ESG performance and market value: the moderating role of employee board representation

Abstract

In this paper, we examine the extent to which the appointment of employees to the board of directors influences market perceptions of environmental, social and governance (ESG) performance. Using a sample of French firms listed on the SBF 120 index from 2007 to 2017, we find that investors react positively to ESG performance but negatively to the presence of employees on the board. Importantly, our results document a negative relationship between ESG performance and market value for firms with employee directors on the board. A more fine-grained examination of ESG pillars shows that when employees are appointed to the board, neither social nor environmental and governance performance are financially rewarded by market participants. Our findings suggest the potential existence of a major conflict of interest between employees and shareholders stemming from the presence of employees on the board. We suggest that, when employees are appointed to the board, high ESG performance may indicate a possible alliance between managers and employees that counterbalances the dominance of shareholders on the board.

Keywords:

• ESG performance
• employee board representation
• market based performance
• France

Disclosure statement

No potential conflict of interest was reported by the authors.

Acknowledgments

The authors thank the editor, Professor Tanya Bondarouk, and the two reviewers for their helpful comments and guidance on this article.

Notes

¹ The concept of CSR has made great progress, affecting both academics' work and corporate behaviour. At this stage, Moura-Leite and Padgett argue that whereas CSR was coupled with strategy literature during the 1990s, CSR became definitively an important strategic issue in the 2000s.

² https://www.challenges.fr/finance-et-marche/ce-qui-va-secouer-les-ag-des-entreprises-au-printemps-2019_638610

³ The 2017 edition of the OECD report on Employment Outlook states that in some countries such as Austria, Denmark, Finland, France, Germany, Hungary, Luxembourg, Netherlands, Norway, Poland, the Slovak Republic, Slovenia, and Sweden, companies above a certain size are required to have employee representatives on the board. This is the case for firms with more than 500 employees in Germany, more than 300 employees in Austria, more than 35 employees in Denmark, more than 30 employees in Norway and more than 25 employees in Sweden. In other countries, such as Chile, Greece, Ireland, Israel, Poland, Portugal and Spain, employees may be represented on the boards only of state-owned enterprises.

⁴ It is, however, worth noting that Germany has a dual-board system with two strictly separated administrative bodies: the supervisory board (non-executive directors only) and the management board (executive directors only). Employees in Germany thus sit on the supervisory board but not on the board of directors. In France, firms may adopt either a board of directors or a dual system with an executive board and a supervisory board.

⁵ Compared to other European countries, France has shown great interest in employee board representation. The first French legislation stipulating labour representation on boards focused on state controlled firms (the law of 1983). Eleven years later, regulators start to pay attention to private companies, allowing them to reserve board seats for employees and employee shareholders subject to acceptance by shareholders at the general assembly (the law of 1994). Starting in 2006, representation of employee shareholders became mandatory for publicly listed French firms when employees hold at least 3% of the total shares. As for directors elected by employees by their right of employment, French boards have been obliged to reserve seats for employee directors since 2013.