The Effect of Corporate Governance Structure on ESG Disclosure

What is the relationship between companies’ board composition and the disclosure of their environmental, social and governance (ESG) performance in Latin America?

Cómo afecta la estructura del gobierno corporativo a la divulgación ESG

Organizations in Latin America do not traditionally report their environmental and social impact at the corporate governance level. Although this trend is on the rise, few companies disclose their ESG (environmental, social impact and corporate governance) performance. This restricts the region's potential to receive more financing from venture capital funds, which require certain sustainability standards for investment purposes.

The literature on corporate social responsibility (CSR) has shown that the composition of boards of directors affects the disclosure of their ESG-related information, which undoubtedly favors firms’ corporate performance in relation to shareholders and stakeholders, as well as society in general. In particular, there are variables that help governing bodies to be more transparent and make this information known publicly, such as: board size, the inclusion of women and independent directors on the same, or the non-participation of the CEO as the board chair.

The correlation between board structure and ESG disclosure is evident in developed countries and some emerging economies. However, in a region such as Latin America there is little evidence in this regard, which represents a significant area of opportunity in the area of governance.  

In order to study the effects of board composition on ESG disclosure in Latin America, I published, together with José Milton de Sousa-Filho, from Universidad de Fortaleza (Brazil), the paper “Board structure and environmental, social, and governance disclosure in Latin America” (Journal of Business Research). In our research, we analyzed 176 listed firms from four countries (Brazil, Mexico, Colombia and Chile) over four consecutive years (2011-2014).

The unique Latin American context

Something that is valid for a US company is not necessarily valid south of the Rio Grande. Institutional contexts are quite different from one country or region to another. In the case of Latin America, companies have three significant features that affect corporate governance:

  1. Little protection for minority shareholders since the purpose of corporate governance is to maintain control of the majority shareholder
  2. Family ownership or control. In Mexico, 71% of listed companies are family owned
  3. Low stakeholder orientation, since both companies and regulation are more concerned with stockholders

The region’s business idiosyncrasy can undoubtedly produce different results from those of developed countries or even other emerging countries. Therefore, it is important to take these aspects into account in order to avoid wrong or counterproductive recommendations.

With the public information of the companies analyzed, our aim was to validate four features of corporate governance that provide a point of comparison to examine their behavior in a region with unique characteristics.

The greater the size, the greater the disclosure

Size is determined by the number of directors on the board pf directors. Prior research shows that the more directors, the lower the variability of corporate performance. In other words, a greater diversity of viewpoints during decision-making processes requires more negotiation and results in the adoption of more centrist decisions. Larger boards may be less effective in making decisions and controlling management.

In terms of ESG goal disclosure, board size has a positive effect on the dissemination of information on governance, as has been observed in other emerging regions.

CEO duality can be harmful

When the company's CEO also serves as chair of the board of directors, there is a negative effect on ESG disclosure. This is because the CEO tends to deal more with the firm’s management than with the board, thereby benefiting directors and managers more than shareholders.

The hypothesis corroborated in this study is that CEO duality decreases the checks and balances of more deliberate decision-making process and will therefore decrease ESG reporting. Unlike Latin America, in the United States the separation of roles of the board chair and CEO seeks to protect minority shareholders.

The value of external directors

The appointment of independent directors has a positive effect on ESG disclosure in Latin America. These directors are external to the company and should not be related to other executives in the firm or have family or business ties with the same. They are often appointed to improve decision-making and increase access to resources.

External directors are able to appreciate the importance of community and environmental concerns, and are more aware of the stakeholders’ needs. They contribute more diverse perspectives and broader considerations regarding the company's impacts.

More women on the board, greater disclosure?

The hypothesis was that the presence of women on the board has a positive effect on ESG disclosure in Latin America. Gender diversity seems to promote greater control and higher quality decisions. However, in a context such as Latin America, dominated by a culture of entrepreneurial families, it can produce disparate results.

In fact, this was the only hypothesis that could not be validated, since the correlation between the proportion of women on the board and ESG disclosure was negative. A possible explanation is that societies which are more collectivist than individualistic, such as those in Latin America, tend to prioritize the internal dynamics of the group over the external ones. In addition, they place more importance on the defense of the family than on external interests, such as the stakeholders’ needs.

Another explanation is the very small number of women present on the boards of the firms analyzed. Gender-based discrimination is prevalent in the region and few women leaders manage to infiltrate boards.

This research represents an important step in understanding boards of directors in Latin America. Given the importance of ESG disclosure in investment decisions and the generation of financial benefits, these results should motivate Latin American companies to find new ways to attract and maintain investments through good corporate governance practices.

Articles of Sustainability + Strategy
Go to research
in your inbox