CEO compensation, incentive alignment, and carbon transparency

Abstract

We examine whether chief executive officer compensation aligned with stakeholders’ interests is associated with enhanced corporate carbon transparency. Using an international sample obtained from the CDP, we find that corporate carbon transparency—as measured by both the propensity to voluntarily disclose carbon information and the quality and comprehensiveness of the disclosure—is greater when managers’ compensation contracts are better aligned with stakeholder interests. Further analyses indicate that this positive relationship is stronger in countries or regions with a code law legal system, with an inefficient rule of law, that show strong social norms toward climate change, that feature collectivist societies, and that have a long-term orientation. These findings indicate that the stakeholder agency problem of voluntary carbon disclosure can be addressed through executive incentives that are aligned with stakeholders’ interests.