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Review of Accounting Studies

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02-07-2022

Do high-ability managers choose ESG projects that create shareholder value? Evidence from employee opinions

Authors: Kyle Welch, Aaron Yoon

Published in: Review of Accounting Studies | Issue 4/2023

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Abstract

Firm managers are facing increasing external pressure to allocate firm resources to environmental, social, and governance (ESG) efforts. Given that ESG activities are frequently perceived as in opposition to shareholder value, however, managers may find it difficult to decide which projects they should select and how much they should invest. Using MSCI ESG Ratings and Glassdoor employee ratings of senior managers as signals for firm ESG efforts and high managerial ability, we find evidence that high-ability managers allocate resources to ESG in a way that enhances shareholder value. Specifically, we implement a calendar-time portfolio regression design and find that firms with highly rated managers and high ESG exhibit significantly higher future stock returns than firms with low ratings on both. The results are robust to using different fixed effect structures as well as controlling for more covariates in a panel regression. Overall the results highlight the importance of senior managers in allocating resources to ESG efforts.

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Employees’ ratings of senior managers in Glassdoor do not explicitly specify if the employees are providing an assessment of managers who are senior to them or senior decision makers of the firm (e.g., C-Suite executives). We treat this construct to reflect employees’ assessment of senior decision makers of the firm, because 1) it is common for ESG decisions to be made at such a level and 2) our main results are robust to using the employee approval rating of the CEO (See Footnote 7 for details).

Glassdoor rating on senior management is not correlated with the firm ESG rating, suggesting that the two measures are very different signals (i.e., correlation: 0.00%; see Table 2 panel B). There is also no correlation between a firm’s social score (i.e., the S of the ESG) and various employee-related sub-scores from MSCI. This finding contradicts the common perception that the S component, employee-related sub-scores, or both would relate closely to employee opinions of senior executives. Our conclusion is that the Glassdoor measure brings new insight by measuring employee perspectives directly. (See Section 3 for details.)

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For example, Di Giuli and Kostovetsky (2014) argue that managers pursue ESG efforts as a result of social and political pressure. Lys et al. (2015) view ESG efforts as separate from value creation, instead seeing ESG efforts as a signal from management of future performance.

ESG project selection may not be instantaneous. There is no theoretical guidance on how long it takes for managers to select projects for ESG issues. Nonetheless, we use managerial ability of year t-1 and ESG of year t to corroborate the notion that managers are choosing ESG projects that enhance shareholder value. While the number of months in our sample decreases from 96 months to 84 months, the results are similar in both economic and statistical significance (i.e., long-short portfolio generates an annualized alpha of 5.23%). We omit the presentation of this result for brevity.

In an untabulated test, we use the employee rating of CEO job performance (see Figure 1) to address the concern that employees’ ratings of senior managers do not specify if the employees are providing an assessment of those managers (i.e., C-Suite officers). We code the three categories of approve, disapprove, or have no opinion as 1, −1, and 0, respectively. We find that the firms with high CEO approval and high ESG outperform the firms with low CEO approval and low ESG by 5.23% (p value<0.05) and 5.54% (p value<0.05) using equal-weighted and value-weighted approaches, respectively. We do not use this as the main construct, because roughly 30% of our data has CEO approval as missing, and considerable variation is lost vis-à-vis the ratings on senior managers that range from 1 to 5. We also use other ratings that are likely shaped by senior leaders of the firm rather than middle managers (e.g., Rating on Career Opportunities and Compensation) and find results consistent with our main results.

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Title: Do high-ability managers choose ESG projects that create shareholder value? Evidence from employee opinions
Authors: Kyle Welch
Aaron Yoon
Publication date: 02-07-2022
Publisher: Springer US
Published in: Review of Accounting Studies / Issue 4/2023
Print ISSN: 1380-6653
Electronic ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-022-09701-4

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