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Do Boards Take Environmental, Social, and Governance Issues Seriously? Evidence from Media Coverage and CEO Dismissals

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Abstract

This study empirically investigates the dismissal of U.S. CEOs following negative media coverage of environmental, social, and governance (ESG) practices. Extending related literature on the media, ESG, and CEO dismissal, I develop a theoretical framework that considers the media as an influential third party that forms and reflects public opinion about ESG issues. In this role, the media reduces information asymmetry by providing cues on their relative salience and prompting corporate directors to attribute firm-level ESG issues to the CEO, regardless of their involvement in the misconduct. Findings confirm this framework and particularly suggest that coverage of issues in prominent media sources is more likely to result in CEO dismissal. Further, companies that have made public commitments to ESG oversight and those with stronger monitoring are more likely to dismiss the CEO following negative coverage of ESG issues. Overall, this study builds an understanding of how contemporary boards approach the uncertain CEO dismissal decision amidst media coverage of ESG- related misconduct and reflects a shifting norm towards ESG integration at the board-level.

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Notes

  1. Wu (2004) finds that companies are more likely to change their CEO after being publicly named by CalPERS (the largest state pension fund in the U.S., which is known for promoting good corporate governance) for having poor corporate governance practices. Similarly, Joe et al. (2009) find that firms listed on Business Week's worst board list are forced to take corrective actions, which include CEO and board chairman replacement and an increase in independent directors. Bednar (2012) detects a significant response to negative coverage of corporate governance issues (e.g., executive pay and management philosophy) in six major media outlets.

  2. RepRisk coverage begins in 2007, so the chosen sample period represents all available data.

  3. For example, in 2012 Best Buy's CEO Brian Dunn "resigned," which would suggest a voluntary turnover. However, the turnover was announced abruptly (i.e., the same day) and most importantly, was discussed in multiple news articles that clearly suggest that Dunn was forced out due to personal conduct issues (e.g., Bustillo 2012).

  4. Results are consistent if variables are instead winsorized at the 5th and 95th percentile or log transformed.

  5. The negative media count variable generally captures firm-level ESG issues, which are listed in “Appendix 2”. Generally, the CEO is not directly nor solely responsible for these issues. To ensure this interpretation is correct, I manually search for information about each dismissal. In six cases, I find evidence that the CEO may be directly responsible for the ESG issues covered (e.g., sexual harassment or inappropriate/undisclosed relationships with employees). Results are consistent if these observations are removed.

  6. While models testing Hypothesis 1 control for industry-specific differences through the inclusion of industry fixed effects, in untabulated analysis I further explore the role of industry. The identified association holds in all industry subsamples, except for one. This provides comfort that results are not driven by industry. The one exception is the manufacturing industry, where negative media count is negatively associated with CEO dismissal. A potential explanation for this result is that negative media coverage of ESG issues does not outweigh the importance of profit maximization for manufacturing firms, and the issues that underlie coverage likely arise from a prioritization of resources towards profit maximization and away from preventing ESG risks. Future research may further consider the role of the media in this industry.

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Authors and Affiliations

  1. University of Colorado Denver, 1475 Lawrence Street, Denver, CO, 80202, USA

    Jenna J. Burke

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Appendices

Appendix 1

CEO dismissal anecdotes

figure a

Appendix 2

RepRisk Data: ESG issues examined

Environmental

Social

Governance

Animal mistreatment

Climate change, GHG emissions, and global pollution

Impacts on landscapes, ecosystems and biodiversity

Local pollution

Overuse and wasting of resources

Waste issues

Child labor

Discrimination in employment

Forced labor

Freedom of association and collective bargaining

Human rights abuses, corporate complicity

Impacts on communities

Local participation issues

Occupational health and safety issues

Poor employment conditions

Social discrimination

Anti-competitive practices

Corruption, bribery, extortion, money laundering

Executive compensation issues

Fraud

Misleading communication

Tax evasion

Tax optimization

  1. Information in this chart was obtained from https://www.reprisk.com/content/static/reprisk-esg-issues-definitions.pdf as of July 2020. Data categories were consistent throughout the sample period used in this study

Appendix 3

Variable definitions

Dependent variable

 

 CEO dismissal

 = 1 if the CEO is dismissed during the fiscal year, and zero otherwise [Audit Analytics and manually collected]

Test variables

 

 Negative media count

Number of articles that cover ESG issues [RepRisk]

 Negative media count, high reach sources

Number of articles that cover ESG issues in medium and high reach media sources [RepRisk]

 Negative media count, low reach sources

Number of articles that cover ESG issues in low reach media sources [RepRisk]

 Negative media count, severe issues in high reach sources

Number of articles that cover severe ESG issues in medium and high reach media sources [RepRisk]

 Negative media count, non-severe issues in high reach sources

Number of articles that cover non-severe ESG issues in medium and high reach media sources [RepRisk]

 Negative media count, severe issues in low reach sources

Number of articles that cover severe ESG issues in low reach media sources [RepRisk]

 Negative media count, environmental issues

Number of articles that cover environmental issues [RepRisk]

 Negative media count, social issues

Number of articles that cover social issues [RepRisk]

 Negative media count, governance issues

Number of articles that cover governance issues [RepRisk]

Control variables

 

 CSR report

 = 1 if the firm issues a stand-alone report on CSR or sustainability issues [Corporate Register, manually collected]

 CSR strengths

Number of CSR strengths [MSCI ESG STATS]

 CSR concerns

Number of CSR concerns [MSCI ESG STATS]

 Institutional ownership

Percentage of shares held by institutional investors [Thomson Reuters Mutual Fund and Investment Company Common Stock Holding database]

 Board tenure

Average number of years independent directors have served on the board [BoardEx]

 Board independence

Percentage of board members who are independent [BoardEx]

 Board size

Number of directors on the board [BoardEx]

 CEO time on board

Number of years the CEO has sat on the board [BoardEx]

 CEO tenure

Number of years the CEO has been employed at the firm [BoardEx]

 CEO ownership

Percentage of shares held by the CEO [Execucomp]

 CEO chair

 = 1 if the CEO and Chariman of the Board are the same individual

 ROA

Net income divided by total assets [Compustat]

 Stock return

Monthly return minus value weighted return [CRSP]

 Firm size

Natural log of total assets [Compustat]

 Complexity

Sum of reported business segments [Compustat]

 Bankruptcy risk

Altman (1968) Z score [Compustat]

 Discretionary accruals

Absolute value of abnormal accruals derived from the difference between total and expected accruals estimated with the modified Jones model augmented with lag ROA (Kothari et al. 2005) [Compustat]

 Restatement

 = 1 if the firm announced a restatement during the fiscal year, zero otherwise [Audit Analytics]

MW

 = 1 if the firm disclosed a material weakness in their SOX Sect. 302/404, zero otherwise [Audit Analytics]

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Burke, J.J. Do Boards Take Environmental, Social, and Governance Issues Seriously? Evidence from Media Coverage and CEO Dismissals. J Bus Ethics 176, 647–671 (2022). https://doi.org/10.1007/s10551-020-04715-x

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