From “Who Cares” to “What They Care About”: The Impact of Corporate Governance on Environmental and Social Performance in China

Abstract

Research Question/Issue

This study investigates whether and how corporate governance influences environmental and social performance in Chinese firms. Two mechanisms of corporate governance are examined: external (shareholder-focused) and internal (CSR strategy- and management-focused).

Research Findings/Insights

The findings reveal a significant positive effect of corporate governance on environmental and social performance in China, mainly driven by firms' CSR strategy-focused governance practices. State ownership of enterprises significantly moderates how governance affects both environmental and social performance, with positive and negative moderation observed for external and internal governance mechanisms, respectively. Furthermore, an environmental regulation shock accentuates the positive influence of corporate governance on environmental performance but not on social performance.

Theoretical/Academic Implications

The main theoretical insight reflects a shift in the governance discourse from “conflict of interest” to “differentiation of interest” between shareholders and managers regarding sustainability concerns. The results shed light on the considerable differences between shareholder and manager behaviors toward environmental and/or social practices.

Practitioner/Policy Implications

This study informs firms and regulators on corporate governance's nonfinancial implications in China. Reforming governance characteristics can be a key factor for firms aiming to improve their environmental and social performance, specifically by re-envisioning their internal governance mechanisms that are CSR strategy-oriented. From the government perspective, we provide insights into how, through ownership and regulatory interventions, governance mechanisms tend to balance environmental and social performance in China.