Sustainable corporate governance: A review of research on long‐term corporate ownership and sustainability

• Published date: 01 January 2023
• Author: Nikolaos Kavadis,Steen Thomsen
• Date: 01 January 2023
• DOI: http://doi.org/10.1111/corg.12486

REVIEW ARTICLE

Sustainable corporate governance: A review of research on

long-term corporate ownership and sustainability

Nikolaos Kavadis

1

| Steen Thomsen

2

1

Center for Corporate Governance,

Copenhagen Business School, Frederiksberg,

Denmark

2

Center for Corporate Governance,

Copenhagen Business School and ECGI,

Frederiksberg, Denmark

Correspondence

Nikolaos Kavadis, Center for Corporate

Governance, Copenhagen Business School,

Solbjerg Plads 3, C5.02, 2000 Frederiksberg,

Denmark.

Email: nk.ccg@cbs.dk

Abstract

Research Question/Issue: Short-termism is increasingly seen as a problem for devel-

oping sustainable and responsible business. We posit that a long-term ownership

horizon is an enabling but not sufficient condition for sustainability and propose

owner stewardship as an important contingency.

Research Findings/Insights: We review 161 articles on the relationship between cor-

porate ownership and sustainability/CSR, published during 2017–2021 and not cov-

ered by previous reviews. We find (1) in most cases, a positive effect of institutional

ownership on sustainability, particularly for long-term institutional investors; (2) in

most cases, a positive effect of state ownership, seen as long-term-oriented; and

(3) mixed results regarding family ownership, also seen as long-term-oriented. We

also observe considerable heterogeneity in how prior research defines and measures

the key constructs of our review.

Theoretical/Academic Implications: Long-term ownership appears to be an enabling

but not sufficient condition for corporate sustainability, and stewardship at the own-

ership level may be an important missing link. Furthermore, the wide variety of termi-

nology and measures in the literature poses a challenge for knowledge accumulation.

Efforts towards convergence and standardization seem important.

Practitioner/Policy Implications: An exclusive focus on short-termism may be mis-

leading. Business leaders and policymakers ought to consider other parameters, such

as steward ownership.

KEYWORDS

corporate governance, investment horizon, ownership, stewardship, sustainability

1|INTRODUCTION

Climate change and the transition to net zero carbon emission may

be the most important social challenge of our time. It certainly fig-

ures prominently in the European Union's green deal (EU, 2021) and

the US Presidency's climate plan (The White House, 2021). Bill

Gates (2021) highlights both the enormity of the problem before us

and the absolute necessity of solving it. At the same time, it is

increasingly recognized that climate action is part of the broader

sustainability challenge highlighted in the UN Sustainable Develop-

ment Goals (UN, 2021), including income and gender equality,

biodiversity, the elimination of poverty and hunger, global health,

and more.

The key question for corporate governance is what changes are

called for to meet the sustainability challenge. Influential business

voices like the World Economic Forum (2020) or the US Business

Roundtable (2020) have called for the replacing of shareholder value

with a broader set of stakeholder goals. Investors are increasingly tak-

ing ESG—environmental social and governance issues—into consider-

ation (Eccles et al., 2017). Mayer (2013,2018), Edmans (2020), and

the British Academy (2018,2019) have called on companies to (re)

state their corporate purpose.

Received: 27 February 2021 Revised: 12 July 2022 Accepted: 14 July 2022

DOI: 10.1111/corg.12486

198 © 2022 John Wiley & Sons Ltd. Corp Govern Int Rev. 2023;31:198–226.wileyonlinelibrary.com/journal/corg

The European Commission has tackled the issue head on with a

policy initiative on “Sustainable Corporate Governance and

Directors' Duties.”Based on a study by Ernst and Young, the

Commission (2020a,2020b) has signaled a broad array of legal

changes. In the words of the Commission:

The Study found a clear trend of short-termism in the

focus of EU companies. It identified key drivers of this

issue, ranging from the narrow interpretation of direc-

tors' duties and the company's interest with the ten-

dency to favour the short-term maximisation of

financial value, through growing pressure from inves-

tors and the lack of a strategic perspective on sustain-

ability all the way to the limited enforcement of the

directors' duty to act in the long-term interest of the

company.

Against this backdrop, we ask whether long-term share owner-

ship can be part of the solution and thus an integral part of sustainable

corporate governance. It is commonly assumed that, because some

owner types (e.g., families, foundations, governments, and some cate-

gories of institutional investors) tend to have long time horizons, their

time horizon provides them with incentives to address current sus-

tainability challenges and resist the temptations discussed by critics of

short-termism. However, recent research is critical to such emphasis

on the time horizon dimension (Edmans, 2020; Roe, 2022).

We seek to contribute to this literature by proposing a theoretical

framework that acknowledges differences in both the time horizons

of shareholders and “owner stewardship,”which indicates the extent

to which shareholders take responsibility for corporate governance.

Building on corporate ownership research (e.g., Boyd &

Solarino, 2016), and drawing from stewardship theory (Davis

et al., 1997; Donaldson, 1990) and the concept of psychological own-

ership (Hernandez, 2012; McNulty & Nordberg, 2016; Sikavica &

Hillman, 2008), we argue that long-term corporate ownership is an

enabling but not sufficient condition for corporate sustainability. We

propose that corporate sustainability is influenced by psychological

factors, inherent in owner stewardship. We apply our theoretical

framework to a comprehensive literature review on the relationship

between corporate ownership and sustainability or corporate social

responsibility (CSR),

1

which enables us to make the following contri-

butions to the literature.

First, shareholder time horizon has been considered an essential

characteristic influencing owner proclivity towards CSR (e.g., Faller &

zu Knyphausen-Aufseß, 2018; Neubaum & Zahra, 2006). However,

our literature review reveals a more complex picture. Long-term own-

ership appears to be, in the majority of cases, positively related to cor-

porate sustainability in state-owned enterprises and in companies

owned primarily by institutional investors, while the evidence is more

mixed for family-owned businesses. Contrary to the widespread belief

in long-termism, many studies focusing on family ownership find a

negative effect on sustainability/CSR, although the question of causal-

ity seems to be rather undecided. The mixed evidence, as shown by

our literature review, highlights the potentially important role of stew-

ard ownership for firms, in particular for family-owned firms.

Second, in recent years, we have witnessed a substantial growth

of research on the link between corporate ownership and CSR. This

growing volume of research comes with increasing internationaliza-

tion of the data employed but also with increasing differentiation. We

address the necessity of tracking and assessing the evolution of this

stream of research with a focus on the most recent period, 2017–

2021, which is not covered by previous literature reviews on the topic

(Faller & zu Knyphausen-Aufseß, 2018; Villalonga, 2018), and which

seems to correspond to a new phase of rapid growth. Compared with

previous reviews, we unpack our empirical material (articles) in a larger

number of dimensions, with the objective to provide a more detailed

understanding of what has been done in our topic during more recent

years, to identify more comprehensively limitations of current

research and opportunities for future research.

Third, the increasing growth and differentiation of research on

the linkage between share ownership and CSR comes with a variety in

the terminology and measures used for ownership and CSR. This

seems to pose a growing challenge in ensuring replicability and knowl-

edge cumulativeness. In this regard, we suggest avenues for future

research.

2|THEORETICAL FRAMEWORK

The above-mentioned policy initiative seems to be part of a broader

concern about investor-driven short-termism as at the origin of harm-

ful effects for society and, as a result, of an increasing interest in the

time horizon of corporate actors, in particular corporate owners, as

part of the solution. Yet, recently, voices warn against such a focus on

time horizon as missing the target, in that lengthening “time horizons

will not bring us closer to a fairer and environmentally stronger

society,”as time horizon and sustainable objectives are “largely sepa-

rate issues that public discourse often conflates”(Roe, 2022, p. 2). For

Roe (2022), short-termism is not at the origin of the major issues that

contemporary societies are facing, but it constitutes a convenient

scapegoat, because executive and non-executive employee interests

align to, it resonates with public sentiments, and it has a place in polit-

ical rhetoric.

Aiming to shed light on the issue, we focus on corporate owner-

ship effects on sustainability. Corporate ownership, or the residual

rights of control over a company, is at the core of corporate gover-

nance and, arguably, the foundation of modern capitalism, given that

no firm exists without owners and the property rights allocated to

these owners (Aguilera & Crespi-Cladera, 2016; Jensen &

Meckling, 1976). Shareholders as the focus of a corporation's eco-

nomic value creation were already underlying much of corporate gov-

ernance scholarship and practice since the 1970s. Their role and

importance may be even more critical in the current context, as a

potential remedy to what many see as excesses of contemporary capi-

talism. In the text that follows, we start with defining the core con-

structs of our study and then we develop our theoretical framework.

KAVADIS AND THOMSEN 199