The effect of board characteristics on sustainability performance: Evidence from the Nordic countries

Abstract

During the past years, there has been a growing interest on corporate social responsibility (CSR) across various industries. Indeed, prior corporate governance scandals have raised the issue over whether social elements should be part of firm objectives along with profit maximization. However, previous literature on board characteristics has mainly focused on their relationship with financial performance and reporting, and much less attention has been given to how they influence non- financial issues, such as sustainability performance.

Therefore, this thesis examines the effect of board characteristics, which include board size, board independence, CEO-chairperson duality, female board membership and director tenure, on sustainability performance. The thesis is a quantitative study, which covers altogether 472 listed companies from the Nordic countries – that is, Denmark, Finland, Iceland, Norway and Sweden, for a three- year time period from 2020 to 2022. Thus, the final sample consists of 1 416 firm- year observations across 11 industries, and all the data is collected from Refinitiv. The empirical findings show that board independence and female board membership positively affect firm sustainability performance. Consequently, the effect of board size, CEO-chairperson duality and director tenure on such performance cannot be confirmed at a statistically significant level.

These findings suggest that firstly, boards should consider independence and gender diversity as selection criteria when appointing new members to the board. Secondly, the results demonstrate to regulators which elements of board governance require further regulatory focus. Moreover, the findings shed light on the board characteristics investors should be interested in when looking for board changes that provide potential for better financial position, as they might lead to better sustainability performance as well. Thus, this thesis provides evidence on the internal governance mechanisms needed for companies to achieve their sustainability targets. Finally, this study provides additional support of the various roles board members play when it comes to the promotion of sustainability initiatives as promulgated by agency, resource dependence and stakeholder theories.