Board of directors network centrality and environmental, social and governance (ESG) performance

• DOI: https://doi.org/10.1108/CG-10-2019-0306
• Date: 23 June 2020
• Pages: 965-985
• Published date: 23 June 2020
• Author: Maretno Agus Harjoto,Yan Wang
• Subject Matter: Strategy,Corporate governance

Board of directors network centrality and

environmental, social and governance

(ESG) performance

Maretno Agus Harjoto and Yan Wang

Abstract

Purpose –Drawing from social capital,social network theory of stakeholder influence and stakeholder

management, the purposeof this paper is to examine the relationshipbetween board network centrality

and firms’ environmental,social and governance (ESG)performance.

Design/methodology/approach –Using social network analysis, the authors construct five board

network centrality,namely, degree centrality (the number of connections),closeness centrality (distance

among firms),eigenvector centrality (the quality of connections),betweenness centrality(how often a firm

sits between two other firms) and the information centrality (the speed and reliabilityof information), as

measuresof board access for social capitaland timely information.

Findings –Using a sample of non-financialfirms listed in the UK FTSE 350 index from 2007 to 2018, the

authors find that board networks, measured by degree, closeness, eigenvector, betweenness and

information centrality,has positive influence on firms’ ESG performance.Furthermore, the findings show

that there is a non-linear relationship between board networks and ESG performance, and this

relationship is strongerin the sectors where firms that have high product market concentrationand high

percentageof women board members.

Originality/value –This study unveils that strong board network centrality brings higher social

(reputational)capital and information advantagesto the firm to effectively, timely and accuratelydeal with

the pressuresfrom stakeholders (stakeholder management),which leads to better ESG performance.

Keywords Board network centrality, Social network analysis, Stakeholder management,

ESG performance, Non-linear

Paper type Research paper

Introduction

In the digital and social media era where the speed and ease of connectivity are

significantly faster, informal social and professional networks have become the essential

part of corporate strategic operations (Collins and Clark, 2003;Zaheer and Bell, 2005).

Extant studies have demonstrated that a firm’s networks or often referred to a firm’s “social

capital” have been found to enhance innovation (Ahuja, 2000;Tsai and Ghoshal, 1998),

knowledge transfer (Burt, 1992;1997;Inkpen and Tsang, 2005;Koka and Prescott, 2002),

intellectual capital (Nahapiet and Ghoshal, 1998), and efficiency (Baker, 1990;Burt, 2000).

Adler and Kwon (2002) define social capital as “the goodwill (sympathy, trust, and

forgiveness) that others have offered us is considered as a valuable resource” (pg. 18).

Furthermore, a firm’s social capital is largely facilitated by their direct and indirect links to

other firms through director interlocks. Empirical studies also find that a firm’s networks built

from its board of directors contribute to the boards’ ability to make more effective strategic

decisions (Carpenter and Westphal, 2001;Thorgren et al., 2010). Our study extends this

research stream by focusing on the board of directors’ networks and the relationship

Maretno Agus Harjoto is a

Faculty at Pepperdine

Graziadio Business School,

Pepperdine University,

Malibu, California, USA.

Yan Wang is a Faculty at

the Department of

Accounting and Finance,

Nottingham Business

School, Nottingham Trent

University, Nottingham, UK.

Received 4 October 2019

Revised 11 May 2020

Accepted 11 May 2020

The authors acknowledged the

contributions from two

anonymous reviewers for their

constructive comments and

recommendations. The authors

thank the Editor, Gabriel Eweje,

for his consideration. Harjoto

acknowledges the Denney

Academic Chair 2019–2021

research endowment for the

financial support and release

time for this research project.

DOI 10.1108/CG-10-2019-0306 VOL. 20 NO. 6 2020, pp. 965-985, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 965

between board networks and firms’ environmental, social, and governance (ESG)

performance.

Existing literature has examined the impact of social and professional networks of the top

executives and board of directors on firms’ financial performance and generally find that

there is a positive relationship between them (Chahine and Goergen, 2013;Chuluun et al.,

2014;Horton et al.,2012;Larcker et al., 2013). Recent studies have also found that there is

a positive relationship between US firms’ alliance network centrality and corporate social

performance (Macaulay et al., 2018;Vo et al.,2020). Muthuri et al. (2009) also find a

positive relation between the networks built from employees’ volunteerism and firms’

corporate social performance on three UK multinational firms. We extend this strand of

literature and focus on the board of directors for UK firms because of two reasons. First,the

structure of board in the UK consists of executive and non-executive directors who work

closely together and are collectively responsible for the firm performance (Conyon and

Peck, 1998;Elmagrhi et al., 2016;Hopt and Leyens, 2004;Van Veen and Elbertsen, 2008).

Bainbridge (2017) indicates that the collective responsibilities of the board in the UK has

increased the importance and the influence of board of directors’ monitoring and advising

roles on firm performance. Second, the informal professional and social networks in the UK

have been considered as deficient relative to other developed countries such as the US

(Conyon and Muldoon, 2006;Letki, 2008;Pichler and Wallace, 2007;Useem, 1984). Thus,

our study highlights the importance of board networks for the UK firms.

In the wake of corporate scandals and the 2007 global financial crisis, corporate

social responsibility performance has drawn much attention among top executives,

investors, and academics. The United Nations Global Compact (2017) indicates that

there are over 9,000 companies and 4,000 non-businesses across 161 countries have

taken serious commitments to address social issues, specifically actions to improve

the environment, social, and governance (ESG) performance . More specifically, UK

has considered corporate social responsibility or ESG performance seriously since

UK was the first country in the world to appoint a Minister for Corporate Social

Responsibility in March 2000. However, similar to most of other developed countries

(e.g. United States), ESG activities in the UK are mostly practiced by large

multinational corporations at which the power of shareholders’ interests seems to

dominate the interests of non-investing stakeholder (Brammer et al., 2012;Goergen

et al., 2019;Kinderman, 2012;Wang et al., 2019). Thus, researchers have argued that

the role of board of directors in the UK firms has become increasingly critical to

represent the interests from the non-investing stakeholders along with the

shareholders’ interests (Aguilera, 2005;Aguilera et al., 2006;Elmagrhi et al., 2016;

Hillenbrand et al., 2013;Money and Schepers, 2007).

Our study argues that having board of directors with strong networks would allow directors

to draw the resources embedded within each director’s social and professional networks,

which are accessible through direct and indirect professional ties (Booth-Bell, 2017;Jang

et al., 2019;Kacanski, 2019;Krenn, 2017). These resources increase firms’ information

advantages to satisfy the needs of and to address the pressures from non-investing

stakeholders, thus leads to better ESG performance. Drawing from the social capital (Adler

and Kwon, 2002) and social network theory of stakeholder influence (Rowley, 1997)and

stakeholder management theory, we argue that board networks represents valuable social

capital that can be mobilized to enhance firms’ ability to gain faster and more accurate

information to satisfy the needs of the stakeholders (Freeman, 1984;Donaldson and

Preston, 1995;Rowley, 1997). We focus on board of directors because they have broader

networks through their services on multiple companies (interlocking) and the board of

directors have advising and monitoring roles, which lead to firms’ tangible strategic actions

(Forbes and Milliken, 1999). We argue that firms with stronger board networks have higher

ability to tap information from their networks to understand recent developmentsto address

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