Paying for Failure: Director Compensation, Oversight Lapses, and Network Effects

We examine whether director compensation functions as an accountability mechanism following sustainability oversight failures. Using major EPA enforcement actions, we find that non-executive director pay declines significantly at violating firms, particularly when prior pay growth is higher. We argue that environmental incidents reframe board compensation as a potential governance liability, prompting restraint when scrutiny intensifies. This response propagates through board interlocks: firms connected through shared directors also reduce pay, with accompanying reductions in toxic emissions. Extending the analysis to other oversight failures, we show that compensation-based accountability depends on whether responsibility is diffuse, assignable, or perceived as external.