Board co‐option and corporate environmental orientation: New insights from the waste management perspective

• Published date: 01 September 2024
• Author: Ammar Ali Gull,Hoa Luong,Muhammad Nadeem
• Date: 01 September 2024
• DOI: http://doi.org/10.1111/corg.12567

ORIGINAL ARTICLE

Board co-option and corporate environmental orientation:

New insights from the waste management perspective

Ammar Ali Gull

1,2

| Hoa Luong

3

| Muhammad Nadeem

4

1

Léonard de Vinci Pôle Universitaire, Research

Center, Paris La Défense, 92916, France

2

International School, Vietnam National

University, Hanoi, Vietnam

3

Department of Accountancy and Finance,

Otago Business School, University of Otago,

Dunedin, New Zealand

4

UQ Business School, University of

Queensland, Brisbane, Australia

Correspondence

Muhammad Nadeem, UQ Business School,

University of Queensland, Brisbane, Australia.

Email: nadeem@business.uq.edu.au

Abstract

Research Question/Issue: We investigate the impact of board co-option on corpo-

rate environmental orientation from the perspective of waste management. As waste

presents damaging effects on the natural environment, climate change, and human

health, businesses assume an ethical responsibility to conduct their operations in a

sustainable and responsible manner.

Research Findings/Insights: Employing firm-level waste production data, we docu-

ment a significant negative relationship between board co-option and waste genera-

tion, suggesting that co-opted directors help firms reduce their waste—a finding that

also carries economic significance.The cross-sectional analysesreveal that the relation-

ship only holds when a CEO does not chair the board and has a shorter tenure. Fur-

thermore, we find that the board co-option–waste management relationship is

stronger in environmentally sensitive industriesand is mainly driven by the manufactur-

ing firms. We perform a battery of analyses to rule out endogeneity concerns and

check for the robustness of our results. The channel test reveals that CEOs of firms

with higher waste management face lower performance-induced turnover, particularly

when working withco-opted boards. Finally,we also find that co-option-induced waste

managementinitiatives ultimately increasefirms' economic value.

Theoretical/Academic Implications: We document that co-opted boards may

enhance firms' waste management practices by reducing performance-induced CEO

turnover. Thus, we make important contributions to the corporate governance and

environmentalism strands of the literature by highlighting the bright side of board co-

option for waste reduction initiatives.

Practitioner/Policy Implications: Our study provides vital policy implications for reg-

ulators and top management teams against the background of public outcry and

social pressure to mitigate the damage to the environment and calls for ethical busi-

ness practices.

KEYWORDS

corporate governance, board co-option, environment, ethical business practices, waste

management

Received: 10 August 2022 Revised: 14 November 2023 Accepted: 16 November 2023

DOI: 10.1111/corg.12567

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any

medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.

© 2024 The Authors. Corporate Governance: An International Review published by John Wiley & Sons Ltd.

758 Corp Govern Int Rev. 2024;32:758–785.

wileyonlinelibrary.com/journal/corg

1|INTRODUCTION

The equivalent of one truckload of plastic enters the ocean

every minute.

1

In this study, we examine the impact of board co-option (the pro-

portion of directors who joined the board after the CEO assumed

office) on waste management by US firms. The motivation of this

study comes from two major developments. First, solid waste produc-

tion is expected by the World Bank to have increased by roughly 70%

to 3.4 billion metric tons by 2050 (Kaza et al., 2018). Waste has cata-

strophic effects on the environment and ecosystems of this planet

through soil, water, and air contamination; harm to marine life; and

adverse impacts on human health, including respiratory problems and

landfill gases causing cancer. Furthermore, poor waste management

results in the release of methane, which is a powerful greenhouse gas

contributing significantly to climate change. World leaders, regulators,

and governments have regularly pledged to mitigate environmental

damage, for instance, in the form of United Nations Sustainable

Development Goals, pledging to cut emissions at the Conference of

the Parties (COP26). Consequently, businesses being major contribu-

tors to waste production face heightened regulatory and social pres-

sure to conduct operational activities in an ethical manner to limit the

impact of their operations on the environment. Despite the recent

surge in corporate social responsibility (CSR) scholarship, studies on

the determinants of corporate environmental externalities are limited

(e.g., Ali et al., 2023; Kock et al., 2012; Nadeem, 2021; Walls

et al., 2012) and non-existent concerning waste management.

2

Second, the board of directors assume the critical responsibility of

validating corporate decision-making (Forbes & Milliken, 1999), and

the composition of the board is critical to the quality of deliberations

and thus meaningfully affectsfirms' decisions (Giannetti & Zhao, 2019;

Nadeem, 2020). Board co-option, a newly constructed attribute of

board composition, has recently received academic attention as to

how it might influence corporate outcomes. The results to date are

mixed. On the one hand, studies report that the dark side of boardco-

option is that firms witha higher proportion of co-opted directors have

lower monitoring effectiveness (Coles et al., 2014), higher default risk

(Baghdadi et al., 2020), more involvement in misconduct (Zaman

et al., 2021), and a lower probability of adopting clawback provisions.

On the other hand, limited but growing evidence suggests that the

bright side of board co-option is that co-opteddirectors are associated

with more innovation and lower sensitivities of CEO pay (Nguyen

et al., 2021). Surprisingly though, the existing studies explore only the

financial impacts of co-opted directors, but their role in non-financial

practices remains an unopened blackbox. We fill this void by examin-

ing the impact of board co-optionon waste management.

The existing board co-option literature and firm-level determi-

nants of environmental policies suggest competing arguments con-

cerning the possible link between board co-option and waste

management. On the one hand, the stakeholder-agency perspective

suggests that corporate boards play a crucial role in protecting stake-

holders' interests, including the environment, and the composition of

the board determines a board's monitoring effectiveness, which is

critical to greener corporate strategies (Gyapong et al., 2021; Kock

et al., 2012; Nadeem, 2021). Against this backdrop, board co-option

studies (e.g., Cassell et al., 2018; Coles et al., 2014; Lim et al., 2020)

provide unequivocal evidence that co-opted directors diminish boards'

effectiveness, leading to adverse corporate outcomes. Thus, to the

extent that boards' monitoring effectiveness is crucial for strategic

decision-making concerning the environment and co-opted directors

are associated with poor monitoring, we would expect a negative

impact of board co-option on corporate environmental orientation,

measured through waste generation.

On the other hand, research from ethical business and decision

horizon perspectives suggests a positive impact of board co-option on

corporate waste management practices. The ethical business theory

suggests that corporate environmental policies are increasingly scruti-

nized by different stakeholders, including customers, lenders, and reg-

ulators (Benlemlih et al., 2023; Chen et al., 2021; Du et al., 2017;

Thompson & Cowton, 2004). Consequently, CEOs pay critical atten-

tion to environmental policies and receive higher compensation for

better environmental performance (Berrone & Gomez-Mejia, 2009)

3

or are sacked for poor environmentalism (Hubbard et al., 2017). Board

co-option studies (e.g., Gull, Sarang, et al., 2023; Lim et al., 2020) sug-

gest that co-opted directors are more likely to have allegiance to the

CEO who appointed them.

From the decision horizon perspective, environmental initiatives,

particularly related to waste management, take a longer time to gener-

ate social and financial value (Qin & Yang, 2022). Waste management

activities are also costly because such initiatives require acquiring new

technology and changes in design and processes, among others. For

instance, King and Lenox (2002) argue that waste reduction requires a

great deal of managerial effort, as it will need a complex redesign of

business processes, innovation in technology, and development of

green competence. Due to extra managerial efforts and a great deal

of cost, waste management initiatives may negatively affect a firm's

short-term financial performance. Board co-option could presumably

make CEOs less worried about dismissal due to poor short-term per-

formance, thereby enabling them to undertake long-range planning.

Furthermore, Qin and Yang (2022) document that linking CEO com-

pensation to CSR may reduce the sensitivity of CEO dismissal based

on financial performance. This, in turn, could allow CEOs more flexibil-

ity to make investments in environmental projects, which could even

be easier to achieve through allegiance from co-opted directors.

Accordingly, we expect a favorable impact of board co-option on

waste management.

We test the above-mentioned competing arguments on US listed

firms, using waste generation data from ASSET4 and a board co-

option measure from Coles et al. (2014). Our empirical analysis reveals

a significant negative relationship between board co-option and waste

generation, implying that firms with a higher fraction of co-opted

directors on their board have significantly lower levels of waste pro-

duced. Our results also have economic significance. For instance, a

1-standard-deviation increase in board co-option reduces waste pro-

duction by 0.143 tons. In further analyses, we find that the co-option

and waste relationship is significant in firms where (a) CEOs do not

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