Which governance mechanisms matter for firm pollution?

Abstract

Using U.S. EPA pollution data, we analyze which governance provisions are related to firm pollution. We find that classified boards, poison pills, limits to amend bylaws, and fair price amendments are associated with significantly greater pollution. In contrast, cumulative voting, because it allows a greater voice for minority shareholders, is associated with lower pollution. We create a pollution-based index (the P-index) based on the sum of those governance provisions positively related to pollution plus an indicator for lack of cumulative voting. The P-index has approximately twice as large an association with firm-level pollution as the E-index. Most measures of board structure or compensation have no significant relation with pollution after controlling for the P-index. An instrumental variable analysis suggests a causal relation between the P-index and pollution.