Do ESG Governance Ratings Reward Form over Substance? Evidence from Compensation Committee Adoption

This study examines whether ESG ratings reflect substantive improvements in corporate governance or primarily reward symbolic governance reforms. Using the adoption of compensation committees among Korean listed firms, we find that firms adopting compensation committees experience significant improvements in overall ESG ratings, driven primarily by increases in governance ratings. However, we find no corresponding changes in pay–performance sensitivity or in the level of executive compensation following adoption. These findings suggest that governance ratings respond to observable governance structures even when underlying corporate practices remain unchanged. Overall, our findings raise concerns about the extent to which ESG governance ratings capture substantive governance quality rather than formal governance arrangements.