Past unethical risk behavior of firm leaders predicts low environmental performance

December 19, 2012 | 2 min read

Lars Hassel (Åbo Akademi University Finland and Umeå University Sweden), Juha-Pekka Kallunki (University of Oulu Finland), and Henrik Nilsson (Stockholm School of Economics Sweden) write: “We hypothesize that when a proportion of board members with past unethical records grows and/or when the company has a convicted CEO, the environmental performance and the quality of environmental reporting of the firm will be lower due to the board becoming more short-term oriented, having more limited risk awareness, having inadequate monitoring and control mechanisms and, ultimately, having a lower strategic decision-making capability in general,”says the team of authors in the introduction to their working paper.

Sampled from Swedish listed companies

Their paper,“Implications of past unethical risk behaviour of board members and CEOs on the environmental performance and reporting quality of firms”, was produced as part of the SIRP project (Sustainable Investment Research Platform) which is funded by MISTRA, the Swedish Foundation for Strategic Environmental Research. The team’s research was drawn from a sample of companies listed on the NASDAQ OMX stock market index SIX 300, for which the Swedish GES Investment Services provides ESG performance and reporting ratings. The sample includedapproximately 270 companies per year, listed between 2005 – 2008, with the total adjusted number of firm year observations at 752 observations.The researchers further examined the criminal activities and/or convictions of directors and CEOs of Swedish companies, based on data provided by the Swedish National Council for Crime Prevention; and examined the stockholdings and ‘other wealth’ of such directors and senior executives, using the database Euroclear Sweden and information from the Swedish tax authorities.

Three research streams

This research contributes to the literature in three existing streams:(1) environmental and financial performance of firms^[1]; (2) board composition and environmental performance^[2]; and (3)linking personal characteristics to environmental performance, including personal traits related to criminal records, non-payment records and bankruptcy activities.While criminal convictions can be used as a proxy for such negative personality traits as excessive risk-taking behavior, dishonesty, and manipulation of information or records for personal gain, research presented in this paper reinforces the results of prior studies regarding a positive approach to ESG in boards and firms.

Boards which promote a proactive environmental strategy may improve their firm’s financial performance either directly, through more efficient utilization of human and material resources; and/or indirectly, through the positive perceptions of the company in the eyes of consumers and other external parties.Firms in which the Board is composed of younger, better –educated members may be more positively-rated in terms of ESG concerns; and firms with a board composed of three or more female directors may also receive higher ratings, adding to the literature around the gender composition of firms vis-à-vis environmental performance.

“This paper advances previous research in several ways,” say Hassel, Kallunki and Nilsson. “It is the first paper to consider the character of board members by constructing an ethical compass of the board based on past fraudulent behavior. In this way, the paper extends previous frameworks, namely the resource-based view and the more traditional research on board structure, to explain environmental performance and reporting quality.”

References

Kacperczyk, Marcin T., and Harrison G. Hong. “The Price of Sin: The Effects of Social Norms on Markets.”
Krüger, P. “Corporate social responsibility and the board of directors.” Working paper: Toulouse School of Economics, May, 2010.

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Paper: Implications of past unethical risk behaviour of board members and CEOs
Research Paper