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Legal Origins, Corporate Governance, and Environmental Outcomes

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Abstract

Environmental governance has emerged as a recent perspective to explain the link between corporate governance mechanisms and environmental performance such as pollution reduction. We extend current models by incorporating the crucial role of the underlying institutional logics in terms of an a priori focus on either shareholder rights or stakeholder inclusion, which, in turn, can be traced back to the legal origin of a specific country. Using data on a sample of common and civil law countries, we find support for our predictions that a shareholder-focused common law legal origin is associated with significantly higher emissions of CO2, and also that international environmental agreements like the Kyoto protocol seem to have a more pronounced effect in shareholder-centric economies than thus far assumed.

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Notes

  1. Additive indices are widely used by empirical researchers (e.g., Gompers et al. 2003; Bebchuk et al. 2009).

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Authors and Affiliations

  1. IE Business School, Maria de Molina 11, 13, 15, Madrid, Spain

    Carl J. Kock

  2. Griffith Business School, Griffith University, Brisbane, Australia

    Byung S. Min

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Appendix

Appendix

Components of Shareholder Rights Index, La Porta et al. (1998)

The Shareholder Rights index is formed by adding one count each for the presence of the following six shareholder friendly rules at the country level: (i) the country allows shareholders to mail their proxy vote to the firm, (ii) shareholders are not required to deposit their shares prior to the general shareholder’s meeting, (iii) cumulative voting or proportional representation of minorities of the board of directors is allowed, (iv) an oppressed minorities mechanism is in place, (v) the minimum percentage of share capital that entitles a shareholder to call for an extraordinary shareholder’s meeting is less than or equal to 10 % (the sample median), or (vi) shareholders have pre-emptive rights that can be waived only by a shareholders’ vote.

Components of Creditor Rights Index, La Porta et al. (1998)

Creditor Rights is the sum of the following four indexes, which is provided by La Porta et al. (1998): (1) No automatic stay—equals one if a business reorganization procedure does not impose an automatic stay on the assets of the firm upon filing the reorganization petition, allowing creditors to seize their collateral after the reorganization petition is approved. It equals zero if such restriction does exist in the law; (2) Reorganization—equals one if the reorganization procedure imposes restrictions, such as creditors’ consent or minimum dividend for a debtor to be able to file for reorganization. It equals zero for countries without such restriction; (3) Secured debt first—equals one if secured creditors are ranked first in the distribution of proceeds of the disposition of the assets of a bankrupt firm; equals zero if non-secured creditors, such as the government and workers, are given absolute priority; (4) No management stay—equals one if an official appointed by the court, or by the creditors, is responsible for the operation of the business during reorganization, and management does not retain administration of its property pending the resolution of the reorganization.

Components of G-Index 41, Aggarwal et al. (Aggarwal et al. 2011)

The G-Index 41 consists of 41 governance attributes that are organized into four subcategories: (i) board (ii) audit (iii) anti-takeover provisions, and (iv) compensation and ownership. There are 24 governance attributes for (i) boards, including the existence of a governance committee and whether the board is controlled to more than 50 % by independent directors, three attributes for (ii) audit, including whether the audit committee is composed solely of independent outsiders, six attributes for (iii) anti-takeover provisions, including whether the company either has no poison pill or a pill that is shareholder approved, and eight attributes for (iv) compensation and ownership, including whether directors receive all or a portion of their fees in stock. G-Index 41, as an additive index, assigns a value of one to each of the 41 governance attributes if the company meets minimally acceptable guidelines on that attribute, and zero otherwise. Then, index is expressed as a percentage. If a firm satisfies all 41 governance attributes, then its G-Index 41 will be equal to 100 %.

The following numbers of firms per country went into the computation of G-Index 41 for each year: Australia (102), Austria (18), Belgium (25), Canada (166), Denmark (22), Finland (29), France (82), Germany (86), Greece (41), Hong Kong (57), Ireland (16), Italy (65), Japan (571), Netherlands (42), New Zealand (17), Norway(22), Portugal (14), Singapore (58), Spain (52), Sweden (44), Switzerland (59), U.K. (45), and U.S. (4921). The average share of market capitalization of these selected companies in each country is 80.2 % of the Worldscope total market capitalization by country in 2008.

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Kock, C.J., Min, B.S. Legal Origins, Corporate Governance, and Environmental Outcomes. J Bus Ethics 138, 507–524 (2016). https://doi.org/10.1007/s10551-015-2617-1

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