Ramsbury Invest AB has a controlling (57.5%) ownership stake in H&M, a fashion retailer that was recently enmeshed in a major greenwashing scandal. Similarly, Duke Energy, which has substantial concentrated ownership of the three largest mutual funds, pleaded guilty to federal environmental crimes surrounding the spilling of more than 39,000 tons of toxic coal ash in North Carolina. While ownership concentration is the oft-prescribed remedy for improving corporate governance by resolving the misalignment between the interests of shareholders and managers, these, and many other examples, raise questions as to their effectiveness.
In terms of evidence, prior research provides conflicting predictions. Some studies suggest that blockholders have stronger power and incentives to govern the firm in a manner that leads to positive organizational outcomes such as less self-interested managerial behavior, higher firm efficiencies, and increased innovation. This may increase the sensitivity of blockholders to negative externalities such as reputation risks and environmental fines and penalties for the focal firm. Accordingly, concentrated owners should push firms towards higher CEP.
However, a contrarian perspective suggests that the short-term value-maximizing demands of powerful, concentrated owners may excessively pressure managers to avoid earnings disappointment, diverting managerial attention away from environmental actions that require substantial investments of organizational resources. This aligns with the well-established Property Rights Theory (PRT) argument that concentrated owners have the influence, authority, and motivation to use firms’ resources to maximize their own welfare. Indeed, some research indicates that blockholders may prioritize financial performance to the extent of not only discouraging socially responsible behavior (e.g., proactive stakeholder management) but also condoning irresponsible behavior (e.g., violation of rules and regulations).
In this paper, we use a robust methodology with a sample of 16,286 observations from 3,275 firms across 43 countries between 2008 and 2017 to seek stronger evidence on the relationship between ownership concentration and CEP. Our findings from fixed-effects, Hausman-Taylor, and GMM regressions (blah, blah …) indicate that concentrated owners are incentivized to communalize private environmental costs unless counterbalanced by effective governance mechanisms. We find an overall negative effect of ownership concentration on CEP. However, this effect varies depending on the strength of internal and external governance mechanisms. In contexts with strong external governance (such as robust regulatory institutions) and strong internal governance (such as high board independence), the effect of ownership concentration on CEP flips to be positive. In weak governance contexts, the effect of ownership concentration strengthens to be even more strongly negative.
Theoretically, we contribute to the corporate governance literature by integrating insights from the Property Rights Theory to explain the conditions under which concentrated owners leverage their property rights to influence CEP. We also extend the Property Rights Theory to explain how its predictions depend on prevailing institutions, i.e., the rules of the game.
As we highlight the importance of both external and internal governance mechanisms in mitigating the negative impact of ownership concentration on CEP, our study has significant implications for policymakers and stakeholders. It informs them about the governance mechanisms that can safeguard environmental interests in the face of short-term value-maximizing pressures from investors. It also provides insights for stakeholders on how to nudge firms towards improving their CEP. Overall, our findings underscore the importance of considering larger systems in which firms are based to promote environmental sustainability.
(This post is based on our open-access study published in the Global Strategy Journal, which can be accessed directly here: https://onlinelibrary.wiley.com/doi/10.1002/gsj.1518).
