance (Cong, Freedman, & Park, 2014; Rivera & Leon, 2005).

In more recent literature, Henry et al (2018) proposed that the fundamental choices made in structuring the TMT will affect its capability to understand and deal with the challenges when pursuing a triple bottom line (TBL) performance. Their findings suggested that the presence of a chief sustainability officer inside the team does not have any effect, but the TMT’s functional diversity positively associates with TBL performance. Along with those results, Kanashiro & Rivera (2019) showed that the chief sustainability officer in TMT is more likely to present lower levels of environmental performance in highly polluting industries. They argued that this might be the case because of the “instrumental roles of chief sustainability officer aimed at helping firms project a legitimacy-enhancing symbolic image of improved environmental protection and/or to show compliance to with enhanced environmental regulatory pressures” instead of actually use their position and capabilities to promote environmental sustainability. Also, Ma, Zhang, Yin, & Wang (2019) argued that top managers’ educational background influences on firm’s environmental information disclosure. Executives with MBA make better environmental decisions than managers who have a legal educational background, who appear to delay the risk instead of coping with it. Finally, the involvement of females in TMT is vital for the effective implementation of activities that can enhance environmental performance (Shahab et al, 2018).

2.1.3 Lower managers

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Early literature has been focused on the role of low managers in strategy implementation. Burgelman (1983) states that they formulate new strategic initiatives and secure the link between strategic plans and intentions with daily operations. Also, low-level managers’ operations knowledge is highlighted by Floyd and Lane (2000), who argue that their role is to communicate and transmit information from the operational level to top management level and thus helping creating valuable ideas.

The position of this management group in corporate governance structure plays an important role in the environmental outcomes. Wheeler, Fabig, and Boele (2002) argue that considering a firm’s plans in becoming more sustainable, there can be a large gap between intentions of top management and decisions made at the operational level. For example, research shows that managers tend to not willingly make environmentally beneficial changes that they will think to harm the operational performance or the well-being of the employees (Pagell & Gobeli, 2009). On the other hand, Posch (2017) sees the lower manager’s important role of “linking pins” as a mean for better implementation of environmental sustainability strategies.

2.2 Hypothesis

Stakeholder theory appears to provide a better theoretical framework in explaining the effects of BOD on a firm’s environmental performance. According to this theory, there are many groups in the society, besides owners and employees, to whom the organization is responsible (Hung, 1998). Customers, creditors, suppliers, governments, the general public, and the environment are some of the stakeholders of an organization (Woodward, Edward & Birkin, 1996). Some stakeholders have conflict goals to each other and firms face a multitude of stakeholder pressures that is quite challenging to manage (Kassinis & Vafeas, 2006).

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dependent on the commitment of key stakeholders, not just shareholders” (Chambers, Harvey, Mannion et al, 2013). Moreover, the extreme pressures of environmental stakeholders for climate change (van Halderen, Bhatt, Berens, Brown & van Riel, 2016) makes the adoption of a sustainable strategy towards the environment vital for the survival and prosperity of the firm (Salvioni, Gennari, & Bosetti, 2016). If a firm fails to comply with environmental standards, it will face severe consequences; either from policymakers in terms of fines or from customers/ activists in terms of negative reputation and low sales. There are various examples from corporations which totally damaged from noncompliance to environmental pressure. Indicatively, Volkswagen’s case in 2015, who intentionally installed ‘defeat devices’ to their cars in order to manipulate the emissions and led to a one-third decrease in the company’s share value (Rhodes, 2016).

Thus, given the critical role of BOD in the long-term survival of the firm I expect that BOD will acknowledge the paramount importance of environmental stakeholders and prioritize them. Thus, I anticipate better environmental outcomes compared to firms that have the responsibility for climate change in lower levels of the corporate governance structure.

For the top management teams and lower managers, I will use the concept of agency theory in order to provide the rationale for the development of the hypothesis. The agency theory is the dominant theoretical perspective applied in corporate governance studies (Shleifer & Vishny, 1997). According to Daily, Dalton, & Cannella (2003), there are two explanations for this. First, it is a simple theory which is dividing the chaotic world of corporations into two participants – shareholders and managers- who have clear and consistent interests. Second, it values the widespread notion of human beings as self-interested and generally opposite to sacrifice personal interests for the interests of others.

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authority to another (Schulze, Lubatkin, Dino, & Buchholtz, 2001). The two different parties are the principal i.e. the owners and the agents i.e. the hired professionals.

There are three main problems that may arise. First, due to the delegation of authority, there is always the risk of agents to be asked to do more than they are paid for. Then, they seek in additional compensation through no compensatory means such as shrinking (i.e. the tendency to work less when the payment is smaller) and free riding (i.e. not contributing their fair share) (Jensen & Meckling, 1976). Second, there is information asymmetry between principal and agent. So, it is possible that the agent may engage in activities that can ultimately harm the firm’s performance and correspondingly principle’s interests (Schulze et al., 2001). Third, there is a cost of techniques used to gather more information on the agent’s activities (Fama & Jenson, 1983). Also, agency costs are by Jensen & Meckling (1976) the monitoring expenditures by the principal, the bonding expenditures by the agent and the residual loss, resulting from the divergence between the agent’s decisions and those decisions which would maximize the principal’s welfare.

Given the lack of extensive prior literature about the relationship between top management teams and environmental operational performance, this part of the hypothesis will be based on the basic principles of agency theory. Hart and Ahuja (1996) showed that environmental initiatives, especially in the short term, are costly for corporations and may result in lower financial performance. There is the possibility of top management, acting as agents, to neglect the importance of environmental performance and focus more on financial performance. The reason behind this is that lower financial performance will lead to lower executive compensation as these two are typically linked (Cordeiro & Sarkis, 2008). Moreover, TMT may view environmental performance management as one of the many responsibilities assigned to them by the BOD and underestimate its priority (Cordeiro & Sarkis, 2008). Also, from an agency theory perspective, the additional responsibility of the CEP may lead TMT to the compensative mean of shrinking. Similarly, TMT may turn to the more visible economic results, avoid taking the risk of implementing environmental initiatives in order to boost their reputation in the eyes of BOD and shareholders.

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performance (Sharma, 2000). On the other hand, Nonaka’s (1994) seminal study suggests that even though lower managers are closer to the firm’s particular technologies or products, they find it extremely difficult to cope with highly specific information. Thus, it is easier for them to pursue more short-term achievements and neglect the importance of environmental sustainability. That is why I expect better environmental outcomes in firms that the responsibility lies with TMT instead of on lower managers.

According to the previous, the following hypothesis1_{is formulated:}

H: The higher the responsibility of climate change is in the corporate

governance structure, the better the firm’s environmental performance

.

3. Research Design

3.1 Research method and data collection

The focus of this study is the influence of corporate governance structure on the firm’s environmental performance. In accordance with what stated in the literature background, this relationship has been proved by a plethora of researchers in the past. Thus, confirmatory survey research will be used because the knowledge of a phenomenon has been expressed in a theoretical form using well-defined concepts and propositions (Karlsson 2016).

I will use data from companies that have answered the questionnaire of the Carbon Disclosure Project (CDP) about climate change. CDP is a non-profit organization that motivates companies and cities to disclose their environmental impact with the ultimate aim to make environmental reporting a business norm and lead to a sustainable economy (CDP, 2019). CDP’s request to organizations includes information on their governance,

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strategy, targets and initiatives, risks and opportunities, methodology and data about specific matters (Ben-Amar & Chelli, 2018). Companies are asked to provide information in an online response system provided by CDP through its website. Despite the voluntary nature of the CDP’s annual survey, both firms and investors and the depth of information seem to have all grown substantially over time (Dahlmann, Branicki, & Brammer, 2017). For instance, in 2018 the latest year that data was available, about 7000 companies have disclosed data on the climate change context (CDP, 2019). As a result, CDP has an increasing attention by many scholars (e.g. Brouwers, Schoubben, & Van Hulle, 2018; Kolk and Pinkse, 2005; Kouloukoui et al., 2019; Tidy, Wang, & Hall, 2015) considering it as the most valuable and comprehensive base when it comes to gathering data on climate management. In these regards, the use of CDP’s corporate climate change data is justified.

Data for the environmental performance will be retrieved from the CDP of 2017 while for corporate governance structure from the year 2015. Given that the environmental performance of a firm is not an easy task to change and requires a lot of time, this two-year gap ensures that GC structure is possible to have an impact on companies’ GHG emissions. So, the initial sample will be firms that have participated in the CDP of both the years 2015 and 2017. Ultimately, the final sample is presented in section 3.3

In order to collect data, I followed the two following steps:

Step 1: I first accessed the CDP of 2017 that was sent to approximately 7000 firms in order to disclose their climate change data (CDP, 2017). There were 2883 companies that have submitted the questionnaire. 1543 of them have actually answered both the sections that are being concerned for this study i.e. the sections of governance and emissions.

Step 2: Because of the aforementioned two-year gap, these 1543 companies must also have completed the CDP of 2015 or at least the two specific sections. After a

matching sequence, the results showed that the initial sample reduced to 674 companies.

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For that reason, the databases of Thomson Reuters Eikon, Fortune 500 (for US firms) and Fortune 500 global (for non-US companies) were used. Thomson Reuters Eikon offers a comprehensive platform for establishing customizable benchmarks for the assessment of corporate performance (Garcia, Mendes-Da-Silva, & Orsato, 2017). Overall is a great and recognized tool to retrieve market data, news, and economic information for listed

companies. Fortune 500 is an annual list compiled and published by Fortune magazine that ranks 500 of the largest US and global corporations by total revenue for their respective fiscal years (Fortune, 2017). Both those databases are reliable and have used by a plethora of authors in scientific research and among users of corporate information (Cheng, Ioannou, Serafeim, 2014).

3.2 Measurement

3.2.1 Independent variable

As mentioned before, the corporate governance structure will be measured as where is the responsibility for climate change within the company. This is corresponding with the question CC1.1 of the governance section of the 2015 CDP which is the following: “Where is the highest level of direct responsibility for climate change within your organization?” The possible answers that the recipient of the survey can provide are a) “Board or individual/sub-set of the Board or other committee appointed by the Board”, b) “Senior Manager/Officer” or, c) “Other Manager/Officer” which are consisted with the aforementioned bodies of BOD, TMT or lower managers/others respectively. Thus, the independent variable will be a nominal variable with three categories “BOD”, “TMT” and “LM” referring to answers a, b and c respectively.

3.2.2 Dependent variable

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it is very important to have an empirical framework that is based on exclusively practical measures. Also, GHG is a consistent and general measure for environmental performance across all different countries, companies and time (Hassan & Romilly, 2018). Greenhouse gas emissions are by many the greatest existential threat to our planet and certainly directly related to measuring the environmental performance of a firm (Dragomir, 2012). As a result, this measure has been used widely in the literature (e.g. Broadstock, Collins, Hunt & Vergos, 2017; Giannarakis, Konteos, Sariannidis & Chaitidis, 2017; Prado-Lorenzo & Garcia-Sanchez, (2010).

However, in this study, further modification is needed. Because it is expected that that larger firms emit on larger scales than smaller ones, it is unequal to compare their emissions in absolute terms. Thus, following prior studies (Busch & Hoffmann, 2011; Hoffmann & Busch, 2008; Trumpp & Guenther,2017), the dependent variable will be measured as the ratio between the scope 1 GHG emissions (in tons) and firm’s revenues (in millions USD). That way the firm size can be directly taken into account when entered into the model. Higher number implies lower environmental performance and vice versa.

Scope 1 emissions come directly from the activities that are controlled or owned by the reporting company (e.g. on-site production processes) (Dahlmann et al., 2017a) and were selected because of their directness to the firm’s procedures. Additionally, in order to increase the validity of the measurement, the percentage difference of the scope 1 emissions (through the years 2015-2017) will be counted. It will be calculated as the difference of emissions’ years 2017-2015 divided by 2015’s emissions. This way a conclusion can be derived for the improvement of the environmental performance of the company. This operationalization is consistent with UNEP’s (2015) scientific assessment of the needfor global GHG emissions to peak and decline, rather than simply to grow less strongly (Dahlmann, Branicki & Brammer,2019).

3.2.3 Control variables

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corporate governance structure on corporate environmental performance. This is because these variables have already been identified as potential explanatory factors of corporate environmental performance in the literature.

Firstly, it is widely discussed in the literature that financial performance affects a firm’s environmental performance (Connelly, Tihanyi, Certo & Hitt, 2010; Hart & Ahuja,1996; Stanwick & Stanwick, 1998). As a proxy for financial performance, accounting-based measures will be used (as in e.g. Ben-Amar & Chelli, 2018; García Martín & Herrero, 2019); revenues and total assets. These measures are in millions of USD and were derived from the aforementioned databases (paragraph 3.1) for the fiscal year of 2017. Additionally, following previous authors (Kanashiro & Rivera, 2019; Naciti, 2019), I included firm size as a control variable, as it may be related to firms’ environmental performance. The firm’s size will be measured by thenumber of employees.

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Low Risk Sector High Risk Sector

Banks, Diverse Financials, Insurance Aerospace & Defense Consumer Durables, Household and Personal

Products Automobiles & Components

Containers & Packaging Chemicals

Food & Beverage Processing Construction & Engineering

Healthcare Providers & Services, and Healthcare Technology

Electric Utilities & Independent Power Producers & Energy Traders (including fossil, alternative and nuclear energy)

Hotels, Restaurants & Leisure, and Tourism

Services Electrical Equipment and Machinery

Pharmaceuticals, Biotechnology & Life

Sciences Mining - Iron, Aluminum, Other Metals

Professional Services Solid Waste Management Utilities Semiconductors & Semiconductors Equipment Technology Hardware & Equipment Software & Services

Trading Companies & Distributors and Commercial Services & Supplies Telecommunication Services Transportation

Textiles, Apparel, Footwear and Luxury Goods Table 1: High and low-risk industries

3.3 Data Selection

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After the initial sample was formulated, a further reduction was made for two reasons. First, either because of the absence of financial information or from data that were incomplete/invalid. Second, it can be seen that there is a big difference between LM and the other two categories. It is the aim of the study to provide a more equal representative sample of each of the three categories in order to avoid possible sample bias2. Thus, the number of observations for the BOD reduced greatly while the observations for the TMT reduced slightly. The number of companies that identified lower managers as responsible for climate change actions within the company remained the same. The observations that were deleted were chosen at random. Ultimately, the final sample is consisting of 219 companies which 103 of them identified BOD, 79 the TMT and 37 the LM.

2_{Similar data alteration was made in quantitative studies such as the bundling of a set of observations}

and exclusion of low representative sample (Elijido-Ten, 2017; Wang & Sueyoshi, 2018). 498 143 37 674 0 100 200 300 400 500 600 700 800

Initial Sample

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As far as the control variable of industry risk level, companies are distributed almost evenly in both categories with 114 out of 219 companies belong in industries with high environmental risk while the 105 in industries with low risk.

3.4 Data analysis and Results

For the statistical analysis of the data, IBM’s SPSS Statistics package 25 was used, executing linear regressions. Before doing the analysis, data coding was needed. The independent variable was a nominal variable with 3 categories thus, in order to avoid multicollinearity, the type k-1 was used. That means that 2 variables entered the model each time. For the control variables, total assets and revenues were log-transformed.This happened in order to prevent skewed data to alter the results (Delmas, Nairn-Birch, & Lim, 2015). In the dummy variable of risk of the industry, companies in the high-risk industries will be assigned with 1 while the rest with 0.

In total, six linear regression were executed. The first included the ratio of scope 1 GHG emissions and revenues as the dependent variable and the variables BOD, TMT, high risk, assets and employees. The second and the third were identical to the first one with the only exception of replacing the BOD and TMT with LM in order to compare the results of lower managers with the other two bodies of corporate governance. For the last three regressions,

103 79 37 219 0 50 100 150 200 250

Final Sample

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the same patterned applied, only this time the dependent variable was the emission difference. The results are presented below.

The result from the first regression is depicted in table 4. It appears that 8.6% of the variations in the firms’ GHG emissions are explained by the variations of the model variables (R square= 0.086). The independent variables of BOD and TMT have a significant effect on emissions with p= 0.012 and p= 0.004 respectively. Having the responsibility of sustainability in the BOD appears to produce fewer emissions per revenue, as the unstandardized B and t have negative values (B= -956.754, t= -2.522). In the same line, TMT seems to influences negatively firm’s emissions as presents negative B and t values (B= -1089.662, t = -2.926) too. Moreover, as expected, companies that belong to high-risk industries have a significant positive effect on GHG emissions (p= 0.026, B= 574.958, t= 2.239). From the rest of the control variables, total assets are presenting positive significant (to 10% level) results with B=623.012 and (p= 0.073). It can be derived that firm size and GHG emissions have a significant relationship, with larger firms (in terms of financial growth) lead to higher emissions.

Model 1 (emissions) Unstandardized B t Sig.

(Constant) 1155.136 3.388 0.001 Employees -0.002 -1.386 0.167 Assets 623.012 1.801 0.073 BOD -956.754 -2.522 0.012 TMT -1089.662 -2.926 0.004 High Risk 574.958 2.239 0.026 R square= 0.086 Table 4.

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with the opposite sign. Concluding, after the first three regressions the results show that firms who have the responsibility of climate change in their BOD or TMT tend to show positive environmental performance opposite to LM, which is found to show negative. As expected, firm size and sector play a significant role in the environmental outcome.

(Constant) 1666.03 2.34 0.020 Employees 0.00E+00 1.764 0.079 Assets -0.107 -0.545 0.587 LM 956.754 2.522 0.012 TMT -132.908 -0.445 0.657 High Risk 574.958 2.239 0.026 R square= 0.081 Table 5.

(Constant) 1201.03 1.890 0.084 Employees 0.00E+00 1.764 0.079 Assets -0.107 -0.545 0.587 LM 1089.66 2.926 0.004 BOD 132.908 0.445 0.657 High Risk 574.958 2.239 0.026 R square= 0.081 Table 6.

As stated before, the percentage difference of the scope 1 emissions (through the years 2015-2017) is the dependent variable in the second set of linear regressions. In this model, only BOD and TMT are presenting significant results (see table 6 below). Specifically, BOD (B= -0.683, t= -2.921, p= 0.004) has a negative relationship with GHG emissions difference. This means that firms that have the responsibility of sustainability in BOD reduced their emission in the two-year lag3_{. Also, same as with the direct emissions, TMT}

depicted positive results (B= -0.780, t= -3.430, p= 0.001) in terms of environmental performance. These results are in line with that of model 1 and will be discussed further in

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the next section. Interestingly, no other variable showed significance with the dependent variable.

Model 4 (Difference) Unstandardized B t Sig.

(Constant) 1.033 4.119 0.000 Employees 0.00E+00 -0.264 0.792 Revenues 0.033 0.137 0.891 Assets -0.002 -0.011 0.991 BOD -0.683 -2.921 0.004 TMT -0.780 -3.430 0.001 High Risk 0.022 0.138 0.890 R square= 0.077 Table 7.

In the last two regressions (table 8,9), the category of LM appears to have a positive significant relationship (B= 0.683, t= 2.921, p= 0.001) and (B= 0.780, t= 3.430, p= 0.004) meaning that it associates with increasing GHG emissions difference through the years 2015-2017. Consequently, it is placed as the worst option among the three to have the responsibility of climate change within the company. About BOD and TMT, the same pattern appeared as in the previous dependent variable: when regressed separately no significance was found.

Model 5 (Difference) Unstandardized B t Sig.

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Model 6(Difference) Unstandardized B t Sig.

(Constant) 0.254 1.054 0.256 Employees 0.00E+00 1.764 0.079 Revenues 0.033 0.137 0.891 Assets -0.002 -0.011 0.991 LM 0.780 3.430 0.004 BOD 0.098 0.535 0.593 High Risk 0.022 0.138 0.89 R square= 0.077 Table 9.

4. Discussion and Conclusions

In this study, I explored the relationship between corporate governance structure and corporate environmental performance. More specifically, I adopted survey-based research to provide insights on which domain of CG is better to have the accountability of climate change actions within the company in order to have better environmental performance. The results of the study give valuable answers to the proposed research question and contribute to the theory of the CG-CEP link. To start with, one of the motives for this study was that the majority of scholars were focused on the board of directors as the domain of research in the CG-CEP system. This study takes steps to a new path of research, proposing that top management is worth-exploring too. In fact, opposed to the hypothesis of the study4_{, results}

show that the top management is an equally suitable layer of CG structure, as the board of directors, to have the accountability of sustainability within the company.

Due to the lack of prior literature to the relationship of TMT-CEP5, the hypothesis was based on the concept of agency theory. TMT acting as agents were expected to put their

4_{It has been hypothesized that responsibility on BOD will lead to better environmental performance than}

TMT.

5_{As stated in the theory section, this study examines CEP with the meaning of environmental operational}

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personal interest above firm’s (i.e. owners’) and thus, devote the high importance of sustainability in favor of more short-termed achievements. As financial performance and executive compensation are typically linked (Cordeiro & Sarkis, 2008) they might have put their effort to increase the earnings of the firm, putting aside more expensive long-term sustainability policies. Clearly, the findings are indicating that this theory is not proven in this study. The top management, besides contributing positively to a firm’s environmental performance, is actually causing almost the same (or even slightly better) environmental outcome as when the board of directors is in charged.

To provide an explanation of why this theory is not predicting the current situation, we have to look into the fundamental values of our time. When agency theory was developed in the ’70s (Jensen & Meckling, 1976), values and norms were highly different; the term sustainability was even not existed. In contrast, due to the rapidly emerging climate change, being sustainable today is one of the top priorities among the whole corporate world. Every organization must comply with numerous environmental standards established by different stakeholders such as governments, international policymakers and even by consumers and business partners. Fail to do so, the future in the business is at stake. Theoretical evidence shows that due to the constant increase of pressure, top management teams have no other option than to engage in wider corporate matters such as the sustainability performance of the firm (Eesley, Decelles & Lenox, 2016; Goranova & Ryan, 2013; Walls, Berrone, & Phan, 2012).

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Thus, opportunistic behavior (a key concept of agency theory) for the top management against the firm’s environmental performance is highly unlikely.

Moreover, the results of the study show that when the board of directors is responsible for the sustainability matters within the company, positive environmental outcomes are expected. In both, emissions of the year 2017 and the percentage difference of the two-year lag, BOD’s coefficients are associated with lower GHG emissions. As stakeholder theory postulates, a company’s real success lies in satisfying all its stakeholders and not just its shareholders (Freeman, 1984). Given the crucial importance of environmental sustainability in our days, it is crucial for the survival of the firm to satisfy the environmental stakeholders such as governments and policymakers. The BOD, as the head decision-maker of the firm and the most upper body of governance, was expected to have acknowledged the importance of such stakeholders and prioritize it (Cordeiro & Sarkis, 2008). Indeed, the findings confirm this argument.

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Companies that have the responsibility of sustainability to lower managers are linked with negative environmental performance. This part of the hypothesis is accepted, as LM presents the worst environmental outcomes among all categories. Since the environmental performance is typically included in the firm’s strategic planning, lower managers can just follow the directions of upper management in each individual department. Their position in the governance structure makes them unsuitable for the accountability of the whole firm’s sustainability matters because this includes coordination across departments and information sharing. In addition, related literature shows that top-management commitment to environmental sustainability is indispensable for success (EPA, 2011; Higgins, 1995). Thus, top management’s passing on the responsibility of sustainability to lower managers can be interpreted as a sign of neglection of the importance of sustainability within the company. And even if this is not the case (i.e. the company values sustainability), previous research has shown that even though top management acknowledges the importance of sustainable production, lower managers do not share the same belief (Pagell & Gobeli, 2009). A possible explanation can be that the changes that have to be made are opposed to traditional operational outcomes such as cost, productivity and employee satisfaction (Pagell & Gobeli, 2009) and thus managers are unwilling to do the tradeoff. Lastly, the aforementioned result can also be explained by the scope of agency theory. Burden with the responsibility of climate change, the managers may compensate themselves with the mean of shrinking (Jensen & Meckling, 1976) and try to avoid the extra workload.

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managerial opportunism (taking advantage those resources) can have a negative impact on environmental performance (Posner and Schmidt, 1992).

4.1 Theoretical and managerial implications

The majority of previous studies on corporate governance and environmental performance link were merely focused on the composition of the board of directors (Lau et al, 2016; Shahab et al, 2018). This study contributes to the literature by exploring the effect of TMT, when in charge, to the firm’s environmental performance. The findings show that the persistence of researchers in examining mainly the board of directors was hiding valuable points, as other layers of corporate governance have an important effect on environmental sustainability. Additionally, this study adds to the relatively small percentage of the related literature that measures corporate environmental performance with practical and quantitative-measured outcomes. The majority of prior literature measured corporate environmental performance with measures that are affiliated with management practices such as disclosure and initiatives (Trumpp et al, 2013). Due to the urgent state of climate change, it is crucial to benchmark performance with outcomes that are directly connected to pollution (Haque, 2017).

Another important contribution that can be derived from this study is concerning agency theory. Due to the major importance of sustainability in our days, one might think again when trying to explain poor environmental performance because of management’s opportunistic behavior. It is highly unlikely for top managers to undermine the firm’s sustainability strategy and act at expense of it because severe consequences will occur in their future in business. Future researchers may apply different theoretical lenses, such as upper echelons theory or stewardship theory, as they may be more representative.

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would be cooperation between those two domains with top management as responsible and in control of environmental practices and board with the role of review.

4.2 Limitations and future research

Although my findings are important, there are a number of limitations that need to be acknowledged. First, the dependent variable is based on the GHG emissions used as a proxy of corporate environmental performance. Although it is considered a valid and clear-cut operational measure, the findings of this study cannot be extrapolated since CEP is a two-dimensional variable that includes environmental management performance. That means that improving a specific facet (e.g., reducing a firm’s GHG emissions) does not automatically mean an enhancement of CEP in general. Nevertheless, there is not an agreement among researchers on adopting a standardized measure for corporate environmental performance. Second, even though CDP is well accepted and used in various studies, its voluntary nature makes the data collection more demanding; a percentage of the acquired data was deficient and thus inappropriate for use. That was probably due to an oversight during the process of filling the questionnaire. Moreover, taken into account the timeline and the resources of the project, some financial data were impossible to be reached. Consequently, the used sample was smaller than was planned.

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An examination of corporate governance structure and corporate environmental performance: is there value in lower layers?