Are co-opted board socially friendly?

Abstract

The emergent social demand on firms to communicate their environmental, social, and governance (ESG) activities to the public poses increasing pressures on corporate reporting and construes different corporate reactions. This study investigates the relationship between board co-option and ESG disclosure practice in a sample of U.S. listed firms. Our results show that firms with higher proportion of co-opted directors on board disclose less ESG information, although this relation diminishes if firms are strong ESG reporters. This negative effect of board co-option holds after a battery of sensitivity and endogeneity tests. Further analyses reveal that long-tenure board chairs, high attendance rates of board and audit committee meetings, and independent chairs of audit committee mitigate this adverse effect. Additionally, we document an increasing inverse relationship in firms locating in more corrupt and Democratic-leaning states, and operating in heavy-emitting industries. Our results give support to the premise that co-opted directors insulate CEOs from the dismissal threat, therefore curtail the need of CEOs to engage in ESG reporting.