When do female directors curb corporate ESG controversies? Evidence from the USA

Global concerns regarding sustainability and gender equality prompt corporations to restructure their operations. In response to the stakeholders' pressure, they have increasingly started prioritizing the United Nations' Sustainable Development Goals (SDGs) . This shift towards sustainability pushes them to pursue stakeholders’ legitimacy. Consequently, corporations have initiated appointing more female directors to boards to mitigate ESG controversies. The literature reveals that board gender diversity improves corporate sustainability performance. However, there is still a need to clarify when female directors have the most positive effect on corporate behavior. To this end, we aim to investigate when specifically female directors curb corporate ESG controversies. Interestingly, we find that they mitigate ESG controversies when acting as independent directors, not executive ones. Additionally, their impact in curbing ESG controversies is significant in firms with sustainability-linked compensation policies, weak governance mechanisms, and those that belong to environmentally sensitive industries. The mechanism analysis reveals that female independent directors mitigate ESG controversies by enhancing transparency through their effective monitoring. The results of our study are robust to endogeneity regarding reverse causality, industry, and time-fixed effects. Our results offer several contributions to the governance and sustainability literature by documenting the significant role of female directors in addressing sustainability issues. • We investigate when female directors are effective in curbing ESG controversies • Female directors mitigate ESG controversies when serving as independent directors • Female directors are effective in firms with sustainability-linked compensation • Female directors have a stronger effect in firms with weak governance mechanisms • Female directors are more effective in environmentally sensitive industries