Co‐opted Independent Directors and Firms' Environmental Performance

Abstract

Research Question/IssueConsidering escalating environmental concerns and the important role of board members in shaping strategic corporate decisions, we investigate the relationship between co‐opted independent directors and firms' environmental performance.Research Findings/InsightsExamining US firms from 2002 to 2018, we document a significant negative relationship between co‐opted independent directors and firm environmental performance. Our findings show that while institutional ownership and CEO power exacerbate the negative association, strong corporate governance mitigates this negative impact of co‐opted independent directors on environmental performance. The cross‐sectional results show that the relationship is pronounced in firms with young CEOs, male CEOs, and low CEO compensation. Further, the relationship is also prevalent in boards with fewer meetings, high multiple directors, and higher compensation, indicating a monitoring compromise by independent co‐opted directors.Theoretical/Academic ImplicationsReasonable theoretical arguments are drawn from agency theory and the theory of friendly boards, and our statistical analysis supports the academic position of the theory of friendly boards. The negative effect of independent co‐opted directors on firm environmental performance challenges the role of independent directors in addressing agency issues in environmental efforts, hinting at a departure from conventional agency theory expectations.Practitioner/Policy ImplicationsTo improve environmental performance, firms should reconsider their board structures, acknowledging the potential drawbacks of co‐opted independent directors. Our findings challenge the Sarbanes–Oxley Act's (SOX) emphasis on increasing the number of outside directors, which assumes independent board members will rigorously oversee executives. Such legislation is greatly based on the premise that independent board members strictly monitor executives. However, our findings indicate that not all independent directors are strict monitors, as demonstrated by lower environmental performance when there are more co‐opted independent directors.