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Board composition: This is crucial for whether companies take social responsibility
Forget gender, ethnic background, and age. When it comes to cutting carbon emissions, other factors matter.
Extreme weather and record-breaking heatwaves are becoming the new normal. Most people have begun to accept the seriousness of grim reports from the UN’s climate panel and that climate change is a result of human activity.
In the business world, concepts such as CSR – Corporate Social Responsibility – and ESG – Environmental, Social, and Governance – have become part of everyday life.
ESG has become a benchmark for how sustainably a company operates.
A low ESG score can hurt a company’s trust and reputation in the market. This can make it difficult to raise capital from banks and investors.
Showcasing social responsibility
This is why more and more companies are showcasing how they have become greener.
Companies are replacing older gasoline-powered trucks with new electric vehicles. Shipping companies are building vessels designed to run on hydrogen gas or ammonia instead of oil. Industries are finding new production methods that use less energy.
Cutting greenhouse gas emissions like CO2 can have a significant impact on an ESG score.
But what does it take for a company to make the right changes?
Ishwar Khatri has studied how the composition of a company’s board affects its success in the competition to be the most sustainable.
“Is there a connection between board diversity and carbon emissions? And how are emissions influenced by the interplay between internal and external governance factors? This is what we wanted to investigate,” says Khatri.
Previous research has already shown a correlation between a board’s composition and how well a company performs on the ESG scale.
Waste management, the use of renewable energy, and carbon dioxide emissions are influenced by gender diversity in the boardroom.
And – the more women on the board, the more transparency there is about the company’s environmental impact.
Gender diversity does not reduce emissions
Khatri has analysed data from 344 companies listed on the London Stock Exchange. The dataset covers a 17-year period, from 2005 to 2021.
His findings provide a nuanced picture of what kind of diversity has an effect.
“I found that only diversity related to tasks and structure effectively reduced carbon emissions,” says Khatri.
Diversity in terms of age, gender, or nationality had no impact on emissions. Khatri says this is because demographic diversity may foster personal conflicts among board members.
According to Khatri, the result is a less effective board.
"What matters is tenure, that is, how long a director has held the position and its heterogeneity. Also, the consideration of whether the board member has a role in the company or comes from the outside is important. The mix of insider and outsider on the board matters,” he says.
Education and background skills
At the same time, Khatri’s research shows that external governance, such as carbon regulation, should be imposed if companies have very little diversity in tenure and 'insiders/outsiders.' This means that internal and external governance may substitute for each other.
External governance here refers to requirements and mandates from external sources, such as the government.
“Shareholders should focus on diversity related to functional abilities or structures when assembling the board. This can involve education, background skills, tenure, and to what extent they're independent of the company,” says Khatri.
He emphasises that this should not prevent the company from also considering diversity in gender, age, and nationality.
“Such diversity can be useful in other contexts. Previous research has found that demographic diversity is relevant for bringing in different perspectives and new ideas. It may improve creativity, innovation, as well as a company’s reputation in society,” he says.
Diverse cultures
Studies from the USA have shown that the higher the proportion of women on the board, the more renewable energy the company uses. However, numerous other studies do not find the same correlation between board diversity and corporate social responsibility (CSR).
In another study of 5,135 companies from 25 countries during 2002-2021, Khatri found that women’s influence depends on the social and cultural values in the society in which they operate, pointing to cultural differences between, for example, Norway and the USA.
“In Norway, there's a strong culture of emphasising the interaction between people, society, and the environment. Companies are expected to take social responsibility. In countries with this type of culture, increasing the proportion of women on the board will have a positive impact on factors like carbon emissions,” he says.
In the USA, companies operate in a culture that emphasises profit maximisation and short-term thinking.
“In countries like that, we see that the proportion of women on boards plays no significant role. Here, it's rather the government that must intervene with external influence, such as through incentives,” says Khatri.
References:
Khatri, I. Boardroom Diversity and Carbon Emissions: Evidence from the UK Firms, Journal of Business Ethics, vol. 195, 2024. DOI: 10.1007/s10551-024-05675-2
Mustafa, G & Khatri, I. Board Gender Diversity and CSR Performance: Do Societal Harmony/Mastery Orientation and Cultural Tightness‐Looseness Matter? British Journal of Management, vol. 36, 2024. DOI: 10.1111/1467-8551.12834
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Read the Norwegian version of this article on forskning.no
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