Hypothesis Chapter: Corporate Governance and Environmental Performance

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¶ … Corporate Governance and Environmental Performance

In Corporate Governance literature, there is no generally accepted definition of the corporate governance concept. However, companies, organizations, investors and other users define the concept according to their perception. In addition, there exists various definitions of corporate governance, and some of the definitions present corporate governance as a system, which is core to the control and directing of a company. On the other hand, there are definitions that stress the activism of investors, presenting their significance in corporate governance. From such a view, the corporate governance refers to the relationship between the firm and shareholders. In this case, the shareholders advocate for best practices, and include the efforts of the shareholders in achieving the company's goals. Other definitions focus on observing regulations or the success of the company. Therefore, corporate governance represents all activities that represent internal regulations of the firm aiming at observing legal, shareholders, and control obligations (Lenciu, 2001).

Corporate governance is a crucial issue in practice, and companies aim to influence stakeholders, including the public and the environment positively. Most importantly, corporate concerns on the environment have become prominent in business management. Nevertheless, there is still a large gap between a company's image and the environmental performance, as evident owing to public demand for accountability and transparency. Corporate governance is an important aspect, which can strengthen investor confidence in management. Prior literatures provide empirical evidence, which states that a company's environmental performance has a positive impact on the firm's performance. In addition, several literatures suggest that equity investors are against some of the strategies from the management dealing with environmental issues. Moreover, it is apparent that may companies, through their managers, tend to engage in pro-active strategies to eliminate or reduce the rates of pollution. Nevertheless, some companies benefit after developing unique strategies related to their environmental efforts.

The topic of corporate environmental management and performance has drawn attention from a good percentage of investigators. Owing to this, some investigators have delivered substantial information on why corporate governance may have a positive relationship with environmental performance. Melnyk et al. (2003) proved that such a positive link exists when firms commit to implement environment management systems, and other authors including Kock and Santalo (2005) found contradictory results on the issue of whether environmental performance and shareholder wealth have a positive relation. In addition, some prior studies focused on the interactions that exist between corporate governance and environmental issues. Some studies advocate for use of models of what incentives the management can use to sway low-level managers to take part and advocate for programs on environmental activities. Initially, most firms used the environment as a free source to deposit waste materials, but legislation attempted to eliminate this issue. On the other hand, this concept changed, and firms later started utilizing environmental management systems, which aimed at handling the environmental issue.

Background, Theory and Hypotheses

The firm's environmental practices have turned into a significant subject in the society, with a variety of stakeholders anticipating environmental accountability. As the societal expectations concerning the firm's environmental responsibilities rise, the environmental performance is becoming a field where companies can identify strategic opportunities. In addition, environmental performance is capable of reducing operating costs, progress entry to resources, and attracts consumers and retains the best employees. For instance, the study by Price Water House Coopers found out that over 40% firms felt that the "green movement" has the capacity to create market opportunities, as made apparent by the increase in customer demand for green products and services. In addition, some case studies by the World Business Council for Sustainable Development suggest that sound environmental performance can result in reduced fuel, energy, and costs of water. Therefore, limiting environmental impacts can result in reduced risk of facing legal sanctions, higher insurance costs, and substantial remediation costs.

Furthermore, another consequence of societal expectations is that there is a potential of risk in incurring environment related liabilities. Environmental calamities, such as oil spills from oil firms suggest that environmental issues can result in high costs, for instance, when companies may be required to pay clean-up costs, fines, and settlements for legal sanctions. In such cases, firms stand to lose substantial amounts of their profits. Countries continue to make laws on the issue of environment, for instance, the annual environmental protection and superfund cleanup costs for firms based in the United States have increased substantially. Owing to the connection in environmental performance and strategic advantages, sound environmental performance will be of interest to the investors. Klassen and McLaughlin (1996) found out that positive stock market returns have a connection to environmental performance awards. On the other hand, Russo and Fouts (1997) found out that there exists a positive relationship between the financial status of a company and environmental performance.

In addition, another study by Dowell, Hart and Young (2000) suggests that companies that adopt a sound environmental standard have a higher market value. In addition, companies that lead in the environmental initiatives have the capacity to gain a competitive advantage, when compared to those that do not. Nevertheless, Barnett (2007) suggests that some companies may adopt some environmental strategies not because they want to, but because some stakeholders advocate for the strategies. Although substantial prior literature suggests that, there is strategic significance of sound environmental performance; management might choose not to follow the trend. This may arise because environmental performance strategies require substantial investments, and most of them are long-term in nature. Such a characteristic is capable of making risk adverse managers to avoid undertaking such environmental initiatives. In addition, the management may be hesitant to incur expenses that may not be able to bring about immediate returns, and, therefore, opt to pursue short-term initiatives, which have the capacity to maximize their reputational and financial status.

Hypothesis Development

Board Size and Environmental Performance

Prior studies suggest that a large board will bring prior experience and knowledge, which will offer understanding and better advice to the company. In addition, a large board is likely to include professionals, from various and particular issues, for instance environmental performance. In support of this, Booth and Deli (1996) suggest that environmental uncertainty will result to large board sizes. In so doing, this composition will allow the firms to handle such environmental uncertainty because of the professionals constituting the board. Most importantly, a large board can include prestigious directors, and this is an important aspect, in relation to the resource dependent related aspect. Prior evidence shows that firms, which need advice, derive greater value from larger boards. Nevertheless, substantial prior literatures suggest that firms with a large board have low costs of debt and low variability of corporate performance, experience improved governance disclosure and low stock price vitality, better disclosure in relation to compensation practices, improved firm performance and a decreased probability of bankruptcy. In this case, it is arguable that a large board is likely to include experienced and knowledgeable directors who posses expertise when it comes to managing environmental issues. Therefore, the hypothesis derived is that there exists a positive relationship between the size of the board and environmental performance.

CEO Duality and Environmental Performance

Combining the roles of the CEO and board chairperson has the capacity to influence the CEO's undue influence over the board, which can subsequently reduce the ability of the board to monitor. In addition, CEO duality has the capacity to increase information asymmetry amid the CEO and the board. In so doing, this can be a source of agency challenges, for instance, this can undermine the efficiency of the oversight roles of the board. A typical example is that a CEO can monopolize the meetings held by the board, by choosing some agenda items (Kelton and Yang, 2008). In addition, empirical evidence suggests that CEO duality to unfavorable results for stakeholders, including excessive managerial compensation, earnings management, and adoption of poison pills, international political risk, bankruptcy, and financial misreporting. This suggests that in case a firm faces an environmental opportunity, the CEO-chairperson has the capacity to increase the possibility of the company focusing on the short-term reduction of costs, at the expense of reaching for long-term environmental opportunities. Owing to this, the hypothesis, which fits such a situation, is that there is a negative relationship between CEO duality and environmental performance.

Board Meetings and environmental performance

According to the many prior literatures provided in respect to the relationship between the board of director's attributes and the performance of the company, studies provide mixed results. This is there are positive and negative, and no relationship existing amid the attributes of the board of directors and the performance of the firm. In a study conducted by Conger (1998), the study shows that there is a positive connection between the board meeting and the performance of the firm. In another study, the authors found out that there is a negative relationship between the board meeting and the performance of the firm. On the other hand, members of the board comprise of two categories and… [END OF PREVIEW]

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