Minority Directors and Firm Sustainability Performance

Abstract

In closely held firms, independent directors tend to be captivated by major shareholders, undermining board independence and, in turn, the effectiveness of monitoring and promoting sustainability-oriented strategies. Thus, minority shareholders' representatives on the board of directors (i.e., minority directors) may represent a mechanism for restoring board independence by limiting blockholders' influence over the boardroom. Using a sample of Italian-listed companies over the period 2017‒2021, we show that minority directors have a positive effect on corporate environmental and social performance (ESP), with results being robust to endogeneity and alternative estimation methods. Furthermore, we observe that their effect in fostering ESP is stronger for higher levels of ownership concentration and firms suffering from higher agency costs, supporting the monitoring argument. Finally, we observe a stronger effect on ESP, whereas corporate carbon risk exposure is more severe. Overall, our findings shed light on the nuanced interplay between ownership concentration, board characteristics, and corporate sustainability performance.