“Environment-selected directors”: An interactive simulation experiment of environmental representation on corporate boards - ScienceDirect

Outline

  1. 1. Introduction
  1. 2. Related work
  1. 3. Materials and methods
  1. 5. Discussion
  1. 6. Future work
  1. 7. Conclusions
  1. Declaration of Competing Interest

Cited by (1)

Figures (2)

Tables (3)

  1. Table 1
  1. Table 2
  1. Table 3
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Abstract

In many legal frameworks, corporate directors are selected by shareholders. Proposed legislature in the US seeks to enable employee representation on corporate boards as well. Nevertheless, current approaches to corporate board selection could result in the systematic discounting of the needs of other, unrepresented stakeholder groups beyond shareholders and employees. To investigate this issue, we envisioned a new kind of corporate director---the environment-selected director---to complement shareholder-selected and employee-selected directors. We conducted an online simulation experiment where human participants were assigned to act as corporate directors, with some being told they were selected by shareholders, some by employees, and some via a “vote by a committee of scientists who study the local and global environment in question”. Results found that participants assigned as environment-selected directors exhibited balanced preferences across stakeholder groups, behavior significantly different from both shareholder-selected directors and employee-selected directors. Further results from 3000 “virtual boards of directors” suggest that boards composed solely of environment-selected directors produce more balanced benefits across all three stakeholder groups studied (shareholders, employees, and the environment) than other configurations of boards. These results suggest that it may be useful for future legislation to consider including this novel form of director, the environment-selected director, on corporate boards.

Keywords

Stakeholder Representation
Corporate Boards
Environment
Non-human Personhood
Accountable Capitalism Act

1. Introduction1

Corporations exert a large influence on the industrialized world. In particular, corporations are key contributors to greenhouse gas emissions (Cadez et al., 2019). Therefore changing corporate behavior is key to addressing climate change.
Corporations' actions are shaped by their directors. Different countries have different legal frameworks that govern director selection and behavior. For example, directors in the United States are typically selected solely by shareholders, and director behavior is governed by fiduciary duties owed to investors (Delaware.gov, 2020). Germany, however, employs a two-tier board structure with a management board analogous to the US model and a supervisory board representing a broader range of stakeholders (Bottenberg et al., 2017).
In many jurisdictions, the directors of publicly traded corporations are selected by shareholders and are primarily accountable to them. “Shareholder primacy” decisively influences corporate behavior (Rhee, 2017). However, generating financial returns for shareholders is frequently at odds with mitigating climate change.
Laws and norms both influence the environmental behaviors of corporations and their directors. Norms are sometimes codified in voluntary frameworks and initiatives such as corporate social responsibility (CSR) (Orlitzky et al., 2003; Baaker et al., 2005; Crane et al., 2008, Blasi et al., 2018), triple bottom line (TBL) accounting (Elkington, 1997; Slaper and Hall, 2011; Hussain et al., 2018), and the UN Sustainable Development Goals (Ingram et al., 2019; United Nations, 2020). Consumers, investors, and regulators presumably value the voluntary pro-environmental or pro-social behavior that the corporation engages in through these initiatives. Some voluntary pro-environmental initiatives may be profitable, and in line with the corporation's fiduciary obligations. However, if an action to reduce environmental impact is not profitable; the obligation of corporate directors to maximize shareholder value may override pro-environmental actions. Further, even if a particular course of action may be both pro-environmental and profitable, shareholder primacy provides an argument not to undertake such an action if it is not the most profitable of all possible actions.
The voluntary and piecemeal nature of these initiatives has led to calls for stronger regulation to rein in environmentally-damaging corporate behavior. Indeed, in 2018, John Elkington, well-known for popularizing TBL accounting (Elkington, 1997), wrote in Harvard Business Review: “Clearly, the Triple Bottom Line has failed to bury the single bottom line paradigm” (Elkington, 2018).
The Accountable Capitalism Act (Warren, 2018) (hereafter, the Act) is legislation proposed in 2018 in the US Senate to restructure corporations' decision-making process. It would change the goals of the corporation and the people “in the room” when decisions are made. The Act would require that at least 2/5 of the directors of large corporations are selected by employees, and that those directors “consider the effects of any action or inaction on” (Warren, 2018) seven different stakeholder groups, including shareholders, employees, and the environment. This 2/5 rule assumes that the people employees select will either be different people from those who might otherwise be selected (presumably by shareholders), or behave differently due to having been selected by employees. The “consider the effects” provision assumes that providing explicit direction to directors will affect their behavior as well.
To explore the interactions among these two forces—who selects the directors, and what the law says they should do—we created an interactive business simulation and used it to study people tasked with playing the role of corporate directors instructed to follow the Act. In this simulation, participants were introduced to the role of directors and the Act's provisions on board membeship, and told that they had been selected by a particular stakeholder group. They were then asked to make decisions on behalf of the corporation.
A previous study (Tomlinson et al., 2020) found that participants made decisions that favored the stakeholder group they had been told selected them. This study asks how participants assigned to act as “environment-selected directors” behave, and what corporate behaviors may arise from boards composed of combinations of shareholder-selected directors, employee-selected directors, and environment-selected directors.
To explore the effect of being “environment-selected” on director behavior, we developed two hypotheses:
H1
: When asked to make a decision in which one choice benefits all stakeholder groups equally and another choice benefits one group over others, participants assigned as environment-selected directors will prefer the former over the latter.
H2
: When asked to make a decision in which each choice benefits a different stakeholder group over the others (from among shareholders, environment, and employees), participants assigned as environment-selected directors will select choices that benefit the environment over other stakeholder groups.
To explore the impact of various compositions of boards on corporate behavior, we developed a third hypothesis:
H3
: Boards with even representation of participants assigned as shareholder-selected directors, employee-selected directors, and environment-selected directors will produce decisions that balance the interests of different stakeholder groups more effectively than those composed exclusively of any one type of director.
This paper finds that legal interventions aiming to balance representation of stakeholder groups' interests may require both legal guidance to corporate directors about their behavior, as well as more comprehensive representation of stakeholder groups on corporate boards. If the law seeks to enable representation of the environment on par with the representation of shareholders and employees, it may be necessary but not sufficient to specify that directors balance the impacts of their behaviors on the various stakeholder groups; it may also be necessary to introduce environment-selected directors into corporate boards.
If the Act, or other legal structures around the world, were expanded to incorporate “environment-selected directors,” this would further institutionalize the rights of nature (Kauffman and Martin, 2018) by integrating the representation of environmental interests in corporate decision-making. Our findings suggest that if the interests of “the environment” are to be treated equally in decision making, it may be necessary to ensure that the environment has human representatives with an explicit mandate. By investigating the need for environment-selected directors, this article contributes to the dialogue around corporate governance reform and specifically board membership. The article highlights one strategy for institutionalizing the rights of nature — specifically, by ensuring that the environment, quite literally, has one or more seats at the corporate board table.

2. Related work

The prevailing view of corporate responsibility over the past forty years has been that corporations owe undivided loyalty to shareholders (Macey, 1991). Corporate responsibility (Bazin, 2009) and sustainability (Wagner, 2010; Xiao et al., 2018) are typically subordinate concerns to duties to shareholders.
Consideration of other parties impacted by corporate policy has been limited in practice, but well-researched in theory. Past works urge for more empirical research to advance understanding of stakeholder participation in practice (Laplume et al., 2008). This research answers the call for greater empirical study of stakeholder theory and builds on substantial previous work in stakeholder theory, non-human personhood, and environmental agency.

2.1. Stakeholder representation on corporate boards

Corporations have slowly embraced the notion that stakeholder considerations can improve business performance since the 1980s; however, stakeholder theory proposes that non-economic interests should carry weight in corporate decision making as well (Laplume et al., 2008).
One form of stakeholder representation is Stakeholder Relations Management (SRM), a means of managed stakeholder involvement ranging from information gathering to goal-oriented partnerships with specific stakeholders (Steurer et al., 2005). The success of SRM is dependent upon broad societal demand for corporate social responsibility; without consensus that one of a corporation's principal functions is serving the public good, the impact of a laissez-faire approach to stakeholder representation is unclear (Steurer et al., 2005).
New forms of corporate charter have been introduced to address the lack of corporate accountability under SRM and better integrate stakeholder interests. Many US states have adopted forms of incorporation such as low-profit limited liability companies (L3Cs), flexible purpose corporations (FPCs), and public benefit corporations (PBCs) accommodate corporations with social missions (André, 2015). The most widely implemented social enterprise form is the PBC (Wilburn and Wilburn, 2014). Like many forms of social enterprise, PBCs struggle to create stakeholder accountability while maintaining fiduciary duties owed to shareholders (Ebrahim et al., 2014). For example, while Delaware corporate law requires PBC directors to balance shareholder and stakeholder interests, it also states that PBC directors have no duty to non-stockholders with respect to decisions implicating that balance (Delaware § 365).
Separation of benefit and control complicate directors' duties. Shareholder-selected directors in PBCs are expected to incorporate stakeholder interests into their decision making (Delaware § 362). Directors struggle to balance financial goals and other social or environmental interests (Adams et al., 2011; Stacey and Stacey, 2014).
The Accountable Capitalism Act represents a shift toward incorporating broader stakeholder interests into the directorate of corporate boards through voting rights for stakeholder groups (Warren, 2018). Reserving a percentage of board seats for stakeholders—namely employees, in the Act—resolves many of the conflicting interests and fiduciary obligations that have encumbered previous attempts to accommodate stakeholders. Due to its recent inception, there is no empirical research into the Act, but its voting and representation measures aim to address the fact that current forms of stakeholder involvement do not effectively represent the interests of non-shareholder stakeholder groups (Steurer et al., 2005; Adams et al., 2011; Stacey and Stacey, 2014; McDonnell, 2018).

2.2. Non-human personhood and environmental agency

Stakeholder representation under a selected director model requires selectors to be identified. In an economic or labor context, the selectors are easily identified as shareholders and employees. It is more difficult to identify environmental selectors. Multiple theories of environmental agency could be employed: environmental personhood, resource self-determination, or committee representation.
Environmental personhood theory suggests that natural objects should possess protections in their own right and not solely in their capacity as resources for human consumption (Stone, 1972). Since Stone's seminal argument, environmental personhood has seen a resurgence in international observance of rights of nature (Kauffman and Martin, 2018). As nonhuman entities cannot speak, Stone advocated for a guardianship theory of legal representation. In the U.S., an early case dealing with rights of nature was Jones v. Butz (S.D.N.Y., 1974), where Helen E. Jones sued as “next friend and guardian for all livestock animals now and hereafter awaiting slaughter in the United States.” No party objected to her standing, nor did the judge acknowledge any issues with her standing in his opinion, opening the door for further “next friends and guardians” of animals. Similarly, in Palila v. Hawaii Department of Land and Natural Resources (9th Cir., 1988), a bird acted as a plaintiff, however standing was never challenged by any of the parties (Smith, 2019). Nevertheless, courts have routinely failed to apply the Palila precedent since this case (D. Mass, 1993, 9th Cir., 2004). Over ninety-six domestic provisions in eight countries have recognized inalienable environmental rights—most prominently among them Bolivia, Ecuador, India, New Zealand, and the United States (Kauffman and Martin, 2018).
Another view similarly advocates for the rights of nature but embraces anthropocentric conceptions of the environment as a resource—suggesting that resources should be afforded protection under a property rights theory. Talbot-Jones and Bennett (2019) use the term “resource self-determination” to describe this approach, which in their view characterizes some existing rights regimes (e.g., the Whanganui River in New Zealand).
Some corporate boards have formed environmental committees to represent environmental interests in the decision-making process. However, it is difficult to reconcile claims about the effectiveness of these committees with the body of research on deceptive corporate environmentalism, ecological marketing, and greenwashing (see, e.g., Laufer, 2003, Ramus and Montiel, 2005, Marciniak, 2010). Environmental committees can be expected to experience the same conflict between stakeholder goals and fiduciary duties owed to shareholders; as a result, environmental stakeholders likely require direct means of representation to ensure environmental needs are considered.

2.3. Developments in legal theory pertaining to corporate governance

Two leading legal theories---entity theory and agency theory---affect corporate governance and the legal obligations of firms and directors. Entity theory examines whether corporate actions are imputed to owners or are considered those of a distinct entity (i.e., the firm) (Stout, 2017). Traditionally, in the “nexus of contracts” theory, corporations are viewed as aggregations of individual owners contractually united, wherein a corporation's rights derive from those of its shareholders, rather than from the state (Chaffee, 2017). However, two recent U.S. Supreme Court decisions, Citizens United v. FEC and Burwell v. Hobby Lobby Stores, Inc., suggest that corporations may themselves be viewed as persons who have rights. Some scholars propose a return to the status of corporations as creatures of the state, directly subject to governmental regulation (Padfield, 2013), while others welcome the status of corporations as persons (Iuliano, 2015). Corporate personhood would complicate proposals for stricter director accountability, given the many rights (e.g., free speech) persons enjoy. By contrast, corporations as entities born of regulation would allow governments wider and more direct scope for governance of corporate and director behavior. This debate creates a fertile context for new proposals relating to corporate governance and oversight, including proposals that aim to institutionalize rights of nature in corporate decision-making.
Agency theory is commonly used to explain and resolve issues between principals and agents. An agency relationship involves a principal and an agent, where the agent performs some service on the principal's behalf due to a delegation of decision making authority by the principal to the agent (Jensen and Meckling, 1976). Agency theory may be useful for describing and delineating relationships between corporations, shareholders, directors, and employees. For example, agency theory is strongly implicated when corporate directors make decisions that affect corporations and/or their employees. Often viewed as an agent of corporations, directors make important decisions and actions on behalf of corporations, including those involving employee treatment and environmental protection.
Legal conceptions of entity and agency provide a theoretical backdrop against which the concept of environment-selected directors may be formulated and assessed.

3. Materials and methods

To examine the potential role of environment-selected directors on corporate boards, we developed an interactive business simulation,2 building on past work in participatory simulation of legal systems (Torrance and Tomlinson 2009; Torrance and Tomlinson 2011). This simulation focused on two elements of the Accountable Capitalism Act, one requiring that large corporations (>US$1B annual gross receipts) have at least 2/5 of their directors selected by employees rather than shareholders, and the second requiring that those directors consider the effects of the corporation's actions on various stakeholder groups.

3.1. Summary of participant experience

The simulation begins when participants visit a website and tutorial that demonstrates the role of corporate directors, assigns them to be a particular type of director (SSD, EmSD, or EnSD3), and summarizes the Act. Next, the tutorial introduces major visual elements of the simulation—the participant's corporation (represented by a factory icon with a share price above it, which reflects benefits to shareholders; see Fig. 1) as well as four competitor corporations; 250 employees (represented by faces that may be smiling, neutral, or frowning, depending on benefits to employees); 250 employee houses; and the background world, which varies from green to brown based on pollution levels.
notion image
Fig. 1. A still image from the 2D computer graphical simulated business world. There are five corporations; the human participant controls the one in the middle. Share price is displayed over each corporation. The numerous face icons display employee happiness via their color and expression. The color of the background changes as the ground gets more or less polluted around each corporation.
In the tutorial (as well as on each decision popup, described later), there is a brief summary of the relevant section of the Act.
Next, participants are shown six seconds of the visualization unfolding, followed by a popup asking them to make a decision about how the corporation should act (see Fig. 2). The popup summarizes their job as director and the relevant law, and asks them to choose between two possible choices represented by charts showing how much each of three stakeholder groups (shareholders, employees, and environment) would benefit from either choice. After each choice, the share price of their corporation is updated based on the “Shareholder Benefit” value, the “Employee Benefit” implications are calculated, and the pollution level near the corporation is updated based on “Environmental Benefit”.4 A visualization then demonstrates the effects of their decision. After twelve rounds of decision-followed-by-visualization, the decision cycle ends, and participants are asked to answer open-ended questions about their experience.
notion image
Fig. 2. This popup was presented to participants periodically to require them to make decisions about which action their corporation should take. It includes text with the participant's instructions, a reminder of which stakeholder group selected them, and a brief summary of the applicable law; as well as two bar charts, each of which displays the Shareholder Benefit, Employee Benefit, and Environmental Benefit that would result from selecting that choice.
SSDs are told they became a director via “a public vote of the corporation's shareholders”, EmSDs “via a public vote of the corporation's employees”, and EnSDs “via a vote by a committee of scientists who study the local and global environment in question.”
In each decision popup, participants are asked to decide between two choices, each represented by a bar chart (see Fig. 2). The value of all three bars in any given chart always sums to 1.0. Thus there is a trade-off between the three stakeholder groups. While the real world may not always involve zero-sum games among stakeholders,5 we represented decisions this way to force hard choices on participants.
Every player is given the same set of decisions between two charts; however, the simulation avoids order effects by randomizing the order in which the decisions and choices are delivered.
Two main types of decisions are presented to each participant: 1) three “balance” decisions that ask participants to choose between a strongly polarized chart that favors one of the three stakeholders and a balanced chart, and 2) three “forced choice” decisions between each pair of the three stakeholders: shareholders vs. employees, shareholders vs. environment, and employees vs. environment.
After completing all twelve decisions, participants are asked free-response questions about their experience. Demographic data are also collected (country of residence, age). Gender is collected in line with best practices in human-computer interaction (Spiel et al., 2019).

3.2. AMT studies

To assess the hypotheses, we conducted a series of experiments using human participants via the Amazon Mechanical Turk6 (AMT) online crowdsourcing platform. In AMT, “requesters” (including the research team) post small jobs (called “Human Intelligence Tasks” or HITs) to a public website, and people around the world (“workers”) complete the HITs for payment.
To ensure participants read and understood the relevant law, we deployed a short qualifying quiz through the AMT interface, where workers were asked to read the summary of the Accountable Capitalism Act and answer questions about what they had read.
To determine the appropriate rate of pay (US$15 per hour), we drew on research by Silberman et al. (2018). Based on a pilot study, we identified the average time taken as approximately 17.6 min, so we set the pay at US$4.40 per HIT.
To assess the three hypotheses, we recruited 100 participants for each of three experimental conditions:
    • Shareholder-selected directors (SSDs)
    • Employee-selected directors (EmSDs)
    • Environment-selected directors (EnSDs)
We excluded two subsets of the data collected from this analysis: participants who scored less than 100% on the initial quiz, and participants who did not write original content in their end-of-game questions as requested. After these exclusions, data from 264 of the 300 participants were included in the study: 89 of the 100 participants in the SSD condition, 91 in EmSD, and 84 in EnSD.

3.3. Virtual boards of directors

To investigate outcomes from corporate boards composed of different groupings of types of directors, we constructed 10 member “virtual boards of directors” composed of different director types, e.g., 60% SSD / 40% EmSD. Directors of each type were selected at random from the full study population to populate the board with that composition. The actual choices made by each participant to each of the six relevant decisions (i.e., the three “balance” decisions and the three “forced choice” decisions described above) were assembled into a “virtual vote”, with the majority winning. Ties were broken by averaging results from both possible outcomes. Outcomes from the six decisions were then averaged to yield the virtual board's overall benefit for each of the three stakeholder groups. This process was repeated 1000 times for each of five different board configurations, each time selecting a different set of participants of those types, reflected in the five rows in Table 3.
Since the nature of the questions limited the range of possible outcomes (for example, no set of decisions would lead to a result that completely favored any one stakeholder group), we compared each result to the maximum possible disparity across stakeholders. We then calculated the actual disparity that occurred in each row by subtracting the lowest stakeholder outcome from the highest stakeholder outcome. This actual disparity was then divided by the maximum disparity to arrive at the percentage of maximum disparity displayed in the last two columns of Table 3. The next to last column displays the percentage of maximum disparity when only the outcomes for human stakeholder groups (shareholders and employees) were considered. The last column displays the percentage of maximum disparity when the outcomes for all three stakeholder groups (shareholders, employees and the environment) were considered.
This analysis does not capture some real-world trade-offs. For example, in a real corporate board, discussions, alliances, and compromises occur that are not reflected here. Nevertheless, this analysis allows some insight into how hundreds of binary decisions by individual participants could be integrated into broader perspectives on the impact of those decisions on particular stakeholder groups.

4. Results

4.1. Demographics

Participants' average age was 39 years, younger than the average age of many boards of directors (62 years) (Barrett and Lukomnik, 2017). 56% of participants were men, 43% women, and 1% non-binary or preferred not to describe. This is more balanced than the 79% of men and 21% of women on corporate boards of directors (2020 Women on Boards, 2018). 86% of participants were from the US, 12% India, and 2% other countries.

4.2. Balance effect

First, the study confirmed H1, that EnSDs would prefer balanced choices over choices than benefit a particular stakeholder group (see Table 1), confirming previous findings that SSDs and EmSDs both preferred balanced choices (Tomlinson et al., 2020). Across the twelve rows (three director types, each making decisions about three stakeholder types, plus a composite of the three stakeholder types for each director type, labeled “All”), participants exhibited between a 77.5% and 90.1% preference for balanced choices (p < 0.000001** in all cases7). In a previous study that compared participants instructed via the Act to participants instructed via Delaware corporate law (Tomlinson et al., forthcoming a), even participants instructed to favor shareholders chose balanced options more frequently than options that favored shareholders, providing evidence that participants' desire to seek balance was not solely the result of their instruction to follow the Act.
Table 1. Balance effect.
Director type
Stakeholder type
% balance
Sample size
P-value
SSD
Shareholders
77.5
89
<0.000001**
SSD
Employees
84.3
89
<0.000001**
SSD
Environment
82.0
89
<0.000001**
SSD
All
81.3
267
<0.000001**
EmSD
Shareholders
83.5
91
<0.000001**
EmSD
Employees
80.2
91
<0.000001**
EmSD
Environment
90.1
91
<0.000001**
EmSD
All
84.6
273
<0.000001**
EnSD
Shareholders
89.3
84
<0.000001**
EnSD
Employees
88.1
84
<0.000001**
EnSD
Environment
83.3
84
<0.000001**
EnSD
All
86.9
252
<0.000001**
All types of directors strongly preferred balanced options over any particular stakeholder group. Rows 1–3 and 5–8 from Table 1 (Tomlinson et al., 2020).
Participant comments reveal the motivations in their reasoning. As one EnSD wrote: “I strived to balance all three interests i.e environment, employees, and shareholder/share price as much as possible.” Such comments were common (see Tomlinson et al., forthcoming b).
After the initial experiment, we investigated whether participants in particular conditions were more or less pro-environmentally biased coming into the study, which could have caused the findings described above. To examine this possibility, we conducted a post-study with the various study populations approximately seven months after the study, by which time any priming effect is likely to have lapsed (Squire et al., 1987). We asked participants to complete an abridged form of the environmental attitudes instrument described by Sutton and Gyuris (2015), and paid them an equivalent rate to the original study (~US$15/h). This process elicited completed questionnaires from 127 of the 322 original participants (39.4%). The average of all participants in each of the four conditions ranged between 2.1 and 2.6 on a 7-point scale, with no statistically significant differences among the populations (using pairwise comparison of means t-tests among the four populations). Therefore, we believe that the findings described here resulted from the experimental conditions rather than different environmental attitudes among participants who were assigned to groups.

4.3. Preference effect

The study rejected H2, that EnSDs would select choices that benefit the environment over other stakeholders. While, as reported elsewhere (Tomlinson et al., 2020), SSDs and EmSDs tended to favor shareholders and employees respectively, EnSDs did not exhibit a significant preference for the environment over other groups (see Table 2).
Table 2. Preference effect.
Director type
Other stakeholder type
% preferring own stakeholder group
Sample size
P-value
SSD
Employees
59.6
89
0.071
SSD
Environment
64.0
89
0.0080*
SSD
Both
61.8
178
0.0016*
EmSD
Shareholders
53.8
91
0.46
EmSD
Environment
68.1
91
0.00054**
EmSD
Both
61.0
182
0.0030*
EnSD
Shareholders
46.4
84
0.51
EnSD
Employees
51.2
84
0.83
EnSD
Both
48.8
168
0.76
When forced to choose, SSDs tend to prefer shareholders and EmSDs prefer employees, but EnSDs do not exhibit a significant preference between the environment and other stakeholders. Rows 1–2 and 4–6 from Tomlinson et al. (2020).
These percentages do not reflect random choices. The only aspect of the interactive simulation that varied across conditions was the wording of which stakeholder group had selected them, and there was a significant difference in both the SSD vs. EnSD and EmSD vs. EnSD comparisons; therefore, the results suggest strongly that EnSDs were being intentional in their behavior.
Participants' comments suggest that EnSDs' loyalties were divided between “the environment,” whose interests they were told they were responsible for representing, and the human stakeholder groups, while SSDs and EmSD found the decision-making process more straightforward. For example, one EnSD wrote: “I wanted to make balanced decisions. When there was the opportunity to choose equally for employees, shareholders and the environment, I did so. Otherwise, I still tried to keep it as balanced as I could.” Such comments were common and are analyzed elsewhere (Tomlinson et al. forthcoming b).

4.4. Virtual boards of directors

The study findings rejected H3, that balanced boards will produce balanced decisions. Instead, an alternative finding emerged (see Table 3).
Table 3. Virtual boards of directors.
% SSD
% EmSD
% EnSD
Outcome for shareholders
Outcome for employees
Outcome for environment
% max disparity (human only)
% max disparity (all three)
100
0
0
0.41
0.35
0.24
15
39
60
40
0
0.39
0.36
0.24
8.3
33
20
80
0
0.37
0.37
0.25
1.4
26
0
100
0
0.36
0.38
0.26
4.2
24
0
0
100
0.34
0.33
0.32
2.3
6.2
Differently composed virtual boards benefit different stakeholder groups. The optimal configuration for balanced results is 100% EnSD, a result that contrasts with the prediction under H3. Rows 1–2 from Tomlinson et al. (forthcoming a).
The last row, representing 1000 boards composed of 100% EnSDs, led to the lowest disparity (the greatest balance) across stakeholder groups, with only 6.2% of the maximum possible disparity. All other configurations had more than 3 times as much disparity across different stakeholder groups. Also, the third row shows that boards composed of 20% SSDs and 80% EmSDs create a slightly lower percentage of disparity between the two human stakeholder groups and higher benefits for both, but at the cost of substantially worse outcomes for the environment. Both of these configurations led to less disparity than the 60% SSD/40% EmSD split proposed by the Accountable Capitalism Act itself, or from boards composed of 100% SSDs as is the current practice in Delaware corporate law (Tomlinson et al., forthcoming a).

5. Discussion

We expected EnSDs to behave similarly to SSDs and EmSDs, who made choices benefiting their own groups (Tomlinson et al., 2020), and therefore that the optimal balance of needs would result from equal representation among groups. However, EnSDs are more even-handed in their distribution of benefits than SSDs or EmSDs. Because of this difference, the “virtual boards” results suggest that, if the desired outcome is corporate behavior that balances all stakeholder interests, the optimal configuration for boards may be composed solely of environment-selected directors. Environment-selected directors could help achieve the Act's goal of balancing impacts across stakeholder groups more effectively than simply instructing directors to balance the interests of different groups.
Existing research at the intersection of corporate governance and firm-level environmental (or sustainability) performance focuses on empirically observable relationships. For example, increased gender diversity on boards improves corporate environmental performance (e.g., Post et al., 2011; Nadeem et al., 2017). The presence of independent directors has been found in some studies to improve environmental performance (e.g., Huang, 2010; Post et al., 2014) but in other studies to worsen it (e.g., Naciti, 2019). More generally, increased board diversity, including gender diversity and the presence of independent directors, has been found to improve corporate social responsibility performance broadly (e.g., Zhang et al., 2013; Harjoto et al., 2014).
This study is therefore part of the relatively young but growing body of work investigating the relation between board composition and environmental performance (e.g., Webb, 2004; de Villiers et al., 2011; Boubaker and Nguyen, 2012; Walls et al., 2012; Dixon-Fowler et al., 2017). The study's experimental approach, however, made it possible to investigate questions about the potential effects on corporate environmental performance of legislation that is at present only proposed---and even to investigate questions about hypothetical variations on that legislation.
The study's findings add to the literature at the intersection of corporate governance and firm-level environmental performance in two ways. First, they offer experimental support that directors who are accountable to environmental stakeholders can be expected to make decisions that benefit the environment more than directors accountable to other stakeholder groups. This is consistent with intuition, but to our knowledge the first experimental investigation of the hypothesis. Second, and unexpectedly, the study findings (specifically, the analyses of “virtual boards”) suggest that environment-selected directors may better balance the interests of all stakeholder groups than directors selected by other groups.
Taken together, these findings offer suggestions for policy. First, if improving firm environmental performance is a first-order goal of legislation restructuring corporate boards, the legislation should ensure that environmental interests are represented by specific persons on those boards; adding employee representation and instructing all board members to balance environmental interests against the interests of their actual constituents may not be enough. Second, the findings provide a surprising but intriguing provisional answer to the question of how many environmental representatives should be on boards if the goal of the legislation is to achieve a balance of interests: the answer may be: “the more, the better.”

5.1. Implementing environment-selected directors

The potential for environment-selected directors to contribute to balancing the interests of multiple corporate stakeholders raises the need to identify methods of implementation for environment-selected directors and environmental agency more broadly.
In this study, we assigned people to serve as EnSDs by telling them they “became a director via a vote by a committee of scientists who study the local and global environment in question”. Is there a better way for organisms and ecosystems to express a preference regarding their own representation? The law has attempted to address this challenge by allowing humans to represent the interests of nature under certain conditions. For example, in the United States, a federal district court allowed human representatives of the Northern Spotted Owl to fight logging in Pacific Northwest forests that threatened the bird's habitat (Northern Spotted Owl v. Hodel, 1988). Similarly, as alluded to earlier, the New Zealand Parliament passed into law that the Whanganui River be recognized as a legal person (Yale Environment 360, 2017). Although these instances of legal recognition for non-human entities are rare so far, they may herald a widening of legal rights to include aspects of the environment. Criteria used to approve humans capable of faithfully representing the best interests of these natural entities could be adapted to the goal of selecting faithful environmental directors.

5.2. Shortcomings

There are substantial differences between this simulation and real business contexts, which likely lead to differences in how participants behave in this simulation versus how real directors behave in real business contexts. Participants in this study were drawn from a population with different characteristics than corporate directors, were placed under different incentives, and were operating at different time scales and in different social contexts. As such, we recognize that findings from this study at best reflect partially on the real phenomena upon which the simulation was modeled.
The simplifications in this model were developed by an interdisciplinary team that includes a law professor, a policy expert, and a simulation researcher, and are similar to those made in economic models used by central bankers and policy makers for decisions that affect the lives of hundreds of millions of people. While all models simplify, and this one is no exception, the losses incurred by that simplification are similar to those in other models in relevant disciplines.
Despite the differences between the simulation and real business contexts, though, we nevertheless believe that interactive simulation experiments such as the one described here may be useful in shedding light on topics worth exploring further, in ways that may be more grounded in human behavior than purely theoretical explorations, but significantly easier to conduct than experiments involving real members of corporate boards. This relative ease broadens the spectrum of topics that may be explored experimentally, and therefore we believe it offers a useful contribution to scholarship.

6. Future work

There are numerous ways in which this simulation could be extended. For example, a treatment where participants would engage in a series of interactions, needing to be “re-elected” by the stakeholder group that initially selected them after each iteration, could more closely resemble the incentive structure under which real corporate directors operate. A treatment in which participants were drawn from directors of real corporations could also enable greater ecological validity, as could studies of real directors using other methods (e.g. interview studies).

7. Conclusions

This paper uses interactive simulation to explore the representation of the environment on corporate boards. Currently, directors of US corporations are typically selected by shareholders. Employees have board representation in some countries, and the Accountable Capitalism Act proposed in the US Senate would give employees representation on the boards of US corporations as well. However, previously published research (Tomlinson et al., 2020) found that shareholder-selected directors are biased in favor of shareholders, and employee-selected directors are biased in favor of employees; therefore, we hypothesized that having corporate directors selected by other stakeholder groups may be necessary if the goal is to have equal representation of those stakeholder groups in corporate decision-making.
We found that, unlike participants assigned as shareholder-selected and employee-selected directors, participants assigned as environment-selected directors did not exhibit statistically significant bias in favor of their own stakeholder group (or, for that matter, either of the other stakeholder groups). Results from this study also suggest that, if the desired outcome is equal representation of the interests of multiple stakeholder groups (including the environment), then a board composed solely of environment-selected directors may outperform other combinations of director types.
These results highlight the importance of direct representation of environmental interests in corporate decision-making, linking long-running theoretical discussions around the rights of nature with ongoing policy debates around corporate governance reform, one step in the long research and policy project of bringing sustainability into the center of human activity.

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgments

We thank the Bren School of ICS at UC, Irvine, for its support of this research, and the anonymous reviewers for their helpful feedback.

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Cited by (1)

1Portions of this paper are adapted from an earlier conference publication (Tomlinson et al., 2020). Additionally, two parallel publications (Tomlinson et al. forthcoming a, Tomlinson et al. forthcoming b) present findings from different analyses conducted using the same simulation framework; these papers therefore share content as well. The framing, findings, and analysis presented here are unique and novel. We follow publication standards articulated by Samuelson (1994).
2Code for this system is available at: https://github.com/wmt-at-ics-uci-edu/corporate-simulation
3The term “EnSD” refers to participants assigned as environment-selected directors, “SSD” to participants assigned as shareholder-selected directors, and “EmSD”to participants assigned as employee-selected directors. When the topic of discussion is directors in real corporate contexts, the full terms (e.g., “environment-selected director”) is used.
4We recognize that the signals related to employee and environmental benefits in this simulation are much more concrete than such signals typically are in real business contexts, where employees are heterogeneous and polling them time-consuming, and where environmental factors unfold across broader scales of time and space, and may be difficult to measure. Nevertheless, innovations in both domains are making such signals somewhat more accessible (Costantini et al., 2017; Tushman et al., 2017).
5Instances of “win-win” possibilities between economic and environmental factors are less common than may be promoted by corporations (Cadez and Guilding, 2017).
6This system's name is unfortunate, especially in light of the history explored by Aytes (2013). We include the full name here for clarity, but refer to the system as AMT elsewhere throughout the paper.
7All p-values were calculated using a one-proportion Z-test. The p-value used for a statistically significant result (*) was set as 0.05, and highly significant (**) at 0.001.