ESG performance and market value: the moderating role of employee board representation

In this paper, we examine the extent to which the appointment of employees to the board of directors influences market perceptions of environmental, social and governance (ESG) performance. Using a sample of French firms listed on the SBF 120 index from 2007 to 2017, we find that investors react positively to ESG performance but negatively to the presence of employees on the board. Importantly, our results document a negative relationship between ESG performance and market value for firms with employee directors on the board. A more fine-grained examination of ESG pillars shows that when employees are appointed to the board, neither social nor environmental and governance performance are financially rewarded by market participants. Our findings suggest the potential existence of a major conflict of interest between employees and shareholders stemming from the presence of employees on the board. We suggest that, when employees are appointed to the board, high ESG performance may indicate a possible alliance between managers and employees that counterbalances the dominance of shareholders on the board.