Propagation of ESG-Linked Compensation through Boardroom Connections
Co-authors: Oksana Pryshchepa, Cong Wang, Qingwei Wang
Izidin and his co-authors examine how ESG-linked compensation policies diffuse across firms through board interlocks and the role of common directors in shaping this process. Using data on U.S. listed firms from 2002 to 2020, they find that a firm is 2.7% more likely to adopt an ESG-pay policy when its board-connected peers have already implemented one. This peer effect is robust across alternative specifications and persists when using an instrumental variable approach based on peers of peers’ ESG contracting. The effect is stronger when interlocking directors hold greater influence—such as serving as CEO in the focal firm, sitting on compensation committees, or being independent directors in peer firms. Moreover, diffusion is amplified in firms with higher board quality, stronger ESG orientation, greater information asymmetry, and more competitive market environments.
