The ESG–financial performance relationship: Does the type of employee board representation matter?

• Published date: 01 March 2021
• Author: Mehdi Nekhili,Amal Boukadhaba,Haithem Nagati
• Date: 01 March 2021
• DOI: http://doi.org/10.1111/corg.12345

ORIGINAL ARTICLE

The ESG–financial performance relationship: Does the type of

employee board representation matter?

Mehdi Nekhili

1

| Amal Boukadhaba

1

| Haithem Nagati

2

1

Le Mans Université (ARGUMANS), Le Mans,

France

2

Emlyon Business School, Écully, France

Correspondence

Mehdi Nekhili, Le Mans Université

(ARGUMANS), avenue Olivier Messiaen,

72085 Le Mans cedex 9, France.

Email: mehdi.nekhili@univ-lemans.fr

Abstract

Research Question/Issue: We examine the impact of two differing types of

employee board representation (i.e., labor board representation and employee

shareholder board representations) on environmental, social, and corporate

governance components of ESG performance and the moderating role of each type

of employee board representation on the relationship between ESG performance

and the firm's market value.

Research Findings/Insights: Using a propensity score matching approach on a sample

of French firms listed in the SBF 120 index from 2007 to 2017, our findings reveal

that labor board representatives act in the opposite direction to employee

shareholder board representatives by focusing exclusively on improving social

performance and reducing environmental and corporate governance performance.

The way employees are represented on the board of directors also moderates the

corporate ESG–financial performance relationship differently.

Theoretical/Academic Implications: Employee directors are not a homogenous

group. The differentiation between the two types of employee directors (i.e., labor

board representatives and employee shareholder board representatives) brings a

deeper understanding of the effect of stakeholders' representation on the board.

Practitioner/Policy Implications: Our results are of interest to governance

policymakers because they provide them with a fresh understanding of the key role

of employee board representation. A meaningful inference to be drawn from our

findings is that employee ownership and the representation of employees on the

board as employee shareholders may bring about fundamental changes in employees'

attitudes and behavior on the board and may, in this regard, be considered as a credi-

ble way of generating social harmony and constructive relationships between

employees and shareholders.

Video Abstract: https://youtu.be/GqB_6GxtH2A

KEYWORDS

Corporate governance, ESG performance, labor board representation, employee shareholder

board representation, value relevance

Received: 25 November 2019 Revised: 27 August 2020 Accepted: 28 August 2020

DOI: 10.1111/corg.12345

134 © 2020 John Wiley & Sons Ltd Corp Govern Int Rev. 2021;29:134–161.wileyonlinelibrary.com/journal/corg

1|INTRODUCTION

In a recent editorial in Corporate Governance: An International Review,

Kumar and Zattoni (2019) proposed that consideration of the role

played by stakeholders in influencing decision making at the top is a

potentially exciting prospect and one of the future challenges in

corporate governance research. Although the board of directors is

the formal corporate body that determines the orientations of a

company acting in the best interest of its shareholders, board diver-

sity is claimed to be a determinant for nonfinancial performance, a

corporate strategy that reflects relations between a firm and its

stakeholders (Coffey & Wang, 1998; Dunn & Sainty, 2009; Hafsi &

Turgut, 2013). Board diversity is defined as the variation among

board members stemming from their personalities, learning styles,

knowledge, age, values, and expertise (Coffey & Wang, 1998). From

the standpoint of stakeholders, a more diverse board may be

viewed as indicative of management sensitivity to their expectations

(Luoma & Goodstein, 1999). Accordingly, Huse, Nielsen, and

Hagen (2009) argue that diversity, including female directors and

employee representatives, is an important criterion when selecting

board members.

Like board gender diversity (e.g., Bennouri, Chtioui, Nagati, &

Nekhili, 2018; Nekhili, Gull, Chtioui, & Radouane, 2020), the represen-

tation of employees on the board has attracted increasing attention

from regulators and researchers. The representation of labor may be

seen as a policy to balance forces (labor and capital) on the board and

to present the concerns of different stakeholders rather than focusing

solely on shareholders. From an agency theory perspective, employee

board representatives do not necessarily have the same interests as

the other directors representing outside shareholders and may be

more concerned about corporate social responsibility (CSR) perfor-

mance (Barnea & Rubin, 2010). Setting out from the supposition that

(1) a CSR-oriented board may achieve better social and environmental

performance (Shaukat, Qiu, & Trojanowski, 2016) and (2) employees

are more concerned about socially responsible activities

(Huse et al., 2009) as well as the long-term survival of the firm

(Kleinknecht, 2015), employee board representation may be an

explicit signal of a firm's greater engagement with all its stakeholders

(Hillman, Keim, & Luce, 2001). Nevertheless, as Devinney (2009)

argues, good CSR performance does not necessarily result in a better

corporate image but rather in a rent “redistribution”between inter-

ested actors. This may lead market participants, as residual claimants,

to exercise great caution when interpreting CSR performance.

Previous studies have focused on the impact of employee board

representation on board efficiency (Huse et al., 2009), agency costs

(Fauver & Fuerst, 2006), CEO entrenchment (Hollandts, Aubert,

Abdelhamid, & Prieur, 2018), payout policies (Ginglinger, Megginson, &

Waxin, 2011), and the implications for human resource management

(Preuss, Haunschild, & Matten, 2009). However, to the best of our

knowledge, with the exception of Nekhili, Boukadhaba, Nagati, and

Chtioui (2019), employee board representation has not been exam-

ined with respect to environmental, social, and corporate governance

(ESG) performance. ESG performance is an important aspect of

corporate strategy and can be used by equity analysts and market par-

ticipants as a proxy for management quality (Eccles, Serafeim, &

Krzus, 2011). Nekhili et al. (2019) examine the moderating impact of

employee directors on the value relevance of firms' extra-financial

performance. They find that employee board representation reduces

the relevance of ESG performance in terms of market value. However,

the authors do not distinguish between the two types of employee

directors as defined by French law.

Whereas the representation of employees on the board is likely

to be a European model of corporate governance (Gold &

Waddington, 2019; Gordon & Roe, 2004), French regulators show

greater interest in employee board representation by considering two

types of employee directors: labor representatives and employee

shareholder representatives. Extending the scope of previous studies

(e.g., Hillman et al., 2001; Huse et al., 2009; Nekhili et al., 2019), we

defend the idea that the two different types of employee directors

may have different attitudes toward ESG performance. We then

examine the moderating role of each type of employee directors on

the market valuation of overall ESG performance as well as each of

the three pillars of ESG performance (i.e., environmental, social, and

corporate governance). We are thereby able to gain further insights

into the relationship between employee directorship and the firm's

extra-financial performance and to determine to what extent the type

of employee directors is important for the financial market in the

assessment of ESG performance.

On the basis of a matched sample of French firms listed on the

SBF 120 index for the period 2007–2017, we report that the two

types of employee directors have different impacts on the firm's

extra-financial (ESG) performance. Our results make it clear that labor

board representation tends exclusively to improve social performance

with regard to the three key ESG pillars, whereas employee

shareholder board representatives are found to enhance overall ESG

performance and especially environmental performance and corporate

governance performance. Our results support the findings of Bøhren

and Strøm (2010) that labor representatives on the board advantage

employees at the expense of shareholders' wealth. In line with our ini-

tial argument, we find that whereas the presence of employee share-

holders on the board positively moderates market participants'

perception of ESG performance, the presence of labor board repre-

sentatives negatively moderates this relationship. Outside share-

holders seem to be more reluctant to have labor directors, as labor

representation may counterbalance shareholders' power on the board

and be inclined to support employees' interests. Conversely, outside

shareholders are more prone to view employee shareholder board

representatives as having closer relationships with their representa-

tives on the board.

The paper is structured as follows. Section 2 discusses the moti-

vation behind the distinction between labor and employee share-

holder board representation and highlights the distinctive features of

the French institutional context. Section 3 reviews existing literature

and states hypotheses to be tested. Section 4 describes our method-

ology, including the sample, variables, and empirical model. Section 5

presents the results. Section 6 summarizes and discusses the results.

NEKHILI ET AL.135