Corporate governance and board of directors: The effect of a board composition on firm sustainability performance

Abstract

Abstract Sustainable Development Goals are setting a new global target on sustainability, for which corporates are expected to play an important role through sustainable practices. One of the approaches to engaging corporate to sustainable practices focuses on the board composition. The literature shows that the composition of board influences corporate's financial performance. However, the relationships between the composition of boards and corporate's sustainability practices are not empirically examined. This study empirically analyzes whether the composition of the Board of Directors affects firms' sustainability performance. Specifically, the analysis focuses on key corporate governance characteristics – namely board diversity, board independence and CEO duality – and seeks to assess the effect they have on social and environmental sustainability components. Hypotheses are developed based on the agency theory and stakeholder theory. Using a system generalized method of moment two-step estimator, with data from Sustainalytics and Compustat databases for 362 firms in 46 different countries, we find that firms with more diversity on the board and a separation between chair and CEO roles show higher sustainability performance. Moreover, our findings reveal that a higher number of independent directors leads to lower sustainability performance. This study contributes to the literature on corporate governance and the firm's performance by demonstrating that the composition of the board of directors affects the firm's sustainability performance.