Impact of professor‐directors on Chinese firms' environmental performance

• Published date: 01 December 2023
• Author: Liqiang Chen,Hong Fan,Xiaofei Song
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/irfi.12416

ORIGINAL ARTICLE

Impact of professor-directors on Chinese firms'

environmental performance

Liqiang Chen

1

| Hong Fan

2

| Xiaofei Song

2

1

Department of Finance, IS & MS, Sobey

School of Business, Saint Mary's University,

923 Robie Street, Halifax, Nova Scotia, B3H

3C3, Canada

2

Department of Accounting, Sobey School of

Business, Saint Mary's University, 923 Robie

Street, Halifax, Nova Scotia, B3H 3C3,

Canada

Correspondence

Hong Fan, Department of Accounting, Sobey

School of Business, Saint Mary's University,

923 Robie Street, Halifax, NS B3H 3C3,

Canada.

Email: hong.fan@smu.ca

Abstract

This study investigates the impact of academic professor-

directors on Chinese firms' environmental performance. We

find that the presence of board directors who are also pro-

fessors has a positive impact on firms' environmental protec-

tion performance, and the result is robust after controlling

for the potential endogeneity of professor-directors. This is

consistent with the notion that professor board directors are

perceived to take more social responsibility and are more

likely to advocate for sustainability. However, this positive

impact is mitigated significantly by the presence of professor

board directors with administrative titles. Moreover, the

above results are mainly driven by non-state-owned enter-

prises, firms with less powerful CEOs, firms with better ana-

lyst coverage, and firmswith less financial distress. Our study

highlights the importance of academic directors for firms'

environmentalperformance.

KEYWORDS

corporate governance, environmental performance, independent

directors, professor-directors

1|INTRODUCTION

The rapid growth of the Chinese economy coupled with its relatively lax environmental oversight has caused serious

environmental problems such as air pollution and “smog”weather conditions in many areas. The conflict between

Received: 15 June 2022 Revised: 5 December 2022 Accepted: 7 March 2023

DOI: 10.1111/irfi.12416

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.

© 2023 The Authors. International Review of Finance published by John Wiley & Sons Australia, Ltd on behalf of International Review

of Finance Ltd.

696 International Review of Finance. 2023;23:696–720.

wileyonlinelibrary.com/journal/irfi

economic development and environmental protection has been exacerbated by the weak monitoring and enforce-

ment from government agencies in China. To promote a more sustainable economy, in recent years, the Chinese

government has shifted from focusing solely on economic development to a more balanced policy including both the

economy and the environment. For instance, in 2011, for the first time, the Chinese central government recognized

that the environment is a constraint on economic growth in its “Report on the Work of the Government,”and

established environmental protection as one of its major tasks.

1

This shift of the central government's focus has also

had a ripple effect on Chinese firms' efforts related to environmental protection, which is evidenced by an increasing

number of Chinese firms promoting a “green economy”and “sustainable development.”While the central govern-

ment's policy gives some guidelines at a macro level, prior studies have shown that firms rely on their own corporate

governance mechanisms for environmental protection efforts and disclosure (see Balasubramanian et al. (2021) for a

review).

In this paper, we focus on independent directors as an important dimension of corporate governance to examine

their impact on Chinese firms' environmental protection efforts. In particular, we are interested inthe impact of inde-

pendent directors with academic backgrounds, that is, independent directors who are faculty members at colleges or

universities. Extant studies have shown that academic directors play an important governancerole through an advis-

ing and monitoring function (Francis et al., 2015) and that firms with academic directors exhibit higher corporate

social responsibility (CSR) performance ratings related to community donations, employee benefits and diversity

commitment (Cho et al., 2017). The underlying rationale is that the public usually perceives that academics hold to

higher moral standards and social responsibility (e.g., Charnov & Payne, 1987; Cho et al., 2017). With a sustainable

economy and environmental protection becoming among the top priorities of China in recent years, it is reasonable

to postulate that academic directors, who are perceived to have advanced knowledge and a heightened sense of

social responsibility, are likely to impact firms' environment-related policies and performance through their advising

and monitoring function. However, there is little empirical evidence on the relationship between academic directors

and firms' environmental performance or the extent of this relationship if it exists. This paper intends to fill this gap.

We focus on Chinese firms for the following reasons. First, China has made significant progress in its “war”

against pollution, especially air pollution. For instance, the concentrations of fine particulates in Beijing declined by

35% from 2014 to 2018.

2

In addition, China has established roadmaps for future environmental protection and a

goal of becoming carbon neutral by 2060.

3

This makes China a valuable sample that can help us understand which

policies and mechanisms are effective for environmental protection. Second, there have been many environmental

policy changes related to incidents or disclosures in China. As a result, studying how Chinese firms responded to

these policy changes enriches our understanding of the role of corporate governance in protecting the environment.

Additionally, due to recent changes in China, more environmentally related data are available, such as those on public

firms' disclosures of environmental protection activities. While most prior studies rely on third parties' ratings as a

measure of firms' environmental performance (e.g., Cho et al., 2017), we use firms' effort (i.e., disclosed environmen-

tal protection activities) as a measure of environmental performance. These new data enable us to investigate the

“input”of firms, while other studies focus on their “output”(e.g., ratings).

With a sample of all publicly traded firms on the Shanghai and Shenzhen stock exchanges for the period 2010–

2017, we find that firms with academic directors are more likely to voluntarily engage in environmental protection

activities. Our findings suggest that the presence of academic directors indeed has positive effects on firms' environ-

mental performance, consistent with recent empirical studies that have shown that academic directors are an impor-

tant factor in corporate governance mechanisms (e.g., Huang et al., 2016). However, we also find that the

relationship between academic directors and environmental performance is mitigated significantly if at least one of

the academic directors also holds an administrative position, such as dean, president, or chancellor. In fact, our

results show that when all the academic directors of a firm have administrative titles, academic directors' impact on

firms' environmental performance become negative. These results suggest that academic directors' advising and

monitoring function could be compromised when administrative professor-directors are likely to be more aligned

with the objective of prioritizing economic growth over environmental protection from the local governments.

CHEN ET AL.697