CEO Turnover Risk and Firm Environmental Performance
Abstract:
The paper by Giulio Cornelli, Magdalena Erdem, and Egon Zakrajšek investigates the connection between the probability of a CEO experiencing a forced turnover and the environmental performance of the associated firms across various dimensions. Key findings indicate:
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Correlation between CEO Turnover Risk and Lower Environmental Ranking: A higher risk of CEO termination correlates with a lower environmental performance ranking, especially concerning environmental innovation activities and increased environmental controversies for the firm.
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Marginal Offset by ESG-Pay Clauses: Incorporating Environmental, Social, and Governance (ESG)-related pay clauses in executive compensation packages does not significantly mitigate the negative impact on environmental performance.
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Impact on Greenhouse Gas Emissions: An increase in the probability of CEO termination is consistently linked to an increase in scope 2 and 3 emissions ("carbon leakage"), whereas scope 1 emissions remain unaffected.
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Mechanism Explanation: The deterioration in firms' environmental controversies and environmental innovation scores is attributed to a strategic shift towards short-termism, indicated through an instrumental variable approach.
Key Points:
- Objective: To explore the relationship between CEO turnover risk and firm environmental performance.
- Methodology: Assembles databases including CEO characteristics, exposure to turnover risk, firm financials, expected default frequencies, and ESG/environmental performance indicators.
- Findings:
- Higher CEO turnover risk negatively impacts environmental performance, particularly in environmental innovation dimensions.
- ESG-Pay clauses show limited effectiveness in countering this effect.
- Increased probability of CEO turnover leads to higher scope 2 and 3 emissions, without significant changes in scope 1 emissions.
- Mechanism traced to strategic reorientation towards short-term objectives.
- Relevance: Contributes to literature on CEO turnover risk effects, ESG-pay clauses efficacy, and environmental performance dynamics.
Keywords:
- Corporate finance
- ESG
- Emissions
- Environmental innovation
- Short-termism
