When corporate misconduct has a negative effect on shareholders – such as following financial fraud and earnings restatements – consequences for top management and directors are severe: CEOs are more likely to be fired (and even sent to jail), and directors lose directorships at other firms’ boards. In my dissertation, I examined whether misconduct relating to a firm’s social responsibility also leads to consequences for CEOs and directors.
Around the time when I began writing my dissertation, Volkswagen was caught manipulating the emissions in its vehicles. The scandal led to widespread negative media attention and significant fines for the company. It also negatively affected customers, the environment, shareholders, etc. – as well as led to the replacement of Volkswagen’s CEO Martin Winterkorn. As Volkswagens emission scandalrepresents one of the most severe cases of ESG-related misconduct in past decades, the aim in my dissertation was to study whether this type of misconduct systematically leads to consequences for CEOs and directors.
A number of papers have been published on social responsibility in top journals in finance in recent years. For example, Hartzmark and Sussman find that investors take into account “sustainability” factors when making investment decisions; Lins, Servaes, and Tamayo show that companies with high “social capital” fared significantly better during the financial crisis in 2008 compared to companies with low “social capital”; Krüger finds that investors react negatively to negative news about a firm’s social responsibility; Dyck, Lins, Roth, and Wagner find that when institutional investors invest in a firm, these firms’ environmental and social performance improve, etc.
Seen from the perspective of a financial economist, I thought that the research question in my dissertation was interesting. In public companies, directors are elected to the board to represent shareholders, and are tasked withoverseeing the hiring – as well as the firing – of the CEO. If misconduct does not directly affect shareholders, it is possible that shareholders are reluctant to make changes to the board – and, similarly, that the board may be reluctant to fire the CEO. If this is the case, i.e. CEOs and directors are not disciplined in the labor market for misconduct, prior literature suggests that more regulation could be needed to deter misconduct.
In our ongoing work with the articles included in my dissertation, me and my co-authors find that CEOs of both European and US firms are significantly more likely to be fired following negative ESG-related news. Consequences for directors are somewhat less severe.
We now continue our work on the articles by studying how investor reactions to negative ESG-related news affects the job longevity of CEOs and directors. In addition, as it has been shown that firms headquartered in civil-law countries (which include the Nordic countries) score significantly higher on ESG-ratings than firms headquartered in common-law countries (such as the US), we are interested in examining whether consequences to CEOs and directors following ESG-related misconduct vary by a firm’s home country’s legal origin.
Niclas Meyer is a postdoctoral researcher at the Department of Finance and Economics at Hanken. He defended his thesis ”Essays on Stakeholder-related Firm Misconduct and Consequences for CEOs and Directors” in finance in 2019.
References: Karpoff, Lee, and Martin, Journal of Financial Economics, 2008; Hartmark and Sussman, Journal of Finance, 2019; Lins, Servaes, and Tamayo, Journal of Finance, 2017; Krüger, Journal of Financial Economics, 2015; Dyck, Lins, Roth, and Wagner, Journal of Financial Economics, 2019; Liang and Renneboog, Journal of Finance, 2017.