Bridge over ocean
20 September 2018 CFA Institute Journal Review

Corporate Governance and Sustainability Performance: Analysis of Triple Bottom Line Performance (Digest Summary)

  1. Thomas M. Arnold, CFA

Particular features of corporate governance are tested to determine the impact on three dimensions of sustainability: economic, environmental, and social (i.e., the triple bottom line).

How Is This Research Useful to Practitioners?

Unlike previous researchers who generally have considered only one aspect of corporate governance, the authors consider six different corporate governance constructs on sustainability as measured by economic performance, environmental issues, and social responsible investment preferences. Generally, each corporate governance construct tends to affect only a particular sustainability dimension and not economic performance.

Consequently, a practitioner can consider each of the six corporate governance constructs when considering investment decisions for clients who have particular socially responsible investment preferences as a significant part of their investment strategy.

How Did the Authors Conduct This Research?

Using data from 152 firms (including 100 US firms) from 2007 to 2011, the authors consider the impact of particular corporate governance structures (i.e., board size, board independence, CEO duality, the presence of women on the board, frequency of board meetings, and the existence of a sustainability committee) on triple bottom line performance dimensions: economic, environmental, and social.

Using regression analysis, they find that none of the corporate governance structures significantly affects the economic sustainability dimension of the triple bottom line. A more independent board and a CEO not at the head of the board improve the environmental sustainability dimension. (Within the analysis, board independence is found to be negatively affected when a CEO is also the head of the board.) A more independent board, the presence of women on the board, more frequent board meetings, and the existence of a sustainability committee improve the social sustainability dimension.

Abstractor’s Viewpoint

I find it interesting that the corporate governance mechanisms are not particularly integrated when considering the triple bottom line. In a way, it makes it easy to consider whether a firm is actively addressing given socially responsible investment preferences by determining whether the firm has particular governance constructs. The E(nvironment) and S(ocial) performance in ESG may have more to do with the culture of the company and also of the board than the specific independent variables analyzed. Alternatively, it seems inefficient that so many constructs are needed to address these issues.

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