CEO compensation, incentive alignment, and carbon transparency

Summary

The paper "CEO compensation, incentive alignment, and carbon transparency" investigates the relationship between chief executive officer (CEO) compensation, stakeholder interest alignment, and corporate carbon transparency. The authors examine whether compensation structures designed to align with stakeholder interests lead to enhanced carbon disclosure. They utilize an international sample of firms obtained from the Carbon Disclosure Project (CDP) to conduct their analysis. Corporate carbon transparency is measured by both the propensity of firms to voluntarily disclose carbon information and the overall quality and comprehensiveness of these disclosures. The methodology centers on analyzing how variations in CEO compensation contracts, specifically those structured to incorporate stakeholder interests, correlate with these measures of carbon transparency. The study's findings reveal a significant positive association: corporate carbon transparency is greater when managers' compensation contracts are better aligned with stakeholder interests. Furthermore, the research uncovers that this positive relationship is not uniform globally but is significantly influenced by a country's legal and cultural institutions. Specifically, the link between CEO incentive alignment and carbon transparency is found to be stronger in countries with a code law legal system, as well as in regions characterized by an inefficient rule of law, strong social norms regarding climate change, collectivist societies, and a long-term orientation. Conversely, the influence of CEO incentive alignment on carbon transparency is weaker in common law countries or regions. These results suggest that the "stakeholder agency problem" concerning voluntary carbon disclosure can be effectively mitigated through executive incentives that are appropriately aligned with the broader interests of stakeholders. The implications underscore the critical role of legal and institutional frameworks, alongside cultural factors, in shaping the effectiveness of executive compensation as a mechanism for promoting corporate transparency on climate-related issues.