1. Introduction
ESG is a comprehensive framework for evaluating the sustainable development of enterprises, which is divided into three aspects: environmental (E), social (S) and governance (G) [
1]. In recent years, ESG has garnered significant attention from regulatory authorities [
2,
3], professional investment institutions [
4,
5] and listed companies [
6,
7], rapidly becoming a central focus in sustainable development research [
8].
The concept of ESG was first officially introduced by the United Nations Global Compact in 2004. In 2006, the United Nations Principles for Responsible Investment (UN PRI) issued the Principles of Responsible Investment (PRI), aimed at encouraging major investment organizations globally to integrate ESG considerations into their investment decision-making processes and improve their sustainable investment management. Under the impetus of PRI, the concept of ESG began to gain momentum, and ESG investment principles were formally established. The ESG performance of an enterprise plays the most important guiding role for investors and asset management institutions [
9]. ESG ratings can mitigate the information asymmetry between investors and enterprises and help investors analyze the potential risks of enterprises [
10]. In addition, ESG ratings can assist enterprises in developing their sustainability capabilities and attracting a greater number of sustainability-focused investors [
11]. Therefore, ESG performance is profoundly consequential for the sustainable development of enterprises.
In China, ESG is a relatively new concept [
12]. In recent years, a considerable number of publicly traded companies in China have started to take notice of their ESG performance and begun to disclose ESG information. However, there are more companies that regard ESG disclosure as a future plan and have not implemented it yet [
13]. In view of this, China is constantly strengthening the institutional construction of ESG. In 2018, the China Securities Regulatory Commission (CSRC) revised and officially promulgated the Governance Standards for Listed Companies (revised version), which for the first time determined the basic framework and standards for environmental, social, and corporate governance (ESG) information disclosure [
14]. In the same year, the Asset Management Association of China (AMAC) launched research on China’s enterprise ESG system and green investment management standards (pilot), establishing the fundamental metrics for enterprise ESG performance management in China [
15,
16]. Since that milestone, China has formally recognized ESG performance as a benchmark indicator for evaluating the sustainability progress of publicly traded firms. The information disclosure, corporate management, strategic planning, and resource allocation activities of Chinese listed companies are significantly influenced by the incremental development of ESG awareness [
17,
18,
19].
The top management team (TMT), serving as a pivotal role in corporate operations and strategic determinations, exerts a substantial effect on organizational effectiveness and developmental tactics [
20,
21]. In the past, the academic research on TMTs initially focused on the repercussions of the CEO’s personal traits on business efficacy [
22]. With the emergence of the upper echelons theory, the study of TMTs has become the focus of many studies [
23,
24]. Corporate executives have different personal characteristics, such as age, values, thinking patterns, educational experience and other background experience differences [
20,
25]. It is equally meritorious as to whether the diversity of personal traits of executives will affect business entities’ ESG performance. Following the tenets of stakeholder theory, the stakeholders of enterprises come from many backgrounds. To secure enduring advancement, the top managers should not only focus on business performance but also pay attention to the interest demands of the many stakeholders [
26]. In addition, based on Maslow’s hierarchy of needs theory, top managers will pursue spiritual needs after meeting basic material needs [
27], helping the company improve ESG performance in order to enhance their own reputation. The satisfaction of such needs is related to the top management incentive mechanism of enterprises. In addition to explicit monetary compensation incentives and equity incentives [
28,
29], more and more scholars have found that organizational resolutions are significantly swayed by the implicit incentive mechanism of executive control right [
30]. In this context, it has significant practical value to study whether the top management incentive mechanism can really stimulate the enthusiasm of TMTs to promote corporate ESG performance.
Consequently, using A-share listed companies in China from 2011 to 2022 as samples, this paper constructs a two-way fixed-effects model by firm and year to investigate the influence of top management team heterogeneity on corporate ESG performance, as well as the moderating role played by top management incentives. The aim is to answer two key questions: Firstly, employing the upper echelons perspective, this study probes into whether corporate ESG performance is influenced by the heterogeneity of top management team characteristics, such as gender, functional background, and overseas background. Secondly, the incentive theory is employed to investigate whether ESG outcomes are positively moderated by the monetary compensation incentives, equity incentives, and control incentives of senior management.
The findings of this paper show that the gender heterogeneity, functional background heterogeneity, and overseas background heterogeneity of top management teams have significant positive impacts on corporate ESG performance, and monetary compensation incentives and control incentives to top management teams play a positive moderating role, while equity incentives exhibit a negative moderating effect. These findings remain robust across alternative measures of corporate ESG ratings and monetary and control incentives, and through the SYS-GMM model test and instrumental variable approach to address endogeneity. The implications of this study suggest that to enhance corporate ESG performance, enterprises should prioritize the promotion of top management team heterogeneity and tailor their incentive mechanisms accordingly.
The primary contributions of this research are summarized as follows: First, utilizing microdata from publicly traded companies in China, this study investigates the repercussions of TMT heterogeneity through the lens of ESG performance and theoretically analyzes and empirically tests the effects of TMT heterogeneity on business entities’ ESG outcomes. Existing research mainly deals with the impact of top management team heterogeneity on business performance [
31,
32], innovation [
33,
34], corporate governance [
35], and information disclosure [
36,
37]. Therefore, compared with the existing literature, this paper reveals the catalytic influence of TMT heterogeneity on firm ESG performance, enriches the research content on TMT heterogeneity and its economic consequences, and expands the investigation into determinants of firm ESG. Second, this paper conducts a theoretical examination alongside an empirical investigation into the buffering influence exerted by executive remuneration on the correlation between TMT heterogeneity and firm ESG. The existing research mainly explores the effects of executive incentives on corporate financial performance and market performance [
38], operational efficiency [
39], corporate strategy [
40], corporate innovation [
41], enterprise digitalization [
42], and other aspects, but there is a lack of research on the interaction between executive motivation and team heterogeneity. By contrast, this paper explores how executive incentives moderate the impact of the heterogeneity of the top management team on ESG performance, further deepening the understanding of the relationship among TMT heterogeneity, top management incentives, and ESG performance. Thirdly, the research conclusions of this paper have important practical significance, providing clear enlightenment for enterprises to effectively improve ESG performance, helping enterprises to find a breakthrough point for improving ESG performance from the perspective of human resource allocation of the top management team, and adjusting the incentive mechanism of the top management team to support the realization of ESG strategic goals.
4. Research Design
4.1. Regression Models
This paper adopts panel data, which have the two dimensions of firm and year. In order to avoid the estimation bias caused by the unobservable effects of firm and year, this paper adopts a two-way fixed-effects model (TWOFIX) with the effects of firm and year [
104]. Since the sample firms in this paper changed their industrial attributes during the sample period, in order to make the conclusion more robust, this paper also controls the industry fixed effects. In order to test the impact of TMT heterogeneity on corporate ESG performance, this paper establishes the following model (1) by referring to the research of Hambrick et al. [
21]:
To test the moderating role of top management incentives, this study adds
TMI into model (1) and establishes the following model (2):
In models (1) and (2), subscript i and subscript t represent the enterprise and year, respectively, and the explained variable ESG represents corporate ESG performance. The explanatory variable TMTH represents TMT heterogeneity and the moderating variable TMI represents top management incentives. Xi,t represents a series of characteristic variables at the firm level, which are used to control the impact of initial characteristic differences of enterprises on the regression results, including: firm size, financial leverage, cash flow, return on assets, growth rate, listed years, ownership concentration, board size, and ratio of independent directors. ΣFirm, ΣYear, and ΣIndustry represent the firm fixed effects, time fixed effects, and industry fixed effects, respectively, which are used to control the interference of inherent characteristics of enterprises that do not change with time and macro factors in different years on the model estimation. εi,t is the random disturbance term. In the specific empirical analysis, in order to exclude the influence of heteroscedasticity and serial correlation on the regression results, this paper adjusts the standard errors of the regression coefficients by clustering at the enterprise level. In measurement model (1), this paper focuses on the estimated coefficient α1, which describes the actual impact of TMT heterogeneity on corporate ESG performance. In measurement model (2), this paper focuses on the estimated coefficient β3, which describes the moderating effect of top management incentives on the relationship between TMT heterogeneity and corporate ESG performance.
4.2. Main Variables
4.2.1. Dependent Variable
The dependent variable in the regression models is corporate ESG performance. We chose ESG scores in the Bloomberg database to quantify the ESG performance of enterprises. The score consists of ESG indicators from three different dimensions, namely, environmental (E), social (S) and governance (G). The indicators of each dimension are composed of various sub-indicators. The detailed indicators of the environmental dimension include environmental disclosure, pollution discharge, energy consumption, sewage discharge, waste management, environmental penalties, sustainable operation investment, sustainable operation policy, and so on. The detailed indicators of the social dimension include employee characteristics, employee diversity, gender pay gap, employee training, safety, supply chain management, community construction expenditure, social responsibility policy, and so on. The detailed indicators of the governance dimension include the board and senior executive diversity, board meeting frequency, the audit committee, the nomination committee, the activities of board and executives, shareholders’ rights and interests, and so on. Below the second-level markers for each aspect are 120 meticulous lower-level indices that constitute the scoring benchmark [
105,
106]. The index system extensively, objectively, and comprehensively provides the environmental, social, and governance (ESG) performance relevant to different stakeholders.
4.2.2. Independent Variable
TMT heterogeneity (
TMTH) serves as the independent variable. Gender, functional background, and overseas background differences among TMT members are used to quantify
TMTH. Drawing on Blau [
107], the Herfindahl–Hirschman Index (HHI) was computed for three types of heterogeneity within the top management team (
TMT): gender heterogeneity (denoted as Hgen), functional background heterogeneity (denoted as Hfun), and overseas background heterogeneity (denoted as Hoversea). A higher HHI value signifies a more TMT heterogeneous, and vice versa.
4.2.3. Moderator Variables
In this study, the moderator element is top management incentives (denoted as
TMI), which is used to assess how TMT heterogeneity influences corporate ESG performance under varying incentive mechanisms. This study divides the top management incentives (
TMI) into three aspects: monetary compensation incentives (denoted as Salary), equity incentives (denoted as Equity), and control rights incentives (denoted as Control). Following the study conducted by Lewellen et al. [
108], the natural logarithm of the sum of the salaries of the top three highest-paid executives is used to measure the compensation incentives. The proportion of shares held by senior executives to the total share capital is utilized as an indicator of the equity incentives. Referring to Zahra et al. [
72], CEO–chairman duality is selected to measure the control rights incentives.
4.2.4. Control Variables
The control variables included in Xi,t are firm size, financial leverage, cash flow, return on assets, growth rate, listed years, ownership concentration, board size, and the ratio of independent directors. In addition, this paper also controls for year fixed effects, industry fixed effects, and firm fixed effects.
Table 1 provides details on how the variables are constructed and operationalized.
4.3. Sample and Data
As a consequence of the 2008 global financial downturn, the yearly financial statements of Chinese publicly traded firms in 2009 and 2010 lacked stability. At the same time, taking into account the accessibility of ESG performance scores, the analysis includes Chinese entities with A-shares traded publicly from 2011 through 2022, serving as our examination sample. In order to safeguard the precision of the data, we applied the following sequential screening process: (1) firms lacking ESG ratings in the Bloomberg database were excluded; (2) financial companies were excluded; (3) companies designated as ST and *ST (indicating special treatment due to financial distress) were removed; and (4) publicly traded firms with missing financial information were excluded. In order to eliminate the effect of extreme values, all variables were winsorized up and down by 1%. After applying these criteria, we obtained 5879 valid samples. The score data of corporate ESG performance involved in this study are from the Bloomberg database, and the financial data are from the CSMAR database.
8. Conclusions and Recommendations
8.1. Conclusions
As a result of the disjunction of property rights and managerial authority, the TMT holds the corporate control rights, which is crucial for the advancement of the company. In the context of an increasingly complex and changeable business environment, it is more explanatory to study the influence of the demographic background characteristics of TMTs on corporate decision making and performance than that of individual managers (such as the CEO). However, while research on the impact of TMT heterogeneity on firm strategy and investment is abundant, there is a relative scarcity of studies on its influence on firm ESG performance. Despite being a significant element influencing enterprise decision making, it is yet unclear how the heterogeneity of TMTs will impact firm ESG performance. Building on the upper echelons theory, this paper investigates the influence of TMT heterogeneity on firm ESG performance and the moderating effect of top management incentives. We utilize data from China’s A-share listed companies over the period of 2011 to 2022 as our sample dataset.
The findings of this paper show that the gender heterogeneity, functional back-ground heterogeneity, and overseas background heterogeneity of top management teams have significant positive impacts on corporate ESG performance, and the monetary compensation incentives and control incentives of top management teams play a positive moderating role, while equity incentives exhibit a negative moderating effect. These findings remain robust across alternative measures of corporate ESG ratings and monetary and control incentives, and through the SYS-GMM model test and instrumental variable approach to address endogeneity.
This paper is noteworthy for its analysis of the economic consequences of TMT heterogeneity from the perspective of corporate ESG performance, using microdata from Chinese listed companies. The effect of TMT heterogeneity on corporate ESG performance is theoretically analyzed and empirically tested. This paper reveals the promoting effect of TMT heterogeneity on corporate ESG performance, enriches the research content on TMT heterogeneity and its economic consequences, and expands the research on the influencing factors of corporate ESG. This study also examines the moderating role of top management incentives on the cause-and-effect between TMT heterogeneity and corporate ESG performance and further deepens the understanding of the correlation among TMT heterogeneity, top management incentives, and corporate ESG performance. In addition, the research conclusions of this paper provide a practical reference for enterprises to construct more flexible TMTs, formulate a more targeted top management incentive mechanism, and improve ESG performance more effectively.
8.2. Recommendations
Based on the above findings, this paper has the following important implications for management and policy.
First of all, in order to improve the ESG performance of enterprises, enterprises should actively promote the diversity of top management teams, including gender diversity, functional background diversity, and overseas background diversity. This can be achieved by developing fair recruitment processes, eliminating gender bias, and establishing women’s leadership development programs. At the same time, they can promote the diversity of functional backgrounds by encouraging job rotation and exchange programs between different departments, as well as actively seeking candidates with different professional backgrounds in the recruitment process. In addition, priority can be given to those candidates with overseas work experience or international education backgrounds, and international exchange activities can be organized to enhance cultural understanding and collaboration among team members.
Second, companies need to align incentives to support the achievement of ESG goals. This includes the adoption of non-equity incentives, such as performance bonuses and long-term service awards, which can be linked to ESG performance and encourage executives to focus on long-term sustainability rather than short-term profits. At the same time, the compensation level of senior executives should be in line with the market, and a certain degree of decision-making freedom should be given to them, including the right of project selection and budget allocation, so as to improve their sense of participation and responsibility.
Third, to ensure the effective implementation of ESG objectives, enterprises should establish a comprehensive ESG management system. This includes assigning clear ESG responsibilities to each executive, such as specific goals for environmental impact reduction, community engagement, and supply chain management, and incorporating these responsibilities into performance evaluation criteria. There is also a need for regular internal seminars and training sessions to raise executives’ awareness and understanding of ESG topics, and encourage them to attend industry conferences, seminars, and online courses to learn about the latest ESG trends and technologies, thus building their capabilities in driving sustainability.
Fourthly, in order to support the ESG practices of enterprises, the government can provide support and guidance from multiple perspectives. First, the government can encourage companies to adopt ESG best practices by issuing relevant policies and guiding principles and set ESG disclosure standards that require companies to report ESG information in their annual reports. Secondly, the government can provide incentives such as financial subsidies and tax breaks to reward those companies with outstanding ESG performance. In addition, the government also needs to establish a comprehensive regulatory framework to ensure that companies comply with the laws and regulations of ESG, such as environmental protection regulations and labor rights protection. Finally, the government can also carry out public publicity campaigns to raise public awareness of the importance of ESG, thus creating a good social atmosphere for enterprises, and strengthen cooperation with other countries to jointly develop international standards and protocols to promote ESG practices worldwide. Through these measures, the government can effectively support enterprises to improve ESG performance and promote the sustainable development of society and the environment.
9. Limitations and Future Research
In this study, we endeavor to make the research conclusions as reliable as possible through a variety of efforts, including a large amount of literature collation, careful research design, meticulous analysis and demonstration, and rigorous data analysis. Nevertheless, the following deficiencies are inevitable in this investigation. First of all, the ESG performance evaluation of A-share listed companies by local rating agencies started late and is limited to non-mandatory ESG information disclosure. Consequently, the coverage of evaluation results is small and the time span is short. In addition, the current evaluation objects of rating agencies mostly focus on enterprises with good market performance, so the samples selected in this paper are not enough to explain the entire A-share market. Secondly, the characteristics of top management teams that affect the ESG performance of enterprises cover many aspects, and the paper does not take into account the heterogeneity of executives in political connections, education level, tenure, and other aspects. Moreover, the measurement of the heterogeneity of top management teams in this paper is still at the level of demographic background characteristics, and psychological characteristics that are difficult to quantify are not studied. Third, this paper only discusses the impact mechanism of top management team heterogeneity on ESG performance from the three detailed aspects of ESG, environmental, social, and governance, and does not delve further into other potential mechanisms. Thus, future research can expand the selection scope of TMT personnel characteristic variables, such as power desire, loyalty, and other psychological heterogeneity, to comprehensively reveal the relationship and potential mechanism between TMT heterogeneity and ESG performance. In addition, future research can try to explore the driving factors of ESG performance of enterprises from multiple perspectives based on more comprehensive and extensive data support.