Renewable Governance: Good for the Environment?

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 environmental sustainability and what insiders at firms are actually doing. We identify the adoption of majority voting for directors and the introduction of a female director as two corporate governance mechanisms potentially strong enough to 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 mechanisms in Canada and France, we find that both board renewal mechanisms are associated with significantly higher future environmental performance. Further tests provide suggestive evidence that board renewal is more strongly associated with environmental performance in settings with better institutions and more motivated institutional investors. These results suggest the importance of board renewal for alignment of firm policies with investor preferences around the world.

Automated summary

We suggest that board renewal mechanisms are necessary to address the inconsistency between investor preferences for environmental sustainability and firms' actual practices. Majority voting for directors and the inclusion of a female director are two corporate governance mechanisms that can effectively influence a board's thinking on sustainability. Through our study of 3,293 firms from 41 countries and the examination of quasi-exogenous shocks in Canada and France, we find that both board renewal mechanisms are associated with significantly improved future environmental performance. Additional tests indicate that board renewal has a stronger impact on environmental performance in settings with better institutions and more motivated institutional investors. These findings emphasize the importance of board renewal in aligning firm policies with investor preferences worldwide.