Executive compensation, environmental performance, and sustainable banking: The moderating effect of governance mechanisms

Abstract

This paper contributes to the extant business strategy and sustainable development literature by investigating the effect of a broad corporate governance disclosure index on executive compensation and, subsequently, determines the extent to which the pay‐for‐sustainability sensitivity is moderated by corporate governance mechanisms. Employing data collected from 16 Sub‐Saharan Africa countries over the period from 2007 to 2018, the findings are as follows: First, we report that better‐governed banks pay lower compensation packages to their executives. Second, we find that executive compensation increases sustainable banking disclosures in the countries. Third, the findings show that executive compensation is negatively associated with environmental performance. Finally, we detect that the association between executive pay and sustainable banking performance is significantly moderated by corporate governance mechanisms, revealing that the pay‐for‐sustainability sensitivity is mainly positive and improves in banks with high corporate governance quality. This implies that the pay‐for‐sustainability sensitivity is contingent on the quality of the bank's internal governance mechanisms. Our findings have key implications for banking practitioners, regulators, environmental activists, and policy‐makers.

Sustainable banking initiatives, environmental disclosure and financial performance: The moderating impact of corporate governance mechanisms

“…In order to check the reliability of the SBD , the study adopts two manual scoring approach as applied by Adu et al (2022). The first round of scoring of the SBD takes 12 months starting in January 2018 and ending in December 2018.…”

“…Appendix A contains the four broad themes and the various variables that make up the CGDI . It also offers clear descriptions of the coding instruments and how the variables have been assessed as applied by Adu et al (2022) and Ntim and Soobaroyen (2013).…”

“…Finally, the study hypothesizes that the FP of a bank is affected jointly by its CGDI and SBD . To examine this, the study adopts Adu et al's (2022) study in estimating the moderating impact of CGDI on the S PS as shown in Equation 3. Precisely, to examine Hypothesis 3 (whether CGDI moderates the SPS ), the study creates an interaction variable by multiplying the CGDI and SBD as follows: CGDI times SBD ( CGI * SBD ).…”

“…Examples of key resources in the banking system include easy access to finance or deposit by establishing links and securing the support of diverse powerful stakeholders. In this regard, banks can achieve this through the implementation of sustainable banking initiatives (Adu et al, 2022).…”

“…Finally, following well-established literature (Adu et al, 2022;Apergis, 2019;Sarhan et al, 2019), the study controls for bank-level variables that can be associated with bank's outcome such as firm size, capitalization, liquidity, leverage, age, audit firm size, research and development, and country-level variables such as GDP, governance quality and inflation (Adu, 2021;Adu et al, 2021;Sarhan et al, 2019).…”