ESG Scores in IPOs: The impact of Board Composition and Ownership Concentration

Abstract: The prevalence of the sustainability agenda and the need for Environmental, Social, and Governance (ESG) issues to be addressed by firms are increasingly characterizing today’s business environment. Creating shareholder wealth while also satisfying the wider base of stakeholders, a strategic management approach that ultimately is affected by the firm’s governance through the composition of the board and the ownership concentration of a firms’ shareholders. While this should be true for all companies in the market in order to stay competitive, it is potentially even more apparent in firms that recently made an IPO. The IPO setting implies that the stakeholder agenda is set under increased pressure due to a broader stakeholder base and increased public visibility through media coverage, analyst following, and society in general. The need for an adequate stakeholder agenda is thus vital for firms in general and IPOs in particular, where the firm’s governance should impact this regard and where the effect of the response to this increased stakeholder pressure should be amplified over time. This thesis takes a quantitative approach to broaden the understanding of how board composition and ownership concentration impacts ESG scores, a proxy for stakeholder management. We use a sample of 710 firms that went public in the US between 2005 and 2017. The hypotheses test whether the impact on ESG scores from board composition and ownership concentration is amplified in the mature stage relative to the early stage of the public life cycle. Board composition is tested through the measures of female board members, independent board members, the board size, and CEO duality. Ownership concentration is tested through the sum of the five largest shareholders, the Herfindahl-Hirschman index, and the largest shareholder’s ownership stake. In line with our expectations, we find that independent board members have a positive impact on ESG scores in the mature stage relative to the early stage of the public life cycle. We also find that CEO duality has an expected negative relative effect in the early stage and the mature stage. However the impact is not amplified in the mature stage of the public life cycle relative to the early stage. On the ownership dimension, we find that ownership concentration has a negative impact on ESG scores in the mature stage relative to the early stage of the public life cycle. However, the marginal effect in the early and mature stage is positive and significant, unexpected, and contrary to previous literature. We speculate that this contrary finding is related to the importance of having large owners from a strategic point of view in the new public environment.