CORPORATE GOVERNANCE AND ENVIRONMENTAL PERFORMANCE

Abstract

Prior research suggests a positive link between corporate governance and corporate social responsibility (CSR). Environmental activities play an important role in a company’s CSR activities. This study finds that corporate governance is positively associated with environmental performance, and good corporate governance also leads to good environmental performance in the following year. We use Brown and Caylor’s (2009) corporate governance index scores to measure corporate governance. Kinder, Lydenberg, and Domini’s (KLD’s) environmental strength score measures environmental performance data. Our analyses document a significant positive association between corporate governance and environmental performance. Our findings contribute to and extend our understanding of the relationship between governance and performance. The results should interest managers who engage in behavior leading to or maintaining strong corporate governance mechanisms, financial analysts who conduct research on corporate governance and firm performance, and policy makers who design and implement guidelines on corporate governance mechanisms. Moreover, results in this study can increase ‘green’ investors’ confidence in investing in companies with stronger corporate governance.