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ESG and CEO Turnover


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ESG scores are already well-established, and nobody doubts that the scores affect investors or companies. Investors seem to care more and more about the other aspects of the stocks and not just the profits – the human welfare, ecology or social aspects of our lives. Additionally, numerous researches point out that the ESG scores can positively affect also the portfolios. However, the novel research by Colak et al. (2020), has examined other implications of the ESG scores: how the ESG affect the CEOs. To be more precise, how the adverse ESG events and subsequent negative media attention affects the longevity of the CEOs. The finding is that negative event significantly increase the probability of the CEO being replaced. Overall, the research paper highlights the importance of ESG scores in the corporate world. 

Authors: Gonul Colak, Timo Korkeamaki and Niclas Oskar Meyer

Title: ESG and CEO Turnover



We investigate corporate reactions to problems related to Environmental, Social, and Governance (ESG) issues by observing the connection between negative media attention to these issues and CEO turnover. We use a sample of large US and European firms, which allows us to consider covariates not only at individual-, firm-, and industry levels, but also at the country level. We find that ESG-related negative news has a robust and significant impact on CEO replacement odds, and this impact is proportional to the severity of an event. Also, CEO turnover probability is inversely proportional to the stock market reaction to an ESG incident in both common-law and civil-law countries, however, the negative media attention on itself (“shaming”) can trigger CEO turnover only on latter group of countries.

As always, the results can be presented through interesting charts:

Notable quotations from the academic research paper:

“Among few studies investigating the connection between corporate social irresponsibility and shareholder wealth, Krüger (2015) provides evidence that investors react negatively to negative news about a firm’s corporate social responsibility (CSR). This suggests that ESG incidences have a
detrimental impact on shareholder wealth above and beyond the negative impact they have on nonfinancial stakeholders. Also, ESG incidences may signal a breakdown in the ethical conduct of a company and its management, and, especially if the media report extensively on the incidence, could harm the reputational capital of a company (Baloria and Heese, 2018) and put pressure on executives and directors (Dyck and Zingales, 2002).2 One would thus expect boards to hold CEOs accountable
for ESG-related corporate misbehavior. Indeed, anecdotal evidence such as Volkswagen’s emission scandal in 2015 and British Petroleum’s (BP) Deepwater Horizon oil spill in 2010 support this interpretation. Both scandals led to widespread negative media attention, and ultimately resulted in the resignations of the firms’ CEOs. Thus, we conjecture that negative media attention about a firm’s ESG issues leads to a higher likelihood of CEOs being fired.

ESG incidences are consequential for the CEOs, and they affect their job longevity. Moreover, we provide evidence that in both US and Europe – with diverse underlying legal, institutional, and cultural norms, as well as differences in firm-level ESG practices and stakeholder orientation across countries – CEOs are fired for ESG failures. However, we document an important difference between common- and civil-law countries: in common-law countries, CEOs are fired when ESG incidences have a negative impact on shareholders’ wealth (“market discipline”,“materiality”), while in stakeholder-oriented civil-law countries, both market discipline and media attention on its own (“shaming by media and stakeholders”) have a distinct impact on CEO turnover.

Furthermore, in univariate results, we document that the unconditional probability of a CEO losing his or her job in the same or in the next year relative to a firm having extreme ESG risk exposure in year t is 23.7%, compared to 18.6% for firm-years with normal or high risk exposure. Employing multivariate logistic regression models, we find that the probability of a CEO losing his or her job is roughly 7 percentage points (average marginal effect) higher if a firm has extreme risk exposure in a year, all else equal. These results are robust to the inclusion of CEO-specific, firm-level, and countrylevel control variables; year, industry, and country fixed effects; country-year and industry-year interacted fixed effects; using a conditional (firm fixed effects) logistic regression model; using linear probability models (OLS firm fixed effects panel regressions); as well as using nonlinear outcome estimations (e.g., probit regression).”

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