The impact of corporate governance on environmental disclosures: The role of institutional and organizational contexts

Guide(s)

Jose, P D

Department

Strategy

Area

Strategy

University

Indian Institute of Management Bangalore

Place

Bangalore

Publication Date

3-31-2024

Year Awarded

March 2024

Year Completed

March 2024

Year Registered

June 2019

Abstract

In this dissertation, I study firms' voluntary environmental disclosures and corporate governance antecedents. Corporate governance is a critical factor that fosters transparency among the organizations stakeholders but it is a complex phenomenon with multiple governance mechanisms. I specifically focus on the influence of contextual factors on corporate governance mechanisms in driving voluntary environmental disclosures and, more generally, other voluntary practices of the firm. I aim to reconcile the discrepancies in empirical evidence of corporate governance's impact on voluntary disclosures and provide novel theoretical explanations for this heterogeneity. In the three-part dissertation, I look at the informal institutional context of national culture, the organizational context of firm ownership, and their role in influencing corporate governance mechanisms like board independence and block ownership. I assess these contextual factors as three studies discussed in chapters 2, 3, and 4 of this thesis. The second chapter explores the influence of national culture on independent directors and their effectiveness in driving voluntary disclosures. Independent directors are a critical prerequisite for effective corporate governance, which prompts institutional actors, regulators, According to agency theory, greater independence improves firm monitoring and transparency. However, empirical evidence is still inconclusive, especially across different country contexts. This study investigates how informal institutions like national culture impact the relationship between board independence and voluntary environmental disclosures. I use hierarchical modeling to study such cross-country data on a longitudinal sample of 2304 firms from 40 countries. The results reveal that institutional collectivism and future orientation increase the positive effect of independence on disclosure, whereas in-group collectivism and uncertainty avoidance decrease it. Consequently, national culture emerges as a boundary condition for agency theory postulates of greater transparency with higher board independence. The findings contribute to corporate governance literature by demonstrating the contingent value of greater independence across cultural contexts in a firm's voluntary initiatives. The study informs multi-national corporations (MNCs) that they should consider the context of national culture when designing corporate governance measures for different country affiliates. This study also informs policymakers about the need to adopt governance reforms that align with the country's informal institutions. In the third chapter, I look at ownership and boards as two mechanisms complementing and substituting each other for effective corporate governance of the firms. This paper builds a theoretical understanding around the two mechanisms and proposes three levers of ownership governance through which owners work with the boards. I test these levers on institutional investors, the largest equity ownership class for the world's firms, who are also highly diversified in their investment philosophies, orientations, and horizons. I exploit the differences among the institutional investors to show how the ability and incentive to monitor the management varies with the investment orientation and horizon of these investors. The chapter shows that institutional investors can use direct monitoring, changes to board structure, and influence board functioning as the three levers of ownership governance. Further, I illustrate that passive, active short-term, and long-term institutional investors employ these levers in varying ways, adapting them to their unique constraints and objectives. These choices suggest that the owners' obligations may influence the choice of governance levers and use them as complements or substitutes. For my investigation, I use a sample of S&P 500 firms over ten years. The chapter provides a granular theoretical explanation of how owners and boards complement and substitute each other and influence firm outcomes like voluntary environmental disclosures. The three levers provide the working mechanisms of their interdependent relationship for effective governance. It also reveals the differentiated impact of institutional owners and their choices of governance levers, which might determine their relationship with the firm's top management. Thus, it shows that the levers may act as complements or substitutes based on the owner's ability and incentive for monitoring the firm. The fourth chapter analyses the principal-principal (PP) agency problem and proposes co-owners as a governance mechanism in the context of influential block holding. The principal-principal agency problem often arises when there is a dominant owner and minority shareholders who lack the ability to challenge their decisions. In many markets worldwide, institutional investors have become significant equity holders in firms, thanks to the expanding influence of securities markets. Institutional owners are seen to have the incentive and ability to monitor the firm's functioning. However, the literature mainly captures the relationship between institutional owners and managers in a principal-agent relationship. The chapter uses institutional investors as a governance mechanism for other dominant owners in most world economies. I use the sample of large Indian firms as the regulations mandate clear identification of the promoters as a dominant owner, providing a better proxy for owner influence beyond individual shareholding / blockholding. I look at listed state-owned enterprises with the Government as the primary owner and analyze their impact on voluntary environmental disclosures with the moderating effect of institutional holdings. The relationship between the Government and the sub-samples of domestic and foreign institutional investors further highlights that the relationship between owners is an important factor for co-owners to act as a governance mechanism. In this chapter, I contribute to the existing literature on PP (Principal-Principal) governance and emphasize the policy implications of divestment of state-owned enterprises (SOEs) in enhancing governance within these firms by increasing institutional owner involvement. The relationship might provide additional insights into the mechanisms as related co-owners are less effective in improving governance outcomes. I also check for the moderation of institutional investors on other dominant owners like business groups and foreign investors and voluntary disclosures as a post hoc analysis. These analyses show that co-owners may be complements and substitutes to each other in driving governance outcomes. Therefore, it further adds to our understanding by showing that complementarity and substitution may be possible within the ownership mechanism through multiple owner types. This dissertation aims to significantly advance our understanding of corporate governance mechanisms and their effectiveness in various institutional and organizational contexts. The study examines a unique context of environmental disclosures, which are globally standardized, voluntary, and non-financial. This setting allows us to make cross-country comparisons of the finer aspects of transparency and the firm's voluntary actions affected by corporate governance in these contexts. As a firm's corporate governance and climate impacts are especially relevant in today's context, this thesis significantly contributes to understanding the phenomenon and its implications to the firms and society. It also highlights firm ownership as an important research area that can be instrumental in understanding the relationship between a firm's governance and environmental outcomes. By drawing inspiration from the frequent calls made by business leaders and policymakers about the need to respond to the challenges associated with multiple environmental issues, including climate change, that have increased substantially, the findings of this thesis aim to help business leaders and policymakers to identify and understand governance relationships and the associated contingencies that can lead to better governance and environmental outcomes.

Pagination

xvi, 189p.

Copyright

Indian Institute of Management Bangalore

Document Type

Dissertation

DAC Chairperson

Jose, P D

DAC Members

Pallathitta, Rejie George; Sahoo, Soham

Type of Degree

Ph.D.

Relation

DIS-IIMB-FPM-P24-08

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