An Exploration Of The Associations Among Corporate Sustainability Performance, Corporate Governance, And Corporate Financial Performance

Abstract

This study examines the relationship between corporate governance and corporate sustainability performance (CSP), the relationship between corporate sustainability performance and corporate financial performance (CFP), and whether corporate governance moderates the CSP-CFP relationship. Corporate governance plays an important role in monitoring and counselling management's decision making including strategic sustainability investing. The study analyzes a sample of over 400 of the largest U.S. companies to examine corporate sustainability performance and corporate governance jointly. Four attributes of boards of directors are examined: board size, board independence, CEO duality, and female directors. The results show that all four board attributes are positively associated with CSP. Further analysis shows that firms with stronger corporate governance are more likely to have higher CSP. Both accounting-based and market-based measures of CFP are used to investigate the relationship between CSP and CFP. The results show that CSP is positively associated with CFP for both one-year lag and two-year lags of CSP. This study also investigates how corporate governance moderates the CSP-CFP relationship. The results show that corporate governance contributes additional value to firm value. The impact of lagged CSP on CFP is higher for firms with stronger corporate governance.