The influence of governance structure on the relationship between pay ratio and environmental and social performance

Fereshteh Mahmoudian and Johnny Jermias

Business Strategy and the Environment, 2022, vol. 31, issue 7, 2992-3013

Abstract: This study investigates the moderating effects of two specific governance structures, board independence and CEO duality, on the relationship between the pay ratio and environmental and social performance. Controlling for the endogeneity of the pay ratio and employees' performance and skills, we use a sample of companies listed on ExecuComp (S&P1500) and apply the 3SLS method to test interaction effects. We find that board independence moderates the negative relationship between the pay ratio and environmental and social performance. Furthermore, the effect of board independence on the relationship between the pay ratio and environmental and social performance decreases when the CEO is also the chair. These results suggest that independent directors moderate the negative effects of the pay ratio on firms' environmental and social performance. Finally, the concentration of power through CEO duality decreases the effectiveness of board monitoring.

Date: 2022
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