Do sustainable institutional investors influence senior executive compensation structures according to their preferences? Empirical evidence from Europe

Abstract

This paper examines whether sustainable institutional investors promote corporate social responsibility (CSR)‐contingent components (e.g., environmental or social aspects) in senior executive compensation in order to align top management interests in the promotion of sustainability with their own. Empirical analyses of a sample of 5979 firm‐year observations from European firms over the 2010–2017 period showed that the presence of sustainable institutional investors positively predicts the likelihood of firms offering CSR‐contingent compensation contracts. This paper significantly contributes to prior empirical research, which predominantly focuses on the effectiveness of CSR‐contingent components within compensation structures. Sustainable institutional investors as a potential driver of CSR‐contingent components have not yet been examined. We specifically investigate institutional investors that have either a substantial or a time‐dependent belief in CSR. Our results indicate that sustainable institutional investors represent a central external corporate governance mechanism and tend to align top management preferences with their own via compensation structures.

Sustainable institutional investors, corporate sustainability performance, and corporate tax avoidance: Empirical evidence for the European capital market

“…This strategy overcomes possible concerns over the applicability of the UN PRI to the lower‐level units of parent companies. Detailed information about each company's 100 largest shareholders was retrieved using the unique InvestorPermid from the Refinitiv database in line with prior research (Focke, 2022; Kordsachia et al, 2022). This database collects ownership information from various sources, such as SEC 13F filings, annual reports, mutual fund aggregates, IPO prospectuses, and the UK Share Register.…”

“…We have already stated that SII are a major monitoring tool in both including sustainability strategies and reducing tax avoidance (Focke, 2022). SII may decrease the central agency problems of information asymmetries and conflicts of interest between managers and stakeholders (Hill & Jones, 1992).…”

“…Short‐term institutional investors may not care much about CSR issues and long‐term investments, which may explain the research results indicating a positive impact of institutional ownership on tax avoidance (e.g., Chen et al, 2019; Cheng et al, 2012; Li, Liu, et al, 2021; Li, Wang, et al, 2021). As we strictly refer to SII and their ethical attitude toward corporate sustainable efforts, in line with our stakeholder agency theoretical framework, SII fulfill a specific stewardship function to include environmental, social and governance aspects in their decision making (Focke, 2022; Velte, 2023b). Consequently, we are congruent with studies that have found a negative relationship between institutional owners and tax avoidance (Alkurdi & Mardini, 2020; Dakhli, 2022; Hasan et al, 2022; Khurana & Moser, 2013; Moore, 2012; Taylor & Richardson, 2013; Ying et al, 2017).…”

“…As SII have considerable experience and resources, they should mainly influence corporate sustainability strategies and thus reduce tax avoidance. Moreover, SII may be active owners and monitors and should pressure management to implement sustainable business models and strategies (Focke, 2022). Thus, we expect that SII are aware of stakeholder concerns, such as climate change, board gender diversity, and other global sustainability challenges.…”

“…Thus, we expect that SII are aware of stakeholder concerns, such as climate change, board gender diversity, and other global sustainability challenges. We refer to Dyck et al (2019) and structured institutional owners by whether they signed the UN PRI as SII (Focke, 2022).…”