Director Accountability for Environmental and Social Failures

We examine whether outside directors are held accountable for environmental and social (ES) failures. We find that directors at ES failure firms are more likely to turn over relative to directors at firms without such failures, particularly when failures have negative implications for firm value. However, we find no evidence that turnover following failures is more likely at firms with higher ownership by socially responsible investment funds. These results indicate that director departures following ES failures are primarily driven by shareholders’ pecuniary preferences. Furthermore, we do not observe elevated turnover among ES committee members, nor reduced turnover when CEOs also leave the firm, suggesting that oversight of ES matters is a collective responsibility shared by the entire board and management. Differences in votes withheld from directors of failure firms are economically negligible relative to votes withheld from directors of firms without failures. Analyses of changes in other outside board positions show that directors who turn over from failure firms are, on average, worse off following ES failures. They are more likely to lose seats than non-failure directors; few of them obtain new seats at other firms; and those that do gain new seats gain them on less prestigious boards. Collectively, our results suggest that labor market incentives provide some ex ante incentives for directors to effectively manage ES activities and risks.