CEO power and CSR‑linked compensation for corporate environmental responsibility: UK evidence

Abstract

This paper examines how CEO power and CSR-linked compensation influences environmental performance. We investigate the role of CEO managerial power (proxied by CEO duality and the presence of executive directors on the board), and CEO legitimate power (proxied by CEO tenure), adopting three measures of environmental performance, including the environmental scores, carbon emission scores and a composite index assessing the level of a firm’s engagement in several environmental practices. Analysing a sample of FTSE-All-Share companies for the period 2011–2019, we find that CEOs who receive compensation from engagement in environmental activities are motivated to improve environmental performance. Moreover, newly appointed CEOs engage more in environmental initiatives, suggesting that they use it as a signal to mitigate career concerns in their early tenure, whereas CEOs with managerial power engage less in environmental projects due to the costs associated with them. These effects are stronger in firms with independent and diverse boards, firms operating in the environmentally sensitive sectors and non-loss-making firms. This study provides original evidence of the role of environmental-linked incentives and managerial power in managing environmental impact and optimising the environmental performance of their companies.