Director Reputation Effects of Environmental and Social Failures

We examine whether outside directors experience reputation penalties for environmental and social (ES) failures. We find that directors are more likely to turn over from ES failure firm boards compared to directors at non-failure firm boards. The effect is small on average but becomes more economically meaningful in cases of severe ES failures. We also find that shareholders withhold more votes from directors at ES failure firms, though the incremental votes withheld are negligible in economic magnitude and when compared to cases of governance failures. On average, we find no evidence that reputation effects spill over to non-failure firms where ES failure directors serve on boards. However, conditional on turnover from ES failure firm boards, failure directors are more likely to turn over from non-failure boards. Moreover, directors who turn over from ES failure firm boards and obtain new directorships tend to join less prestigious boards. Collectively, our results suggest that labor market incentives and shareholder voting may provide some ex ante incentives for directors to effectively manage ES activities and risks.