Essays on Stakeholder-related Corporate Misconduct and Consequences for CEOs and Directors

Abstract

CEOs and the board of directors have the main decision-making power in a firm and hence carry a significant responsibility for its performance. Consequently, they are often blamed when their firms are caught for misconduct. As Karpoff, Lee, and Martin (2008) note, it is important to know whether corporate governance and the director and CEO labor markets work to deter misconduct and scandals, i.e. whether culpable individuals incur personal penalties, as a lack of penalties would indicate to policy makers that more oversight and regulation might be needed. Prior research documents that CEOs and directors are disciplined following economic misconduct. However, firms may be involved in other types of scandals, such as customer fraud, environmental violations, employee disputes, etc. Such scandals relate to a firm’s Environmental, Social, and Governance (ESG) standards or its Corporate Social Responsibility (CSR) – and have been argued to be potentially costly for firms, their shareholders, and stakeholders. Yet little is known about whether CEOs and directors suffer personal costs following stakeholder-related corporate misconduct. The three essays in this thesis study consequences for CEOs and directors following ESG/CSR-related scandals. In the first essay, we examine whether directors of US firms with the highest numbers of CSR controversies in a year experience losses in their reputations in the director labor market. We find that independent directors, who lose their seat at the focal firm’s board, and affiliated directors, who retain their seat, lose seats at other firms’ boards in the future. Additionally, we find that, among “controversial” independent directors, losses are significant only for directors who serve on the governance committee. The second essay investigates whether firms’ risk exposures to ESG issues affect the career prospects of directors of Stoxx Europe 600 firms. Employing panel data regressions, I find that directors’ career prospects decline when a firm has had very high or extremely high risk exposure to ESG issues. Furthermore, prior literature documents significant variation in ESG rankings between firms in different countries. Examining European firms allows studying if legal origin, as well as other country-level variables, affect penalties to directors following ESG scandals. I find that penalties vary by legal origin: contrary to expectations, penalties are severe in common-law countries, where firms, on average, score the lowest on ESG rankings, and somewhat weaker in civil-law countries, where firms, on average, score the highest on ESG rankings. In the third essay, we study CEO turnover following ESG scandals. Using logistic regression models, we find that the likelihood of CEO turnover increases significantly following environmental and governance issues, but not following social issues. In addition, we find that firms in common-law countries rely on ex post penalties, whereas firms in civil-law countries appear to rely on ex ante (governance, regulation, etc.) mechanisms, to deter ESG-scandals.