Substantive Board Independence and Board Interlocks on ESG Performance: The Role of CEO Power

Recently, the influence of boards of directors on the efficiency of ESG practices has been extensively explored in academic literature. However, the impact of board characteristics on ESG performance has not been thoroughly examined in Korean research. This study aims to fill this gap by investigating how substantive board independence and interlocks involving outside directors and CEOs influence ESG performance, and how this relationship is moderated by CEO power. We analyzed panel data from 4,926 firm-year observations of Korean-listed firms with ESG scores from 2012 to 2021. Our empirical evidence reveals that substantive board independence, particularly non-affiliated outside directors, positively influences ESG, including environmental and social performance. Additionally, outside director interlocks are positively associated with ESG and social performance, while CEO interlocks negatively affect all ESG aspects in companies belonging to business groups. Furthermore, we demonstrate that specific board characteristics significantly affect ESG outcomes, and this relationship varies depending on the role of CEO power. Our findings indicate that effective board leadership is the most decisive factor linking higher ESG performance to enhanced long-term shareholder value for all stakeholders. By integrating stakeholder perspectives with extended agency theory, we elucidate how resource allocation decisions made by the board and CEO significantly impact strategic ESG performance.