*2.1. Monitoring and Strategic Functions of the Board*

The board participates in the various phases of the strategic decision-making process through interaction with the firm's TMT (Top Management Team) [30–33] and, therefore, is able to direct the use of digital technologies toward goals that stakeholders perceive as socially, economically, and environmentally responsible. Moreover, the board is an internal control mechanism that, depending upon the extent to which it is composed of independent directors, can mitigate moral hazard problems between insiders and stakeholders [34,35]. From this perspective, independent directors represent an effective monitor of the risk that those digital technologies, which were acquired with the best of intentions, might be put to use in unforeseen ways.

Due to the increased attention that environmental issues, and their concomitant strategic opportunities, receive nowadays, managing environmental strategy has become one of the activities which are required of a board of directors [14,15]. Therefore, we look at the aspects of the board that relate to its function as a monitor (i.e., the level of independence it enjoys) as a proxy for how it performs environmentally. Agency theory indicates that strategies are initiated and executed by managers, whereas the process is monitored by the directors [36]. From this viewpoint, the greater independence directors have (i.e., the less financial involvement non-executive directors have with the firm), the more rigorous the monitoring will likely be. There is strong evidence in the literature of the existence of a close relationship between the board's monitoring of managerial behaviour and corporate strategic decisions [36,37]. There is, however, still little understanding of exactly how an active board can influence environmental strategies. Although it is recognised that an appropriate, acceptable level of environmental performance is of importance strategically, it seems that management does not always consider it a priority. Any new environmental initiatives might require a significant degree of investment (in such areas as production processes or new technologies), and the re-coordination of employees from different areas of the production process may be necessary for new strategies [38]. What is more, as it might well take some time for a responsible environmental strategy to produce any

clear benefit [39], there is no great appeal for risk-averse managers in such responsible environmental initiatives [34].

Instead of dealing with issues that offer little to their own personal short-term interests, managers often prefer to follow conventional strategies which provide them with immediate financial and reputational benefit [40,41].

Managers and shareholders have diverse utility functions [42,43]. The increase in effort required to plan and follow innovative environmental strategies diminishes managers' utility, but this is not necessarily the case for shareholders. For example, shareholders will not experience any adverse consequences due to managers' dedicating their valuable time to finding a remedy for the company's high pollution levels through a reorganisation of its internal practices. It has been shown that managers need to make a great extra effort when reorganising their production procedures and obtaining environmental knowledge and experience so as to reduce or avoid producing waste emissions [44]. As a consequence, the firm faces higher costs due to its new procedures and increased managerial effort in its attempt to render its operations more environmentally responsible. As a counterbalance, though, as shareholders might well see that the costs of this increase in effort on the part of managers are justified by the problems involved in the designing and applying of better environmental strategies, it may be assumed that they will accept the higher costs involved. However, the fact that this greater managerial effort is subjective renders its monitoring and verification very difficult [38].

Given that the main activities of the board should include the observation and checking of a firm's operations and the behaviour of its managers, together with evaluating any change in expenditure due to new green practices, the environmental strategies adopted by top management should also be the subject of close scrutiny by the board [15]. Indeed, agency theory-based studies highlight how a higher level of a board's independence within a firm can be linked to a more methodical approach to the performing of its monitoring duties [45]. It is generally accepted that a more independent board of directors will fulfil its role as a monitor of the CEO's activities better because observation and evaluation of the firm's achievements will be carried out with greater objectivity [46,47]. Furthermore, the degree to which a firm practices socially responsible corporate behaviour tends to be more highly valued by independent boards [48]. According to McKendall et al., an independent board of directors is more likely to recognise the potential green investments may have in the long term and, therefore, resist managerial pressure to adopt a different investment strategy [15]. Consequently, there is a greater inclination on the part of independent boards to adopt environmentally-friendly policies, even when they are expensive. Therefore, logic suggests that a more objective application of the board's experience and knowledge to how it monitors the firm's green behaviour will occur if the proportion of independent directors is increased. If independent board members wish to continue in their positions on boards of directors, they have an incentive to safeguard the directors' good reputations, and, to this end, their task will be easier if they work on the boards of firms with a reputation for environmental responsibility. Consequently, we adopt the following as our first hypothesis:

**H1.** *Board independence has a positive influence on a firm's environmental performance.*
