Renewable Governance: Good for the Environment?

Abstract

We use a sample of 3,293 firms from 41 countries to test the conjecture that investors require ‘contemporary’ governance mechanisms—substantive enough to renew the thinking of the board—to correct a mismatch between investors’ desires and firms’ choices regarding environmental performance. Enhanced investor power in director elections and appointments of female directors improve environmental performance by 8% and 14%, respectively. These results generally hold even when a country’s institutions are weak. Quasi-exogenous shocks to these board renewal mechanisms support the interpretation that governance improvements drive environmental performance and suggest that the ability of investors to renew the board and replace directors is a powerful mechanism to influence corporate outcomes around the world.