Are co‐opted boards socially responsible?

Abstract

Abstract Corporate resolution on environmental, social, and governance (ESG) communication informs firms' environmental commitment, a growing determinant of corporate risk profile perceived by the market. This study examines ESG reporting in the presence of board co‐option, a phenomenon that paralyzes the dependency of the board of directors and impairs corporate transparency. Using data from 643 US‐listed firms from 2007 to 2018, we investigate the relationship between board co‐option and ESG disclosure practices and show that firms with a higher proportion of co‐opted directors on board disclose less ESG information, though this relationship diminishes if firms are strong ESG reporters. Further analyses reveal that long‐tenure board chairs, high attendance rates at board and audit committee meetings, and independent chairs of audit committees mitigate this adverse effect. In addition, we document an increasing inverse relationship among firms located in more corrupt and Democratic‐leaning states and operating in heavy‐emitting industries. Our results support the premise that co‐opted directors insulate CEOs from ESG reporting pressure and highlight that corporate governance, environmental performance as well as state institutions play significant moderating roles in this relationship.

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