Proceedings of World Business, Finance and Management Conference
8 - 9 December 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-66-5
The impact of Corporate Governance on Carbon Reduction
Performance: Australian Experience
Jibriel Elsayih1, Qingliang Tang and Gabriel Donleavy
This study aims to investigate the effect of corporate governance mechanisms on carbon reduction
performance in large listed Australian firms. We employed univariate and multivariate analysis for a
sample of 205 firm - year observations over the 2009 - 2012 period. Our study considers all the
important aspects of corporate governance: board size, board independence, board diversity, board
meetings, environmental committee, audit committee independence, CEO stock option, CEO long term
bonus, ownership concentration and managerial ownership. The empirical results show: first, generally
speaking, the corporate government strength is not significantly related to carbon reduction
performance. Second, superior carbon performance is only found in firms that take an environmental
orientation and proactive carbon strategy. Third, carbon performance is higher in carbon intensity
sectors than carbon none intensity sectors. Finally, the results also indicate carbon performance is
sensitive to some financial indicators such as leverage, Tobin’s Q, and capital intensity. The results of
this study contributes to a growing literature on corporate governance and climate change association
and presents new evidence of how carbon performance is impacted by corporate governance. Our
findings suggest current version of corporate governance mechanism in Australia appears to be
structured to focus primarily on maximisation of financial performance. As a consequence, board of
directors of our sample firms seem to ignore other aspects of performance such as carbon reduction.
Our empirical evidence is also consistent with many previous studies that also documented inconclusive
or mixed findings on this issue.
Keywords: Climate Change, Corporate Governance, Carbon Performance, Carbon Accounting
1. Introduction
Among the major problems of the 21st century are the emissions of greenhouse gases (GHG) and
the overdependence on carbon-based energy sources. This explains why there is a growing need to
address climate change issues as scientific researchers continue to present mounting evidence of
the effects of greenhouse gases (GHG) on climate change. Companies have become central to the
efforts owing to the large material flows that they process and their capabilities for technological
innovation (Hoffmann and Busch, 2008). This importance is reflected in the emerging literature in the
corporate and public policy fields which requires companies and organizations to respond and adapt
to climate change (Griffiths et al., 2007).
The control of greenhouse gas emissions is a fundamental aspect of sustainable development. All
managers and corporate personnel are obliged to develop organizational structures for the control of
emissions, assessment of the risks associated with GHG, the evaluation of structures developed to
address the issue. According to a report issued by the Carbon Disclosure Project (CDP, 2011; and
Pinkse & Kolk, 2009) corporate carbon reporting has increased around the world and particularly in
Australia over the last few years. This is mainly due to the fact that climate change issues have
become increasingly fundamental to a wide range of stakeholders in the corporate sector, which has
shifted attention to the effects of GHG, mainly carbon, on corporate activities (Luo and Tang, 2011).
1
Corresponding Author: University of Western Sydney, School of Business,
J.Elsayih@uws.edu.au
Qingliang Tang, University of Western Sydney, School of Business, NSW, 2150, Australia.
Gabriel Donleavy, University of New England.
Australia.
Email
Address:
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8 - 9 December 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-66-5
This is a trend evidenced by the increase in the number of socially responsible investments by firms
all over the world (Clarkson et al., 2011).
This article examines the relation of carbon information that is disclosed voluntarily in the CDP Project by
Australian firms to the underlying carbon performance and its correlation with corporate governance structure
in Australian firms. The CDP reports encourage the firms to develop web-based forms of corporate
accountability with regard to carbon activities (Luo and Tang, 2011).
The disclosure of environmental information by Australian companies started in the early 1990s, but it was not
until some years later that it was taken seriously, after a change in the Australian Corporations Law was
enacted. This change required all corporate executive, specifically for companies whose operations were
subject to any particular environmental regulation, to include details of their company‟s performance in
relation to the regulation in the annual director‟s report (Gibson, and O‟Donovan, 2007). According to Frost
and English, (2002), there has been a significant increase in the number of companies disclosing the
information on their performance in relation to the environmental regulations since the enactment of that law in
Australia, where, previously, it was voluntary, with very few disclosures recorded.
This study aims to investigate the impact of corporate governance mechanisms on carbon reduction
performance in a sample of the largest Australian firms. By using OLS regression model for a sample of 205
firm- year observations over the 2009 - 2012 period. The empirical results show that only the presence of
environmental committee has a strong positive association with carbon reduction performance. However, other
types of corporate governance mechanisms (board size, board independence, board diversity, board meetings,
audit committee independence, CEO stock option, CEO long term bonus, ownership concentration and
managerial ownership) are not statistically significantly associated with carbon reduction performance. Further,
the results also indicate that leverage, Tobin‟s Q and industry types, as control variables, have a strong positive
association with carbon reduction performance, whereas, firm size and profitability are not related to carbon
reduction performance.
Proceedings of World Business, Finance and Management Conference
8 - 9 December 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-66-5
This research work was inspired by the significance of the climate change issue in Australian organisations. It
is also expected that this study will enrich both academic and empirical literature on several accounts: first, the
majority of previous literature focuses on partial aspects of the relationship between corporate governance and
social and environmental performance (e.g. Walls et al., 2012, Cong and Freedman, 2011, Kock 2005). In
contrast, this study will examine the association between corporate governance and carbon performance in
Australia. Second, there is few previous studies using comprehensive corporate governance indicators or
thoroughly examined the relationship in a complete manner. Therefore, the findings of the study will
contribute to a growing literature on corporate governance and climate change association and present new
evidence of how carbon performance and transparency is impacted by the strength and structure of corporate
governance.
The remainder of this study is structured as follows. Section 2 provides a literature review and formulates the
hypotheses. Section 3 introduces research methodology and describes the data. Section 4 report empirical
results and discusses the findings, section 5 presents the further analyses to check the robustness of the initial
results, and finally the concluding remarks and limitations are presented in section 6.
2
Literature Review and Hypothesis Development
2.1 Board Size
Board size is considered to be one of the most important elements of corporate governance mechanism that can
contribute to affect the board effectiveness. Alexander et al. (1993) indicate that larger boards (relative to
others) serve a „„buffering‟‟ function by connecting the firm to its environment and provide protections from
environmental disturbances. Furthermore, larger board size also provides broader representation from
stakeholders and wider expertise across various tasks, which in turn, lead to greater monitoring capacities
(Siciliano 1996). In addition, larger and more diverse boards of directors help companies to reduce
environmental uncertainties (Goodstein et al., 1994) and enhance company performance (Pearce and Zahra,
Proceedings of World Business, Finance and Management Conference
8 - 9 December 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-66-5
1992). Moreover, larger boards can more effectively to reduce detrimental GHG opaqueness (Liao et al., 2014;
Brown et al., 2006). Moreover, it is arguable that a large board is likely to include experienced and
knowledgeable directors who possess expertise when it comes to managing environmental issues. On the other
hand, large boards may face some problems in reaching a consensus on important decisions, as well as may
hinder the effectiveness of board in ensuring that the firm is responsive to environmental change (Goodstein et
al., 1994). This is because of the lack of coordination related to a large board, which slows down the decision
making process and decreases board efficiency (Jensen, 1993; Lipton and Lorsch, 1992).
Empirical literature that has provided evidence on the association between board size and carbon reduction
performance are generally rare. However, some evidence has found a positive and significant relationship
between the size of board and environmental concerns (Walls et al., 2012). Another study by Brown et al.,
(2006) have also indicates that the board size is positively associated with corporate philanthropy actions.
Similarly, Kassinis and Vafeas, (2002) point out that board size is positively related to environmental
litigation. Further, de Villiers et al. (2011) find evidence that environmental performance is higher in firms that
have larger boards. Whereas, Bai, (2012) fount that board size is negatively associated with social performance
in for-profit organizations, but positively related to social performance in non-profit organizations. On the
other hand, Hafsi and Turgut, (2013) found that board size have no significant effect on firms‟ social
performance in companies listed in the S&P500 Index. Therefore, due to mixed results in prior literature, the
following hypotheses are proposed:
Hypothesis 1a: There is a positive association between the number of directors in the board and carbon
reduction performance.
Hypothesis 1b: There is no significant association between the number of directors in the board and carbon
reduction performance.
Proceedings of World Business, Finance and Management Conference
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2.2 Board Independence
A common feature of international corporate governance guidelines is that company boards should have a
majority of independent directors. The OECD (2004) reports that the independence of directors bring an
objective view, can contribute significantly to decision‐making, and play an important role where the interests
of management, the company and shareholders may diverge. In Australia, the ASX (2003) Recommendation
2.1 specifies that a majority of the board should be independent, and lists seven criteria for assessing
independence. Furthermore, the NYSE, (2009), cited in Larcker and Tayan, (2011) can be defined
independence as having “no material relationship with the listed company (either directly or as a partner,
shareholder, or officer of an organization that has a relationship with the company).” Zahra and colleagues,
(1993) have indicated that the presence of outside directors members on the board increases the racial, ethnic,
and gender diversity of the company‟s board. Independent directors on the firm‟s board are more concerned
about certain components of CSP (Ibrahim & Angelidis, 1995) and show greater social responsiveness (Zahra
and Stanton 1988). Therefore, the presence of independent directors on the board can provide more objective
feedback regarding the operations of company and its performance (Liao et al., 2014). Consequently, it can be
argued that the presence of independent directors can contribute to the effective management of stakeholders
through enhanced stakeholder management, which in turn, leads to elevated carbon reduction performance.
The empirical academic studies have provided contradictory results. While some studies found that the
presence of outside directors is significantly positively associated with CSR performance within a firm‟s
industry. Zhang et al, (2013), Dunn and Sainty (2009) found that board independence is positively related to
corporate social performance A similar study have provided by Johnson & Greening, (1999), who indicated
that the independence of board is positively associated with a people (women and minorities, community,
employee relations) and product quality (product and environmental) dimension of CSR. Another study by
Wedd, (2004) has also found evidence that outside directors is positively associated with socially responsible
behaviour of firms. Similarly, Ibrahim et al, (2003) pointed out that outside directors is positively related to the
discretionary components of corporate responsibility. Further, de Villiers et al. (2011) have provided evidence
Proceedings of World Business, Finance and Management Conference
8 - 9 December 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-66-5
that environmental performance is higher in firms that have higher board independence. Some empirical
studies, On the other hand, report that outside directors is negatively related to environmental litigations
(Kassinis and Vafeas, 2002). Whilst, other studies found no relationship between outside directors and the
legal and ethical dimensions of CSR (Ibrahim et al, 2003; and Ibrahim & Angelidis, 1995). Moreover,
McKendall, S´anchez, and Sicilian, (1999) were unable to find significantly relationship between board
independence and environmental violations. In sum, the role of board independence in carbon performance is
still not clear. Hence, given the above foregoing evidence, the following un-directional hypothesis is tested:
Hypothesis 2: There is no significant association between board independence and carbon reduction
performance.
2.3 Board Diversity
Board diversity refers to the various characteristics that may be present among directors in the boardroom that
can influence decision–making process (Van der Walt & Ingley, 2003). Board diversity may derive from
multiple sources, including age, gender, ethnicity, culture, religion, constituency representation, independence,
knowledge, educational and professional background, technical skills and expertise, commercial and industry
experience, career and life experience (Milliken and Martins, 1996). From a signalling perspective, the
presence of female on a company‟s board may act as a signal to observers indicating that the firm pays
attention to women and minorities, and, thus, socially responsible (Bear et al, 2010). Nielsen and Huse (2010)
suggests that the presence of women directors on the board may be particularly sensitive to „„certain
organizational practices, such as corporate social responsibility and environmental politics (p. 138)‟‟.
Moreover, representation of female directors on boards may have social consequences (Hafsi and Turgut,
2013). Therefore, having more female directors on the board may sensitize boards to environmental initiatives,
and provide perspectives that can be helpful in addressing environmental issues.
Few empirical evidence to date exists on the association between board gender diversity and carbon reduction
performance. However, in the context of corporate social performance in general, a positive relationship exists
Proceedings of World Business, Finance and Management Conference
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between proportion of women directors on the board and corporate social responsibility (CSR) performance as
documented by (Zhang et al, 2013; Boulouta 2013; Webb, 2004; Hafsi and Turgut, 2013). Wang and Coffey
(1992) and Williams (2003) have found a positive and significant link between the proportion of female and
corporate philanthropy. With respect to environmental performance, Post et al. (2011) have found weak
evidence of a positive relationship between the presence of female on a firm‟s board of directors and its
environmental performance. On the other hand, insignificant relationship between the percentage of women
board members and corporate philanthropy has been found (Coffey and Wang, 1998). In sum, overwhelming
evidence suggests board diversity has a positive impact on environmental accountability which can enhance
the company‟s carbon performance. Therefore, the following hypothesis is formulated:
Hypothesis 3: There is a positive association between corporate board diversity and carbon reduction
performance
2.4 Board Meetings
According to Jensen (1993), an important proxy for measuring the effectiveness and corporate boards‟
monitoring power is the frequency of board meetings. In addition, Vafeas (1999a) has contended that the
frequency of board meetings is an important dimension of board operations that can have important
implications for performance, which is consistent with stakeholder theory (Conger et al. 1998). Boards that
meet more often in response to company events are more likely to perform their duties in accordance with
shareholders' interests (Vafeas 1999a) and are more likely to effectively monitor management, reduce
manipulation of corporate earnings (Xie et al., 2003) and can result in a higher quality of financial reporting
(Laksmana, 2008). Therefore, the frequency of board meetings may increase the company boards‟ monitoring,
improving the effectiveness of board, enhance performance, and which in turn, reduces information
asymmetry.
Recently, there is limited empirical evidence regarding the relationship between the frequency of board
meetings and environmental performance, particularly for carbon reduction performance. However, in the area
Proceedings of World Business, Finance and Management Conference
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of social performance, although Prado et al. (2009b) did not find a statistically significant impact between
board meetings and CSR, evidence of a significant negative association between the number of meetings and
the dissemination of information on greenhouse gases is found by Prado-Lorenzo and García-Sánchez, (2010).
Consequently, it can be arguable that board of directors that meet more often are more likely to improve carbon
performance via increased capacity to effectively advise and monitor management. Thus, the following
hypothesis is proposed:
Hypothesis 4: There is a positive association between the number of board meetings and carbon reduction
performance.
2.5 Audit Committee Independence
The existence of audit committee on the board of directors plays an important role because it is concerned to
monitoring the accounting processes, and to provide the credibility of the accounting information to the firm‟s
stakeholders (Pincus et al., 1989; Beasley, 1996), to prevent fraudulent accounting statements (Klein 2002a), to
reducing information asymmetry problems (Li 2012), and mitigates agency costs (Ho and Wong, 2001), and
thereby to enhance overall company performance (Weir et al., 2002). An audit committee on the company's
board takes active role in overseeing the firm‟s financial reporting and accounting process (Whittington and
Pany, 2000). More importantly, in order for the Audit committee to more effectively fulfil its oversight role
and protect the interest of shareholders, it must be independent of the management of company (Bédard et al.,
2004; Fama & Jensen, 1983). Therefore, the Australian Corporate Governance Principles and
Recommendations (ACGPR) (Australian Securities Exchange Corporate Governance Council 2007)
recommend that an audit committee should be comprised of at least three independent members. The common
wisdom is that a higher level of audit committee independence is associated with improved monitoring of the
financial reporting process (e.g. Bronson et al., 2009; Bédard et al., 2004; Klein, 2002a).
There is limited empirical evidence on the link between the audit committee independence and environmental
performance, including carbon reduction performance. However, in the context of company performance in
Proceedings of World Business, Finance and Management Conference
8 - 9 December 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1-922069-66-5
general, some empirical studies found that the independence of audit committee is positively associated with
the quality of financial reporting (Mangena & Tauringana, 2007, Klein 2002a) and negatively related to
misleading and fraudulent reporting (Abbott et al., 2000). With Based on this argument, the independence of
committee can contribute to improve overall corporate performance, and thereby enhancing carbon
performance of the company. Thus, the following hypothesis is developed:
Hypothesis 5: There is a positive association between the independence of an audit committee and carbon
reduction performance.
2.6 Environmental Committee Presence2
Prior studies (e.g. Liao, et al 2014) suggest that an environmental committee plays a significant role to bring
greater objectivity and a higher level perspective to bear on environmental matters than could a full board. The
aim of an environmental committee is to motivate a firm into implementing sustainability policies and
activities (Liao et al., 2014). Establishing an environmental committee on the board can be viewed as a means
of dealing with stakeholders and responding to their expectations (Michelon and Parbonetti, 2012). The
existence of environmental committee on the firm‟s board can help to systematically plan and implement
carbon-reduction actions (Liao et al., 2014). The environmental committee can provide strategic advice to
management in the handling of an environmental incident and may also underscore the Board's focused
commitment to achieve a realistic balance between environmental concerns and the operations of the firm.
There is little empirical study that explicitly has examined directly the link between the presence of
environmental committee on the board and carbon reduction performance. Nevertheless, some empirical
studies were unable to find significant association between the existence of environmental committee on the
board and environmental performance which is measured in terms of regulatory compliance, pollution
prevention, and environmental capital expenditures (Rodrigue et al., 2013). A similar study by Berrone and
2
Note: Such committees can be labelled under various names, such as Compliance and Ethics Committee, Environmental
Committee, Public Policy Committee, Sustainability Committee, Corporate Social Responsibility Committee, environment, health,
and safety committees, and Social Welfare Committee, but they all have jurisdiction over environmental issues.
Proceedings of World Business, Finance and Management Conference
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Gomez-Mejia (2009a) did not find that environmental performance had a higher impact on chief executive
officer (CEO) pay in firms with environmental committees. Another study by McKendall et al., (1999) has also
failed to find significant association between social responsibility committee and environmental violations. In
contrast, Lam and Li (2008) point out that firm with an environmental committee on its board is related to a
significant increase in environmental performance for high polluting firms. Furthermore, Walls et al., (2012)
indicates that an environmental board committee is positively associated with both environmental strengths
and environmental concerns. Consequently, the present study argues that the existence of an environmental
committee will have substantial influence on the firm, and it enables a firm to credibly collect, record and
account for GHG emissions (Liao et al., 2014) and therefore is likely to see the importance of GHG reporting
(Michelon and Parbonetti, 2012). Hence, the existence of environmental committee can be seen as a proxy for
strategic environmental orientation that should have a positive impact on firm carbon performance.
Hypothesis 6: There is a positive association between the presence of environmental committee and carbon
reduction performance.
2.7 CEO Stock Options
Stock options are typical forms of long term compensation used to foster a longer decision horizon among
managers. Moreover, Stock options provide compensation only when executives have increased the stock price
to the point at which the options trade (Larcker, Tayan, 2011). Further, stock options can also contribute to
align the managers' interests and shareholders (Jensen & Meckling, 1976; Jensen & Murphy, 1990), because it
is the part that is most sensitive to performance. A sander (2001) argues that stock options encourage riskier
strategies by concentrating attention on potential gains, rather than loss. Accordingly, the executives that
receive stock options are more likely to take actions consistent with maximizing the interests of the firm in the
longer term (Mahoney and Thorne, 2006).
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There have been mixed empirical evidence on the relationship between the CEO stock options and
environmental performance. On the one hand, evidence of the existence of a significant positive association
between the CEO stock options in long term and corporate social performance is documented by Mahoney and
Thorne, (2005, 2006); Deckop et al., (2006) and Callan and Thomas, (2012), respectively. Furthermore,
Berrone and Gomez-Mejia, (2009a) found that long-term pay such as stock options is positive and highly
significant for pollution prevention performance. On the other hand, Coombs and Gilley, (2005) have found no
relationship between stock options and any CSR dimensions, and McGuire et al., (2003) failed to find
relationship between long-term incentives including stock options and good social performance. Further,
McGuire et al., (2003) provided empirical evidence that the stock options are positively associated with poor
social performance. Walls et al, (2012) found evidence that environmental performance was best when the
CEO stock option was low, particularly if the institutional ownership was high. Therefore, the following null
hypothesis is formulated:
Hypothesis 7: There is no significant association between CEO long term stock options and carbon reduction
performance.
2.8 CEO Long Term Bonus
The CEO long term bonuses is an alternative compensation that provide long term incentives to executives
intended to align the managers' interests and shareholders (Fama & Jensen, 1983; Jensen & Meckling, 1976;
Jensen & Murphy, 1990: Berrone and Gomez-Mejia, 2009a), because their final value is contingent on future
performance (Murphy, 1999), and it is possible this may enhance future environmental performance (Berrone
and Gomez-Mejia, 2009a).
Callan and Thomas, (2012), provide evidence that the long term compensation which includes restricted stock
and long-term incentive plans is positively associated with social performance. Moreover, Berrone and GomezMejia, (2009a) found that long-term pay has positive impact on pollution prevention performance. A similar
study by Deckop et al., (2006) finds a positive and statistically significant association between long-term CEO
Proceedings of World Business, Finance and Management Conference
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pay and corporate social performance. However, Rekker et al., (2014), from their study found that there is a
negative relation between long-term compensation such as long term bonus and socially responsible firms.
Thus, based on the inclusive empirical evidence documented in the previous literature, the following null
hypothesis is proposed:
Hypothesis 8: There is no significant association between the CEO long bonus and carbon reduction
performance.
2.9 Ownership concentration
According to Shleifer and Vishny (1997), concentration of ownership leads to better monitoring of managers,
who may attempt to pursue their own goals. Similarly, Admati et al. (1994) suggest that minor shareholders
may attempt to free -ride on the social contributions and undermine firm performance. Moreover, Ullmann,
(1985) and Adams &Hardwick, (1998) indicated the more dispersed the ownership structure, the companies
are more sensitive to social problems. Earnhart and Lizal. (2006) found that greater concentration of ownership
as measured by the single largest shareholder in a company leads to better environmental performance with
respect to absolute emissions. On the other hand, Brown et al., (2006) did not find relationship between
concentration ownership and corporate Philanthropy. Similarly, Adams and Hardwick (1998) found evidence
that ownership concentration as measured by the proportion of the total number of shares held by the top three
shareholders is insignificantly associated with the level of corporate discretionary donations. Finally, Reverte
(2009) noted that companies with widely held shareholdings are more likely to use carbon reduction
performance reporting than companies with a concentrated ownership structure. Again, both the theoretical
argument and empirical evidence is ambiguous, so we provide a null hypothesis:
Hypothesis 9: There is no significant association between ownership concentration and carbon reduction
performance.
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2.10
Managerial Ownership
Managerial ownership has an important alignment effect on the interests of managers vs. shareholders (Jensen
and Meckling, 1976; Fahlenbrach and Stulz, 2009), because managerial ownership provides an incentive for
managers to act in accordance with the interests of shareholders. As per Jensen and Meckling, (1976), a
manager who holds a percentage of shares in the company bears the consequences of managerial actions
therefore it assists to align the interests of company managers with those of the owners. In this regards,
company managers that hold higher portion of ownership can better manage the company from the perspective
of equity owners (Paek et al., 2013).
There are quite limited studies that have investigated the relationship between managerial ownership and
environmental performance. Prior studies found that managerial ownership had a positive and significant
association with CSP factors such as donation probability and charity (Jia and Zhang, 2013) and a positive link
between top management equity and social performance in terms of environment and product quality (Johnson
and Greening 1999). Coffey and Wang, (1998) demonstrated that there is a positive relationship between
managerial control as measured by the percentage of total stock owned by inside board members and corporate
philanthropy. In contrast, Oh et al., (2011) documented that managerial ownership is significantly negatively
associated with CSR rating of the firms. Similarly, Simerly and Bass‟s (1998) provide evidence of significant
negative relationship between a firm‟s corporate social performance and the proportion of stock equity owned
by top management, whereas Paek et al., (2013) indicate that managerial ownership has an insignificant
relationship with CSR performance in terms of community, environment, and product dimensions. Hence,
given the foregoing evidence, a null hypothesis appears to be appropriate.
Hypothesis 10: There is no significant association between managerial ownership and carbon reduction
performance.
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3. Research design
3.1 Sample selection
The initial sample for the current study consists of all Australian companies in CDP database for the period
from 2009 until 2012. The sample includes both financial and non-financial firms based on their sector
affiliation as defined by the Global Industry Classification Standard (GICS) (e.g. Consumer Discretionary,
Energy, Consumer Staples, Financial, Health Care, Information Technology, Industrials, Materials,
Telecommunications and Utilities). Important reasons for choosing these companies and its period are: First,
the CDP sent the questionnaire to these companies for the period of 2009 through 2012. The second reason for
selected this period because the CDP questionnaire before 2006 was incomplete and fewer companies respond.
Third, the periods between 2006 until 2009 for these companies were without template of the CDP Scoring
Methodology. In addition, an important motivation for choosing the banking, insurance, and other industries is
that they contribute to climate change mainly by purchasing electricity and provide finance for green projects.
However, some of the observations need to be dropped from this sample due to some companies did not meet
certain criteria in the present study. For example, companies that did not respond to CDP, firms without detail
information publicly available and that declined to participate in CDP and companies that provided information
but did not answer the CDP questionnaire. In addition, companies with unpublished annual reports are
excluded, companies with missing corporate governance data and companies missing data from DataStream
are deleted, and some companies in 2009 were also omitted due to unavailability of the template of CDP 2009
Scoring Methodology. Hence, the current study covered a period of four years. So the final sample that meets
all of these selection criteria is 205 firm year observations. (See Table 1)
Data will be gathered from multiple sources of high reliability. Firstly, data related to corporate governance
were manually collected from annual reports of the sampled companies. Secondly, Data related to carbon
reduction performance and carbon disclosure scores were mainly gathered from firm's response for CDP
standardized questionnaire. Finally, data for the control variables group (e.g. natural logarithm of total assets,
Tobin‟s q, the return on assets, and capital intensity) are obtained from the FinAnalysis database. Therefore, the
Proceedings of World Business, Finance and Management Conference
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current study relies onto the CDP questionnaire responses and annual reports of these companies.
Table 1: Sample Selection Procedures for the study period
Description
2009 2010
2011
2012
Original sample obtained from CDP database in 192 195
189
236
Australia
(less) No Response ( did not reply to CDP regarding (73) (73)
(55)
(106)
request)
(less) Declined to participate (Decline to participate (17) (29)
(34)
(29)
in the project)
(less) Information provided – View Investor (3)
(1)
(3)
(1)
Response (did not answer all question)
(less) Information provided (provided information (0)
(0)
(2)
(0)
relevant to the questionnaire, did not answer the
questionnaire)
(less) Details not publicly available
(22) (15)
(18)
(17)
(less) See Another (the response is covered by (0)
(3)
(5)
(7)
another company usually parent company)
Total Sample of View Investor Response
77
74
72
76
(less) Annual reports not available or shorter than 12 (10) (1)
(2)
(0)
months fiscal year
(less) Missing Corporate Governance Data
(2)
(1)
(1)
(1)
(less) Firms without Scoring in 2009 due to (43) (0)
(0)
(0)
unavailability of the template of CDP 2009 Scoring
Methodology
(less) Missing data from DataStream(e.g. financial (2)
(12)
(3)
(16)
data, scope1&2)
Final Test Sample
20
60
66
59
Pooled
812
(307)
(109)
(8)
(2)
(72)
(15)
299
(13)
(5)
(43)
(33)
205
3.2 Model Specification
This study uses Ordinary Least Squares (OLS) multiple regression analysis to examine this relationship
between CG and carbon performance. The model is provided as follows:
Equation (1)
LOG_C_PER = ß0 + ß1 NDB + ß2 NIDB + ß3 NFDB + ß4 NBM + ß5 NIDAC + + ß6 EC_D + ß7 CEO_SO
+ ß8 CEO_LTB+ Є
Equation (2)
LOG_C_PER = ß0 + ß1 NDB + ß2 NIDB + ß3 NFDB + ß4 NBM + ß5 NIDAC + ß6 EC_D + ß7 CEO_SO + ß8 CEO_LTB+ ß9
LOG_OWN_CONC +ß10 LOG_MANG_OWN + Є
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Equation (3)
LOG_C_PER = ß0 + ß1 NDB + ß2 NIDB + ß3 NFDB + ß4 NBM + ß5 NIDAC + + ß6EC_D + ß7 CEO_SO
+ ß8 CEO_LTB+
ß9 LOG_OWN_CONC +ß10 LOG_MANG_OWN + ß11 FSIZE + ß12 ROA + ß13LEV + ß14 LOG_TOBINSQ + ß15
LOG_CAPINT + Є
Equation (4)
LOG_C_PER = ß0 + ß1 NDB + ß2 NIDB + ß3 NFDB + ß4 NBM + ß5 NIDAC + + ß6 EC_D + ß7 CEO_SO + ß8 CEO_LTB+ ß9
LOG_OWN_CONC +ß10 LOG_MANG_OWN + ß11 FSIZE + ß12 ROA + ß13LEV + ß14 LOG_TOBINSQ + ß15 LOG_CAPINT
+ ß16 INTSECTOR + Є
3.3 Dependent Variable
This study defines carbon reduction performance as the total Scope 1 and 2 emissions divided by the total sales
at the end of fiscal year (Luo and Tang, 2011, Tang and Luo, 2014). Natural log transformations for this
variable were performed to adjust skewed distributions.
3.4 Independent Variables
The independent variables of this study are corporate governance characteristics of all Australian companies
that completed the CDP 2009 -2012 questionnaire and allowed their responses to be published on the CDP
website. NDB represents board size and measured as the number of directors serving in the board (Zahra and
Pearce II, 1989; Beasley, 1996; Yermack, 1996; Vafeas, 2000; Agrawal & Knoeber, 2001; Kassinis & Vafeas,
2002; Abbot et al., 2004; Coles et al., 2008; de Villiers et al. 2011). The variable of board independence
(NIDB) is defined as the number of independent directors in the board (Core et al., 1999; de Villiers et al. 2011
and Kathyayini &Lester, 2012). The variable of board diversity (NFDB) is calculated as the number of female
directors in the board (Coffey and Wang, 1998; Wedd 2004; Dunn & Sainty, 2009 and Walls et al, 2012). NBM
represents board meetings and measured as the number of board meetings per year (Vafeas, 1999; Nelson et al.
2010; Brick and Chidambaran 2010). The variable of audit committee independence (NIDAC) is measured as
the number of independent directors in audit committee (B´edard, Chtourou, and Courteau, 2004; Anderson et
al. 2004). The variable of environmental committee presence (EC_D) is measured as a dummy variable equal
to 1 if the company has a board-level environmental committee and 0 otherwise (McKendall et al, 1999;
Michelon and Parbonetti, 2012; Peters and Romi, 2011, Liao et al., 2014). The variable of stock options
(CEO_SO) are measured by a dummy variable that equal 1 if CEO compensation includes a stock option and 0
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otherwise (McGuire et al, 2003; Fich & Shivdasani, 2004; Arcay and Vazquez, 2005, Liao et al., 2014). Long
term bonus (CEO_LTB) is measured by a dummy variable that equal 1 if CEO compensation includes a longterm bonus and 0 otherwise. (Deckop, Merriman, & Gupta, 2006, Liao et al., 2014). LOG_OWN_CONC
represents ownership concentration and calculated as the percentage of ordinary shares owned by substantial
shareholder (McKinnon and Dalimunthe, 1993; Hossain et al, 1994; Halme and Huse, 1997; Haniffa and
Cooke, 2002; Eng and Mak, 2003; Huafang and Jianguo, 2007, Liao et al., 2014). Managerial ownership
(LOG_MANAG_OWN) is defined as of the percentage of total outstanding shares held by all directors,
including the CEO, executive directors and non-executive directors (Johnson and Greening, 1999; Eng and
Mak, 2003; Huafang and Jianguo, 2007; Oh et al. 2011; Khan et al, 2013). Natural log transformations were
performed for variable of ownership concentration and managerial ownership to adjust skewed distributions.
Table (2) describes a summary of variable descriptions.
3.5 Control Variables
This study included a number of control variables based on prior literature that may influence the firms‟
performance. Firm size (FSIZE) is measured as the natural logarithms of total assets (Berrone and GomezMejia, 2009; Luo and Tang 2011; De Villiers et al. 2011; Rupley et al., 2012; Walls et al. 2012; Luo et al, 2013,
Liao et al., 2014). Profitability (ROA) is calculated as the firm‟s return on assets (Cormier et al., 2011; De
Villiers et al. 2011; Peters and Romi, 2011; Rupley et al., 2012 Luo et al., 2012; Luo et al, 2013). leverage
(LVE) is computed as total debt divided by total assets (Peters and Romi, 2011; De Villiers et al. 2011; Walls et
al. 2012; Luo et al, 2013; Wegener et al, 2013). Tobin‟s Q (TOBINSQ) is measured as market value measured
of equity, plus book value of preferred stock, book value of long term debt and current liabilities, divided by
book value of total assets (Chung & Pruitt, 1994; King & Lenox, 2001; Clarkson et al. 2007; Stanny and Ely,
2008; Zhongfu et al, 2011; Busch & Hoffmann, 2011; Wegener et al, 2013). The variable of capital intensity
(CAPINT) is calculated as the capital expenditures over sales (Russo and Fouts, 1997; Elsayed & Paton, 2005;
King & Lenox, 2002; Clarkson et al. 2007; Gao and Connors, 2011; Walls et al, 2012). The variable of
Intensive Sector (INTSECTOR) as a dummy variable that is coded one if a firm operates in Materials, Energy
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or Utilities sector, and otherwise, zero(Luo and Tang 2011). Table (2) describes a summary of variable
descriptions.
Table (2) Summary of Variable Descriptions
Variables
Abbreviation
Board Size
Board Independence
Board Diversity
Board Meetings
Audit Committee
Independence
Environmental Committee
Presence
CEO Stock Option
NDB
NIDB
NFDB
NBM
NIDAC
The number of directors serving in the board.
The number of independent directors in the board.
The number of female directors in the board.
The number of board meetings per year.
The number of independent directors in audit committee.
EC_D
A dummy variable equal to 1 if the company has a board-level
environmental committee and 0 otherwise.
A dummy variable that equal 1 if CEO compensation includes
a stock option and 0 otherwise.
A dummy variable that equal 1 if CEO compensation includes a
long-term bonus and 0 otherwise.
Logarithm of the percentage of ordinary shares owned by substantial
shareholder.
Logarithm of the percentage of total outstanding shares held by all
directors.
The natural logarithms of total assets.
The firm‟s return on assets.
Total debt divided by total assets.
Logarithm of market value measured of equity, plus book value of
preferred stock, book value of long term debt and current liabilities,
divided by book value of total assets.
Logarithm of the capital expenditure over sales.
A dummy variable that is coded 1 if a firm operates in Materials,
Energy or Utilities sector, and 0 otherwise.
CEO_SO
CEO Long Term Bonus
CEO_LTB
Ownership Concentration
LOG_OWN _CONC
Managerial Ownership
LOG_MANAG_OWN
Firm size
Profitability
Leverage
Tobin‟s Q
FSIZE
ROA
LEV
TOBINSQ
Capital Intensity
IntensiveSector
Description
CAPINT
INTESECTOR
4. Empirical Results
4.1 Descriptive Statistics:
Table (3) depicts the descriptive statistics for all variables (dependent, independent, and control variables)
performed in the empirical model. the Table (3) show that the mean (median) of carbon reduction performance
for the overall sample period is -2.842(-2.612), The standard deviation of carbon reduction performance is
approximately 1.886, with rang from a minimum of -7.849 to a maximum of 0.820 among the sampled firms.
Because of the high skewness and kurtosis statistics for the original value of the variable carbon reduction
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performance, this variable has been transformed using a natural logarithm transformation in the empirical
model. After the transformation, the skewness statistics of the variable were reduced from 3.189 to -0.257 and
kurtosis from 14.174 to 2.157, respectively (Table 3). The mean (median) board size in this study sample is
8.234(8) directors, of which 6.385 are independent directors, indicating that board size in Australia seems to be
smaller than board size in US companies (e.g., the median value of board size in US companies is
approximately 11 in Bhagat and Black, 2002), and the majority of the directors are independent, which is in
line with the ASX Good Governance Principles and Recommendations of (2003; 2007). In addition, there is a
substantial variability in board size, ranging from a minimum of 5 directors to a maximum of 13 directors.
The data show that the average of the number of female directors on the board is 1.253, with standard deviation
of .807. In addition, on average 11.741 board meetings were held each year, with a wide range from a
minimum of 5 to a maximum of 24. With respect to board committees, the average (median) number of
directors in audit committee is 3.693(4) with standard deviation of 1.124, and a maximum and a minimum size
of 2 and 9, respectively. On average, 42.6 % of the sample firms have an environmental committee. Regarding
compensation structure, Table 5 also presents that 68.3% of firms offered stock options and 86.8% offered
long term bonuses as part of CEO compensation. With regards to ownership structure, it can be observed that,
the mean level of ownership concentration which is measured as the percentage of ordinary shares owned by
substantial shareholder is 29.7%, with a minimum of -3.034 and a maximum of 4.579. Managerial ownership,
measured by the percentage of total outstanding shares held by all directors, has a mean of -6.044 (median 6.668),
with
standard
deviation
of
2.429.
It can be also seen in the above table that the ownership concentration and managerial ownership had high
values for skewness and kurtosis. Thus, a natural logarithm has been used to transform these variables to
reduce the skewness and kurtosis statistics to a lower and acceptable level. A log of ownership concentration
reduced skewness from 2.070 to 0.479 and kurtosis from 7.087 to 1.870. A log of managerial ownership
reduced skewness from 3.959 to 1.099 and kurtosis from 18.533 to 3.472. Finally, regarding the control
variables, Table 5 shows , that the mean (median) value of firm size measured as the natural logarithms of total
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assets is approximately 16.284(15.807), indicating that the sample of this study comprises relatively larger
companies in Australia, with a standard deviation of 2.171, a minimum size and a maximum of 12.359 and
23.337, respectively. The data also show that the mean (median) value of ROA and leverage are 36.6 %( 3.1%)
and 22.9 %( 22.5%), respectively. The mean (median) of Tobin‟s Q and Capital Intensity are 1.168(.969), 2.479(-2.586), respectively, with a standard deviation of .801 and 1.720. The Tobin‟s Q and Capital Intensity
variables initially had very high values for skewness and kurtosis. Thus, following previous study (e.g. AlAkra and Ali, 2012: Delmas and Nairn-Birch, 2011; Iwata and Okada 2011), these variables have been
transformed by using a natural logarithm transformation. A log transformation of Tobin‟s Q and capital
intensity provided the most suitable distribution. A log of Tobin‟s Q mitigated skewness from 2.439 to 0.700
and kurtosis from 9.566 to 2.867. A log of capital intensity mitigated skewness from 6.253 to -0.056 and
kurtosis from 55.723 to 2.349. The average number of firms in emission intensive sectors is 35.6%, ranging
from a minimum of zero to a maximum of one.
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Variables
LOG_C_PER
Table(3) Descriptive Statistics for all variables (N:205)
N Mean
Std.
Median Min Max skewness
Deviation
203 -2.842
1.886
-2.612 -7.849 .820
-0.257
kurtosis
2.157
NDB
205 8.234
1.900
8
5
13
0.409
3.070
NIDB
205 6.385
1.969
7
2
12
0.123
2.920
NFDB
205 1.253
.807
1
0
4
0.296
2.950
NBM
205 11.741
3.649
11
4
24
0.750
3.647
NIDAC
205 3.693
1.124
4
2
9
1.560
8.521
EC_D
205
.426
.496
0
0
1
0.286
1.082
CEO_SO
205
.683
.466
1
0
1
-0.786
1.618
CEO_LTB
205
.868
.339
1
0
1
-2.178
5.744
LOG_OWN_CONC
202
.297
2.203
0
-3.034 4.579
0.479
1.870
LOG_MANAG_OW
N
205 -6.044
2.429
-6.668
-11.076
1.099
3.472
FSIZE
205 16.284
2.171
15.807
12.359 23.337
1.018
3.658
ROA
205 .0366
.152
.031
-.466
1.795
7.553
89.022
LEV
205
.229
.138
.225
-.154
.695
0.637
3.982
LOG_TOBINSQ
205 1.168
.801
.969
-.267
3.493
0.700
2.867
LOG_CAPINT
205 -2.479
1.720
-2.586
-7.11
1.635
-.0556
2.350
INTSECTOR
205
.480
0
0
1
0.601
1.361
.356
0
Notes: All variables are described in model development section and Table 2 for variable definitions.
N is the number of observations.
4-2 Results of Multicollinearity check
In addition, this study has used correlation coefficients to test the existence of multicollinearity in the empirical
model. According to Field, (2009); Hair et al. (2010) and Tabachnick and Fidell (2013), multicollinearity
problem exists if the correlation between independent variables exceeds 0.9. The Pearson‟s correlation analysis
demonstrates that the degree of correlation between any of the independent is either low or moderate, which
suggests the lack of multicollinearity between independent variables. However, there has been no definitive
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criterion for the level of correlation that constitutes a serious multicollinearity problem (Tsui, Ashford, StClair,
& Xin, 1995; Chen & Francesco, 2003). While some researchers indicated that correlations of 0.8 or higher are
problematic (e.g. Gujarati, 2003 and Cooper and Schindler, 2003); others suggest that the general rule of
thumb is that it should not exceed 0.75 (e.g. Tsui, Ashford, StClair, & Xin, 1995 and Green, 1978). The
Pearson correlations in Table (5) presented that the highest correlation was between board size and board
independence at 0.838. Therefore, this result indicates that multicollinearity is not likely to be a potential
problem because the Pearson correlation indicators for all independent and control variables are less than 0.9.
In addition, Variance Inflation factor (VIF) with tolerance values has been undertaken as another effective
method of testing the multicollinearity in the regression model. Tolerance is an indicator of how much of the
variable in the independent variable is not explained by the other independent variables in the model. If the
tolerance values are greater than 0.1 (TOL> 0.10), it suggests that multicollinearity does not exist among all
independent variables (Pallant, 2007). Another means to evaluate multicollinearity problem is to look at the
Variance Inflation Factor (VIF), which is the inverse of the Tolerance measure (1 divided by Tolerance), it
regresses each independent variable on the remaining independent variables to capture any linear dependencies
which may exist. As a rule of thumb, if the VIF values are less than 10 (VIF< 10), it also indicates that there is
no issue of multicollineraity (e.g. Myers, 1990; Gujarati, 2003). As can be showed in the Table (4), the highest
VIF value is 5.27
and the mean VIF is 1.91. Moreover, the lowest tolerance coefficient is 0.190.
Consequently, the above results of correlation coefficient and VIF with tolerance values indicate that there is
no multicollinearity issue between the independent and control variables. Therefore, these variables can be
used in our empirical models.
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Table (4) Variance Inflation Factor (VIF) of corporate governance structures and control variables
Variables
VIP
5.27
4.53
1.9
1.84
1.76
1.67
1.66
1.62
1.5
1.35
1.33
1.3
1.27
1.26
1.2
1.1
NIDB
NDB
CEO_LTB
LOG_TOBINSQ
NFDB
FSIZE
NIDAC
CEO_SO
LOG_MANAG_OWN
ITESECTOR
EC_D
LOG_CAPINT
NBM
LEV
LOG_OWN_CONC
ROA
Mean VIF
Note: Definition of variables are described in Table 2
Tolerance (1/VIF)
0.190
0.221
0.526
0.543
0.570
0.599
0.602
0.618
0.665
0.741
0.754
0.771
0.787
0.791
0.832
0.912
1.91
4.3 Correlation Coefficients Analysis
Table (5) provides the Pearson correlation coefficients for all variables (dependent, independent, and control
variables) performed in the empirical model. The results show that the carbon reduction performance
(LOG_C_PER) is significantly negatively correlated with the board size (NDB), board independence (NIDB),
board diversity (NFDB) which is measured by number of female directors in the board and audit committee
independence (NIDAC) at the 1% level (p < 0.01, two-tailed). Significant and positive correlation is existed
with the presence of environmental committee (EC_D) (p < 0.01, two-tailed), which is consistent with the
hypothesis (1.6). In contrast, the positive but not significant correlation amongst carbon reduction performance
(LOG_C_PER) and each of board meetings (NBM), ownership concentration (LOG_OWN_CONC) and
managerial ownership
(LOG_MANAG_OWN), while the presence of a share option (CEO_SO) and long-
term bonuses (CEO_LTB) are insignificantly negative correlated with carbon reduction performance
(LOG_C_PER). The analysis indicates that carbon reduction performance(LOG_C_PER) is significantly
negatively correlated with both the natural logarithms of total assets (FSIZE) and Tobin‟s Q (TOBINSQ) at the
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1% level (p < 0.01, two-tailed), whereas positive correlations are identified between the carbon reduction
performance (LOG_C_PER) and Capital Intensity (CAPINT) and Intensive Sector (INTSECTOR) at the same
level. In contrast, No significant relationship is detected between carbon reduction performance
(LOG_C_PER) and profitability (ROA) and leverage (LEV).
A number of significant correlations also existed between the numerous independent variables. More
specifically, number of directors serving in the board (NDB) is positively correlated with board independence
(NIDB), number of female directors in the board (NFDB), audit committee independence (NIDAC) and CEO
long term bonuses (CEO_LTB) at the 1% level (p < 0.01, two-tailed), and significant negative correlations
with board meetings (NBM) and with managerial ownership (LOG_MANAG_OWN). Nevertheless, the
insignificant relationship of the presence of environmental committee (EC_D), the presence of a share option
(CEO_SO) and ownership concentration (LOG_OWN_CONC) are confirmed for board size (NBM). The
correlations analysis indicates that board independence (NIDB) is positively correlated with the number of
female directors in the board (NFDB), audit committee independence (NIDAC), the presence of environmental
committee (EC_D) and long term bonuses (CEO_LTB) at the 1% level (p < 0.01, two-tailed, and significant
and negative correlated with board meetings (NBM) and with managerial ownership (LOG_MANAG_OWN)
at the same level. However, no significant relationship is detected between board independence (NIDB) and
each of the presence of a share option (CEO_SO) and ownership concentration (LOG_OWN_CONC). In
addition, number of female directors in the board (NFDB) has significant positive correlation with only audit
committee independence (NIDAC). Furthermore, audit committee independence (NIDAC) is negatively
correlated with only managerial ownership (LOG_MANAG_OWN).
The presence of environmental
committee (EC_D) has significant and positive correlation with CEO long term bonuses (CEO_LTB) at the 5%
level, but negatively correlated with managerial ownership (LOG_MANAG_OWN) at the same level. In
addition, the presence of a share option (CEO_SO) is positively related to CEO long term bonuses
(CEO_LTB) at the 1% level, and negatively related to managerial ownership (LOG_MANAG_OWN) at the
same level. The Pearson Correlation analyses also show that the CEO long term bonuses (CEO_LTB) have
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significant and positive correlation with managerial ownership (LOG_MANAG_OWN) at the 1% level, and
negatively correlated with ownership concentration (LOG_OWN_CONC). Additionally, managerial ownership
is significantly positively correlated with ownership concentration (LOG_OWN_CONC) at the 5% level.
Finally, for the correlations between independent variables and control variables, board size (NDB), board
independence (NIDB) and board diversity as measured by number of female directors in the board (NFDB),
are positively correlated with both the natural logarithms of total assets (FSIZE) and Tobin‟s Q (TOBINSQ) at
the 1% level (p < 0.01, two-tailed), and significantly negatively correlated with Capital Intensity (CAPINT) at
the same level. Whereas weak correlation is existed between board independence (NIDB) and Intensive Sector
(INTSECTOR) at the 10% level (p < 0.10, two-tailed), significant negative correlations are identified between
the number of female directors in the board (NFDB) and Intensive Sector (INTSECTOR) at the 1% level (p <
0.01, two-tailed). The analysis also indicates that the number of board meetings (NBM) is positively correlated
with firm size (FZIZE), and negatively correlated with profitability (ROA). Another significant results show
that audit committee independence is positively correlated with both firm size (FSIZE) and Tobin‟s Q
(TOBINSQ), and negative correlated with Capital Intensity (LOG_CAPINT) and with Intensive Sector
(INTSECTOR) at the 1% level. In addition, the presence of environmental committee (EC_D) is significantly
negatively correlated with Tobin‟s Q (TOBINSQ), and positively with Intensive Sector (INTSECTOR) at the
10% level (p < 0.10, two-tailed). With regard to CEO compensation structure which including both stock
options (CEO_SO) and long term bonuses (CEO_LTB) are significantly and negatively correlated with both
leverage (LEV) and Capital Intensity (CAPINT), and positively correlated with Intensive Sector
(INTSECTOR) at the same level. While positive sign is existed between stock options (CEO_SO) and Tobin‟s
Q (TOBINSQ) at the 5% level. Finally, in respect to ownership structure, ownership concentration
(LOG_OWN_CONC) is positively correlated with only profitability (ROA) at the 5% level and managerial
ownership (LOG_MANAG_OWN) is significantly negatively correlated with both firm size (FSIZE) and
Tobin‟s Q (TOBINSQ) at the 1% level.
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Table5: Pearson’s Correlation Coefficients (N=205)
LOG_C_PER
NDB
NIDB
NFDB
NBM
NIDAC
EC_D
CEO_SO
CEO_LTB
LOG_OWN_
LOG_MANAG_
CONC
OWN
LOG_C_PER
NDB
1.000
-0.197***
NIDB
-0.272***
1.000
0.838***
NFDB
-0.350***
0.399***
1.000
0.521***
NBM
0.037
-0.294***
-0.183***
1.000
-0.061
NIDAC
-0.274***
0.291***
0.484***
0.432***
1.000
0.076
EC_D
0.331***
0.090
0.186***
0.020
-0.014
1.000
0.044
CEO_SO
-0.097
0.068
0.102
-0.019
0.078
0.066
1.000
0.019
CEO_LTB
-0.036
0.223***
0.253***
0.105
-0.004
0.048
0.134**
1.000
0.541***
LOG_OWN_COMC
0.073
-0.042
-0.114
-0.087
-0.029
0.002
-0.031
0.034
1.000
-0.223***
LOG_MANAG_OWN
0.033
-0.172***
-0.289***
-0.096
-0.111
-0.278***
-0.154**
-0.229***
0.296***
1.000
0.137**
-0.224***
0.388***
0.396***
0.355***
0.166***
0.346***
-0.074
0.054
0.079
-0.026
1.000
-0.330***
ROA
-0.016
0.080
-0.049
-0.053
-0.153**
-0.064
-0.072
0.075
0.062
0.143**
-0.108
LEV
0.113
0.121*
0.003
-0.106
-0.053
-0.074
-0.037
-0.161**
-0.234***
-0.047
0.009
LOG_TOBINSQ
-0.511***
0.418***
0.428***
0.333***
-0.059
0.316***
-0.258***
0.147**
0.109
-0.089
-0.288***
LOG_CABINT
0.329***
-0.232***
-0.276***
-0.171***
0.097
-0.309***
0.012
-0.135**
-0.146**
-0.107
0.007
INTSECTOR
0.481***
-0.086
-0.125*
-0.348***
-0.089
-0.169***
0.199***
0.134**
0.139**
0.061
-0.054
FSIZE
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Table 5: Pearson’s
Coefficients
Correlation
(N=205) Continued
FSIZE
ROA
LEV
LOG_TOBINSQ
LOG_TABIN
INTSECROR
FSIZE
ROA
1.000
-0.035
LEV
0.029
1.000
-0.102
LOG_TOBINSQ
0.461***
-0.021
1.000
0.209***
LOG_CABINT
-0.186***
0.041
0.045
1.000
-0.188***
INRSECTOR
-0.149**
0.104
-0.112*
-0.163***
1.000
0.229***
1.000
Notes: *, ** and ***denote significance at the 10%, 5%, and 1% levels, respectively, based on two-tailed tests. All variables are described in Table 2
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4.4 Multivariate Analysis and Hypotheses Testing
This section provides the results obtained from regressing the carbon reduction performance variable on the
various independent variables. Table (6) reports an adjusted R2 are % 25.89, % 24.80, % 40.97 and % 50.86,
and the F- Values are 9.82, 7.56, 10.21 and 13.87 respectively for the four models and are highly statistically
significant at the 1% level. These results indicate that all four models show a reasonable explanatory power
of the relationship between the dependent and independent variables.
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Variables
Pred.
Sign
Model (1)
Board Structure
Model (2)
Board Structure and
Ownership Structure
Model (3)
Mode (1)+Model (2)+ control
variables without Intensive sector
variable
Table (6) results of OLS Regression between Governance Variables and Carbon Reduction Performance
Model (4)
Model (3)+ Intensive sector
variable
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Coef Est.
0.131
-0.272**
-0.535***
0.015
-0.152
1.411***
-0.429
0.246
P-value
1.11
-2.11
-3.1
0.45
-1.21
5.92
-1.46
0.59
Coef Est.
0.124
-0.268**
-0.514***
0.016
-0.174
1.366***
-0.531*
0.355
P-value
1.02
-2.00
-2.93
0.45
-1.35
5.59
-1.71
0.80
Coef Est.
0.136
-0.157
-0.382***
-0.002
-0.010
0.829***
-0.136
0.553
P-value
1.18
-1.3
-2.38
-0.06
-0.08
3.54
-0.48
1.35
Coef Est.
0.134
-0.156
-0.069
0.021
-0.021
0.579***
-0.217
0.272
P-value
1.27
-1.41
-0.45
0.7
-0.2
2.67
-0.85
0.72
0.060
1.06
0.079
1.54
0.052
1.11
-0.032
-0.59
-0.054
-1.05
-0.056
-1.18
0.080
1.29
0.069
1.21
0.84
0.716
0.66
NDB
NIDB
NFDB
NBM
NIDAC
EC_D
CEO_SO
CEO_LTB
LOG_OWN_CONC
+
+
+
+
+
+
+
+
LOG_MANAG_OWN
+
FSIZE
?
ROA
?
0.999
LEV
?
LOG_TOBINSQ
?
LOG_CAPINT
?
INTSECTOR
?
Constant
Observations
F-Value
Adjusted R2
2.368
***
-1.083
0.268
-1.649
-2.02
-1.774**
-2.13
2.83
***
-6.07
***
4.05
-3.448***
-3.51
2.970
***
3.86
***
-6.82
***
2.76
***
6.16
-4.74
-1.111
0.172
1.400
-4.298***
203
200
200
200
9.82(.000)
7.56(.000)
10.21(.000)
13.87(.000)
% 25.89
% 24.80
% 40.97
% 50.86
Notes: *, ** and ***denote significance at the 10%, 5%, and 1% levels, respectively, based on two-tailed tests. All variables are described in Table 2.
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4.4.1 Results of model 1
The first model examines the association of the eight variables that proxy for board structure
with carbon reduction performance. The results from model 1, reported in the third column of
Table 6, show that a strong significant positive association between the presence of
environmental committee (EC_D) and carbon reduction performance (LOG_C_PER), (β=
1.411, p < 0.01, two-tailed). The results also indicate that board independence (NIDB) is
negatively and significantly related to carbon reduction performance (LOG_C_PER) at the
5% level (β= -0.272, p < 0.05, two-tailed). The result also shows that the number of female
directors in the board (NFDB) is negatively and significantly associated with carbon
reduction performance (LOG_C_PER), (β= -0.535, p < 0.01, two-tailed). On the other hand,
the regression result observed that no significant association is documented between carbon
reduction performance (LOG_C_PER) and board size (NDB), board meetings (NBM) and
the independence of audit committee (NIDAC). Turning to the findings for the compensation
package, the results indicate CEO Stock Options (CEO_SO) and CEO Long Term Bonus
(CEO_LTB) are both statistically insignificantly related to carbon reduction performance
(LOG_C_PER), with coefficient estimate of -0.429 and 0.246 and a p-value of -1.46 and
0.59, respectively. The adjusted R2 of this model is % 25.89 indicating that 25.89 per cent of
variance in carbon reduction performance can be explained by the model in the current study;
the F- Values for this model is 9.82 and is highly statistically significant at the 1% level.
These results indicate that the model show a reasonably acceptable explanatory power of the
relationship between the dependent and independent variables.
4.4.2 Results of model 2
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The second model tests the joint impact of board structure and ownership structure on carbon
reduction performance. The findings in this model, stated in the column fifth of Table 6,
observe that the presence of environmental committee (EC_D) is statistically significantly
positively associated with carbon reduction performance (LOG_C_PER), (β= 1.366, p <
0.01, two-tailed).
The empirical results also show that board independence (NIDB) is
significant and negative association with carbon reduction performance (LOG_C_PER) (β=
-0.268, p < 0.05, two-tailed). The result also indicates that the number of female directors in
the board (NFDB) is negatively and significantly associated with carbon reduction
performance (LOG_C_PER), (β= - 0.514, p < 0.01, two-tailed). Nevertheless, the regression
result displays that no significant association is found between carbon reduction performance
(LOG_C_PER) and board size (NDB), board meetings (NBM) and the independence of
audit committee (NIDAC). Regarding compensation structure, the result of regression
indicate that the CEO stock options (CEO_SO) has a slightly significant negative association
with carbon reduction performance (LOG_C_PER) (β= - 0.531, p < 0.1, two-tailed).
However, the CEO long term bonus (CEO_LTB) has a positive but insignificant association,
with coefficient of 0.355 and a p-value of 0.80. In respect of ownership structure, the results
suggest that two aspects of ownership structure, namely ownership concentration
(LOG_OWN_CONC)
and
managerial
ownership
(LOG_MANAG_OWN)
have
insignificant association with carbon reduction performance (LOG_C_PER), with
coefficient estimate of 0.060 and - 0.032 and a p-value of 1.06 and - 0.59, respectively. The
adjusted R2 of the model is % 24.80 indicating that 24.80 per cent of variance in carbon
reduction performance can be explained by the current model; the F- Values for this model is
7.56 and is highly statistically significant at the 1% level. These results indicate that the
model show a reasonably high explanatory power of the relationship between variables.
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4.4.3 Results of model 3
The third model tests the relationship between all corporate governance variables and carbon
reduction performance, including control variables, but without the Intensive Sector variable.
The findings from model 3, described in the column fourth of Table 6, imply that two
variables of corporate governance characteristics, namely board independence (NIDB) and
the presence of environmental committee (EC_D) are significantly associate with carbon
reduction performance (LOG_C_PER) at the %1 level. However, for the other corporate
governance characteristics including board size (NDB), board diversity (NFDB), board
meetings (NBM) and the independence of audit committee (NIDAC), the results indicate the
insignificant relationship with carbon reduction performance (LOG_C_PER). Concerning
the two aspects of compensation package, the results of OLS regression indicate that the two
variables of executive compensation, namely the CEO stock options (CEO_SO) and the
CEO long term bonus (CEO_LTB) have insignificant association with carbon reduction
performance (LOG_C_PER), with coefficient of – 0.136 and 0.553 a p-value of – 0.48 and
1.35 respectively. With reference to ownership structure, this model provides the same results
at the second model, which show that none of the two aspects of ownership structure, namely
ownership
concentration
(LOG_OWN_CONC)
and
managerial
ownership
(LOG_MANAG_OWN) was found to be significant related with carbon reduction
performance (LOG_C_PER), with coefficient of 0.079 and – 0.054 a p-value of 1.54 and –
1.05 respectively. Among the control variables, only leverage (LEV), Tobin‟s q
(LOG_TOBINSQ) and Capital Intensity (LOG_CAPINT) are found to be significantly
related to carbon reduction performance (LOG_C_PER) at the %1 level. Nonetheless, no
significant relationship is detected between carbon reduction performance (LOG_C_PER)
and each of firm size (FSIZE) and profitability (ROA). The adjusted R2 of this model is %
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40.97 indicating that 40.79 per cent of variance in carbon reduction performance can be
explained by the model in the current study; the F- Values for this model is 10.21 and is
highly statistically significant at the 1% level. These results indicate that the model show a
high explanatory power of the relationship between the dependent and independent variables.
4.4.4 Results of hypothesis testing for the fourth model
This study developed ten principal testable hypotheses to investigate the impact of corporate
governance on carbon reduction performance. In this section, based on descriptive statistics
and Pearson‟s correlation coefficients, this study performed the Ordinary Least Squares
(OLS) multiple regression model to testing this relationship. The rule of decision in this study
is based on the significances of the t-statistics which are symbolized by the p-value flagged
by the statistical packages used.
The results from regression model 4, reported in the column sixth of Table 66, indicates that
the adjusted R2 of the model is % 50.86 indicating that 50.86 per cent of variance in carbon
reduction performance can be explained by the primary model in the current study, the FValues for this model is 13.87 and is highly statistically significant at the %1 level. These
results indicate that the model show a acceptable high explanatory power of the relationship
between the dependent and independent variables.
The results of regression model in column 6 of Table 6 showed that the coefficient of board
size (NDB) is positive but not statistically significant associated with carbon reduction
performance (LOG_C_PER), with coefficient estimate of 0.134 and a p-value of 1.27, which
is inconsistent with our expectation (H1). This result implies that larger boards are ineffective
in improving carbon performance. One of the possible reason is companies with large board
may be more likely to suffer from the agency problems. Larger board might be lack of
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coordination, communication and have free rider problems, which leads to slower and lessefficient decision-making and decrease board efficiency (Lipton and Lorsch, 1992; Jensen,
1993; Yermack, 1996). In an Australian context, the size of Australian boards is usually
small with an average number of less than 10 directors (Kiel and Nicholson, 2003; Stapledon
and Lawrence, 1996 and Bonn, 2004). This implies that board size of Australian companies
tends to be smaller than optimal. In sum, this result failed to find support for hypothesis H1,
but is in line with findings that gathered by Hafsi and Turgut, (2013) who failed to find any
significant association between board size and social performance. The result, however,
differs with the findings of Walls et al., (2012) who provides evidence that board size is
positively related to environmental concerns. The result also contradicts with the findings of
de Villiers et al. (2011) who indicate that environmental performance is higher in firms that
have larger boards.
As for board independence, the result shows that the board independence (NIDB) is not
statistically significantly related to carbon reduction performance (LOG_C_PER). The
coefficient estimate on independent directors is -0.156 with a p-value of -1.4, this is also
contrary to our expectation (H2). The result implies board independence may be less effective
as monitors of management (Barako et. al. 2006) because they might not be provided
sufficient information on company‟s carbon activities. Although the finding is inconsistent
with Zhang et al, (2013); Dunn and Sainty (2009) and Johnson & Greening, (1999), who
found positive association and also in contrast with Kassinis and Vafeas, (2002) who report
negative association between board independence and environmental litigations, the result is
consistent with previous study by Ibrahim et al, (2003); and Ibrahim & Angelidis, (1995) who
document an insignificant relationship between outside directors and the legal and ethical
dimensions of CSR and also similar to McKendall, S´anchez, and Sicilian, (1999) who were
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unable to find significantly relationship between board independence and environmental
violations. Overall the hypothesis H2 in this study is not supported based on the statistical
results.
With regards to board diversity measured by the number of female directors in the board.
Inconsistent with this study‟s expectation, the empirical result displays that insignificant
negative association between the numbers of female directors in the board (NFDB) and
carbon reduction performance (LOG_C_PER). It produced a coefficient estimate of -0.069
and with a p-value of -0.45. The plausible explanation for this could be that, because the
percentage of female on the board is relatively small (As seen in the descriptive statistics
section, the average of female on the board is 1), which hinders the ability of female directors
to exert influence on board. According to critical mass theory firms that having one or two
women on its board may be not sufficient for change to happen (Konrad et al. 2008). Also, as
Rosener (1995) who indicates that one woman on the board is often regarded as a token, two
women on the board might be not enough to influence board‟s decision process. In this
respect, this result is consistent with previous empirical findings of Coffey and Wang, (1998)
who found insignificant relationship between the percentage of women board members and
corporate philanthropy. However, it is contradictory to the evidence presented by Hafsi and
Turgut, (2013); Boulouta (2013) and Zhang et al, (2013) who found a positive and significant
relationship exists between proportion of women directors on the board and corporate social
responsibility (CSR) performance. Hence, this study does not find support for the prediction
that there is a positive association between corporate board diversity (NFDB) and carbon
reduction performance (LOG_C_PER). Concerning the board meeting, the regression result
depicts that insignificant association observed between the board meetings frequency (NBM)
and carbon reduction performance (LOG_C_PER), with a coefficient estimate of 0.021 and
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a p-value of 0.7. Therefore, this finding does not support hypothesis (H4) which anticipated
that the number of board meetings (NBM) is negatively related to carbon reduction
performance (LOG_C_PER). This result is in line with the argument that board meetings are
not necessarily useful to shareholders (Ntim and Osei, 2011, Vefeas, 1999a) because the
limited time directors spend together is not used for the meaningful exchange of ideas with
directors or management (Vefeas, 1999a, Lipton and Lorsch, 1992). This result is consistent
with previous finding that board size is unrelated to carbon performance. If large board does
not effectively monitor management and large board would have more meetings, then the
more meetings of large board should have less impact on carbon performance. Currently,
there are little empirical studies investigating the relationship between board meetings and
carbon reduction performance in particular. However, previous research on Corporate Social
Responsibility in general found mixed results. Although Prado et al. (2009b) did not find any
significant impact of the number of annual meetings of the administration on the volume of
information on Corporate Social Responsibility, Prado-Lorenzo and García-Sánchez, (2010)
opined that the number of meetings held by the board of directors during a financial year is
negatively and significantly associated with the dissemination of information on greenhouse
gases. As for the independence of audit committee, the result of regression indicates that the
independence of audit committee (NIDAC) is insignificantly negatively related to carbon
reduction performance (LOG_C_PER). The regression produced a coefficient estimate of 0.021 and a p-value of -0.2. This is inconsistent to our expectation indicated in H5. A possible
explanation for this result is the majority of firms do not undertake any social or
environmental audit. Referring to environmental committee, the results of regression model
displayed that the presence of environmental committee (EC_D) is strongly and positively
associated with carbon reduction performance (LOG_C_PER) at the 1% level (p- value <
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0.01, two-tailed), which is consistent with H6. The result suggests firms that created an
environmental committee is likely to adopt a proactive environmental strategy and they
probably have an environmental orientation in their decision-making. Such a strategy can
translate into a detailed carbon reduction programs that facilitate carbon reduction
performance. In addition, the presence of an environmental committee can be viewed as a
means to better monitor management in terms of their environmental actions and
performance and as an effective way to provide advice to management when addressing the
environmental issues (Rodrigue et al., 2013). Furthermore, the setting up of an environmental
committee can be seen as a way of addressing stakeholders' interests and resolving the
problem of legitimacy gap (Michelon and Parbonetti, 2012). In this regard, this result can be
deemed consistent with Walls et al., (2012) who indicated that an environmental board
committee is positively associated with both environmental strengths and environmental
concerns. The result also is in line with the argument of Lam and Li (2008) who pointed out
that firm with an environmental committee on its board is related to a significant increase in
environmental performance for high polluting firms. However, the result contradicts with the
evidence presented by Rodrigue et al., (2013) who failed to find significant association
between the existence of environmental committee on the board and environmental
performance which is measured in terms of regulatory compliance, pollution prevention, and
environmental capital expenditures and with McKendall et al., (1999) who also failed to find
significant association between social responsibility committee and environmental violations.
Regarding CEO, the empirical result indicates that none of the two components of
compensation for CEO was found to be significant at the 1% or 5% levels in all the four
models. The findings in the column sixth of Table 8 show that the CEO stock options
(CEO_SO) are not statistically significantly associated with carbon reduction performance
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(LOG_C_PER), the coefficient estimate on CEO stock options is -0.217 with a p-value of 0.85. Such insignificant and negative association is inconsistent to our expectation. A
possible reason for this result is due excessive focus on a financial performance even in the
longer term goals that may be detrimental to the promotion of social and environmental
objectives (Mahoney and Thorne, 2006). In this respect, this result supports the argument of
Coombs and Gilley, (2005) who suggested no relationship between stock options and any
CSR dimensions. This result is also similar to the findings from the exploratory study by
McGuire et al., (2003) who failed to find relationship between long-term incentives including
stock options and good social performance. The result, however, is in contrast to the findings
of Mahoney and Thorne, (2005, 2006); Deckop et al., (2006) and Callan and Thomas, (2012)
who document positive association between the CEO stock options in long term and
corporate social performance and also in contrast with Berrone and Gomez-Mejia, (2009a)
who provide evidence that long-term pay such as stock options is positive and highly
significant for pollution prevention performance. Thus, based on the result, the current study
does not reject hypothesis (H7) that the CEO stock options (CEO_SO) in long term are not
positively associate with carbon reduction performance (LOG_C_PER).
Column sixth of Table 6 shows that CEO long term bonus (CEO_LTB) has a positive
coefficient, which is consistent with our expectation. However, the coefficient value is 0.272
and a p-value of 0.72, so it is not statistically significant. Thus, the result does not strongly
reject H8. Recently, there is not empirical study that linked CEO long term bonus to carbon
reduction performance. Nevertheless, in the context of social performance in general, Callan
and Thomas, (2012), provides evidence that the long term compensation which includes
restricted stock, stock options and long-term incentive plans is positively associated with
social performance, whereas, Rekker et al., (2014) found out that there is a negative relation
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between long-term compensation such as long term bonus and socially responsible firms.
With reference to ownership structure,
as can be observed in the column 6 of table 6,
ownership concentration (LOG_OWN_CONC) is not statistically significantly correlated
with carbon reduction performance (LOG_C_PER), with the coefficient value of 0.052 and a
p-value of 1.11. This is also opposite to our expectation. A possible explanation for this
finding could be that, carbon activities incur costs (Liao et al., 2014) and the existence of
substantial shareholders may prevent managers from engaging in conspicuous social and
environmental activities. Another possibility is that ownership concentration may give firms
less freedom to pursue carbon policies that go above and beyond compliance.
This is
consistent with the result that provided by Brown et al., (2006) who did not find any
significant relationship between concentration ownership and corporate Philanthropy, and
Adams and Hardwick (1998) who failed to find any connection between concentration
ownership and corporate giving. This result, on the other hand, is inconsistent with the work
of Earnhart and Lizal. (2006) who found that greater concentration of ownership in the
company leads to better environmental performance with respect to absolute emissions.
Therefore, this result does not reject the hypothesis H9, that there is no significant association
between ownership concentration (LOG_OWN_CONC) and carbon reduction performance
(LOG_C_PER).
The results described in the last column of Table 6 indicate the managerial ownership
(LOG_MANAG_OWN) is negatively but not significantly related to carbon reduction
performance (LOG_C_PER), with coefficient of – 0.056 and a p-value of – 1.18. This,
however, contradicts this study's earlier expectation. The plausible explanation for this result
may be due to the fact that the level of managerial ownership in the current study sample is
negligible. As can be shown in the descriptive analysis section (table 5) the mean (median) of
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managerial ownership is - 6.044 (- 6.668).This means that when the level of managerial
ownership is low, it is unlikely that managerial ownership can reduce agency problem arising
from the separation of ownership and management in the firm. Another possibility is that
managers with less shares in the companies are relatively less concerned about social and
environmental activities. This result is in line with the work of Paek et al., (2013) who
provide evidence that managerial ownership has an insignificant association with CSR
performance in terms of community, environment, and product dimensions but however not
inconsistent with Jia and Zhang, (2013) who found that managerial ownership had a positive
and significant association with CSP factors such as donation probability and charity. The
result also disagree with Johnson and Greening (1999), who found a positive association
between top management equity share and social performance in terms of environment and
product quality. This result also in contrast to the findings of Oh et al., (2011) who
documented that managerial ownership is significantly negatively associated with CSR rating
of the firms and with Simerly and Bass‟s (1998) who provide evidence of significant negative
relationship between a firm‟s corporate social performance and the proportion of stock equity
owned by top management. Therefore, Results reported Table (8) fail to reject hypothesis
H10 that no association exists between managerial ownership (LOG_MANAG_OWN) and
carbon reduction performance (LOG_C_PER).
Among the control variables, the results in the last column of Table 6 show that the
coefficient of leverage (LEV) is significantly positive associated with carbon reduction
performance (LOG_C_PER) at the %1 level. The findings suggest that companies with
higher degree of leverage might be inclined to improve carbon reduction performance. This
result corroborates the study by (De Villiers et al. 2011; Walls et al. 2012) who found that
leverage is positively associated with environmental performance. Similarly, Capital Intensity
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(LOG_CAPINT) has significant and positive relationship with carbon reduction
performance at the %1 level (β= 0.172, p < 0.01, two-tailed). This result indicates that
companies with higher sustaining capital expenditures may want to signal their
environmental type through more disclosures regarding their environmental performance.
This result is consistent with the previous literature (Russo and Fouts, 1997 and Walls et al,
2012). It is also observed that IntensiveSector (INTSECTOR) is positively associated with
carbon reduction performance at the %1 level. This finding indicates that companies
operating in the higher level of carbon emissions will lead to increased carbon exposure so
that these companies tend to promote carbon reduction performance. The results also display
that the coefficient of Tobin‟s Q (TOBINSQ) is statistically significantly and negatively
associated with carbon reduction performance (β= - 1.111, p < 0.01, two-tailed). The result is
consistent with prior work by Delmas and Nairn-Birch (2011) who found that increasing
carbon emissions negatively impact on market based measures of financial performance
(using Tobin‟s q) in the US companies. On the other hand, the results indicate that the
coefficient of firm size (FSIZE) is not statistically significant associated with carbon
reduction performance (LOG_C_PER) (β= 0.069, p- value = 1.21). This result is
inconsistent to the prediction that bigger companies tend to provided more information on
GHG emissions than the smaller companies (Luo et al., 2013). In addition, it is argued that
firms that are smaller in size may not exhibit high level socially responsible behaviours as do
larger firms (Waddock & Graves, 1997; Busch & Hoffmann, 2011). One possible explanation
is that the majority of firms in the sample study are the largest Australian companies. This
result is congruent with the work of Grant, Jones, & Bergesen, (2002) who documented that
firm size is not related to pollution prevention performance. Similarly, profitability (ROA) is
statistically insignificant associated with carbon reduction performance (LOG_C_PER) (β=
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0.716, p- value = 0.66). Although it can be argued that firms with more profit could be more
easily afford in the expenditures needed for carbon activity (Luo and Tang, 2011), Delmas
and Nairn-Birch (2011) found that direct carbon emissions have insignificant association with
ROA in 1100 US companies.
5. Further analysis and Robustness Checks
In this section we provided a several tests that could lead to validate the robustness of the
main results. That is, board size measured using cut-off basis, audit committee independence
measured using cut-off basis and alternative measure for firm size
5.1 Board Size measured using cut-off basis.
Following Jensen (1993) who suggested that more than eight members on board are less
likely to function effectively. This study used eight members as the cut-off basis as
alternative measure for board size. Therefore, the current study was measured board size as a
dummy variable (DUMMY_NDB) by taking the value of 1if board size equal or more than
eight members, and 0 otherwise. The summaries of analysis (which are un-tabulated) confirm
the initial evidence that board size is insignificant factor influencing carbon reduction
performance. The findings on other variables are the same as those reported in Table 8.
5.2 Audit committee independence measured using cut-off basis.
Prior studies such as Klein, (2002a), Bedard, Chtourou and Courteau (2004), Davidson et al.
(2005), Baxter and Cotter (2009) examined the sensitivity of audit committee independence
to specific cut-offs. In order to confirm the credibility of the results of regression analyses,
this study repeated the OLS regression model with alternative measure of audit committee
independence, where measured as a dummy variable (DUMMY_NIDAC) by taking the value
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of 1 if the audit committee is composed solely of independent directors and 0 otherwise. The
current study has chosen 100% threshold as the cut-off point following the published
literature and governance reports (e.g. Menon and Williams, 1994; BRC, 1999, ASX, 2003,
Davidson et al. 2005) who suggested that audit committee should consist exclusively of nonexecutive or independent directors. The results (un-tabulated) confirm that audit committee
independence (NIDAC) has no significant effect, which is consistent with the original results
of the regression analyses. While the results for the other variables are virtually the similar as
those reported in Table 8, except board independence (NIDB), which had a weak relationship
with carbon reduction performance at the %10 level.
5.3 Alternative measure for company size
A number of prior studies such as Stanwick & Stanwick, (2001) and Berrone et al. (2010)
have employed the logarithm of the firm‟s total sales as a proxy for firm size. Therefore, the
current study used this measure as an alternative measure for firm size. The analysis results
(which are un-tabulated) confirmed that firm size as measured by logarithm of the firm‟s total
sales has no significant influence on carbon reduction performance, which is consistent with
the main test results. The rest of other variables have the similar results as those presented in
Table 8
6. Concluding remarks
The purpose of this article was to investigate empirically the impact of corporate governance
mechanisms on carbon reduction performance in a sample of the largest Australian firms. By
using univariate and multivariate analysis for a sample of 205 firm - year observations
participating in the CDP over the 2009 - 2012 period, the study‟s findings show that there is
indeed a strong relationship between the presence of environmental committee and carbon
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8 - 9 December 2014, Rendezvous Hotel, Auckland, New Zealand, ISBN: 978-1922069-66-5
reduction performance. It implies that the presence of an environmental committee can be
viewed as a means of environmental orientation and carbon proactivity. The committee can
better monitor management in terms of their environmental actions and performance and as
an effective way to provide advice to management when addressing the environmental issues
(Rodrigue et al., 2013), Whereas other types of corporate governance mechanisms (board
size, board independence, board diversity, board meetings, audit committee independence,
CEO stock option, CEO long term bonus, ownership concentration and managerial
ownership) are not statistically significant with carbon reduction performance. Further, the
statistical results also show that leverage, Tobin‟s Q and industry types, as control variables,
have a strong positive association. In contrast, the study did not provide any evidence that
firm size and profitability are related to carbon reduction performance.
The results of this article have some limitations that could be acknowledged and addressed in
future work. One limitation of this study is that the sample size is relatively small and
restricted to those firms that completed the CDP 2009 -2012 questionnaire. Therefore, the
result may suffer from the selectivity bias due to the limited availability of firm-level carbon
data. At the same time, four years period for this study appears to be short. Future studies
may be expanded to include more firms and to multiple period of time. Another limitation is
that the sample of this study includes only internal governance mechanisms, although other
external governance mechanisms may influence on company‟s carbon activities. Future
research may expand to encompass mechanisms of external governance. Notwithstanding,
the study‟s results contribute to a growing literature on corporate governance and climate
change association and present new evidence of how carbon performance and transparency is
impacted by the strength and structure of corporate governance.
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