Busy outside directors and ESG performance

Abstract

In this paper, we analyze whether a firm’s governance structure plays a role in corporate sustainability performance. Specifically, we study the impact of busy outside directors (outside directors who serve on multiple boards) on firms’ environmental, social, and governance (ESG) performance. By doing so, we are able to test the Overcommitment and the Reputation Hypotheses. We find a positive relationship between busy outside directors and ESG performance. Busy outside directors have a positive impact on not just the total ESG score but also on individual components of ESG. The Environment Score is most affected by busy outside directors, while Governance score seems to be minimally impacted. Contrary to the theory that busy outside directors are overcommitted and detract from firm value, our results lend support to the theory that busy outside directors enhance the firm’s sustainability performance because of their involvement, experience and reputation.

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