Director expertise has a direct impact on corporate sustainability, study shows

Findings from Alberta School of Business researcher Lukas Roth demonstrate that change in US firms is driven by directors with sustainability expertise gained from board experiences in foreign countries.

In their recently-published study, finance professor Lukas Roth and his colleague Peter Iliev from Pennsylvania State University set out to answer a key question: does the sustainability expertise of a firm’s board of directors influence its sustainability performance?

The answer – outlined in the article “Director Expertise and Corporate Sustainability” appearing in the November issue of the academic journal Review of Finance – is a resounding ‘yes.’

"Our results show that the board of directors is essential in driving US firms’ corporate sustainability,” they write, noting that the directors’ sustainability expertise can be “instrumental in devising an efficient and effective corporate sustainability strategy.” 

Overall, their findings suggest that a board that gains sustainability expertise increases a firm’s overall sustainability performance by 7.1%. 

Using a sample of over 2,800 US firms over a 15 year period, Roth and Iliev found that a driving factor for change is expertise that is imported from other countries where the directors also have experience serving on boards. 

Lukas Roth“Historically, US firms were lagging behind sustainability performance compared to firms in other countries,” says Roth. However, as directors with foreign experience learn to implement regulations being passed in countries with more advanced environmental and social standards, they naturally transplant this learning back to the US firms they serve. 

Roth refers to this scenario as “a shock” to the directors’ expertise. “The director doesn’t choose to gain that expertise – they happen to be sitting on that Netherlands board, for example, and they have to learn [how to implement the new regulations].”

Roth and Iliev also examine the role specific nuances play in determining the extent of the changes that can be implemented – including board structure, the industry in which the firm operates and the countries where the directors’ gained their foreign expertise. 

While there is an extensive body of literature on the role of boards of directors, the findings from Roth and Iliev’s study represent a new perspective. 

“We add to this literature by demonstrating that the board’s influence is not limited to managing governance risks and setting executive compensation but also takes an active role in shaping firms’ corporate sustainability,” they write. 

As corporate sustainability continues to remain in the spotlight, Roth says understanding the influence of directors adds a new dynamic to developing strategies for moving towards a carbon neutral economy. 

“If outsiders want a firm to change, they can focus on making sure directors have sustainability expertise because that translates into change,” he says. 

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