The Relationship between Audit Committees, Corporate Environmental Disclosure, and Environmental Reputation: UK Evidence

Abstract

The thesis examines the determinants of the volume of environmental disclosures and their quality, with particular reference to the role of audit committees and the role of such disclosures in the creation and sustenance of firms’ environmental reputation. It also examines the impact of environmental reputation on enhancing firm financial performance. Using a resource-based view (RBV) and quality signalling approach, this study examines three questions: first, to what extent are the volume and quality of environmental disclosures determined by the resource base of the firm and the quality of its audit committee?; second, does the combination of quality disclosures and audit committee add to the reputation of the firm?; and finally, what is the relationship between corporate environmental reputation and firm financial performance?
Using a sample of UK FTSE 350 companies from 2007-2011, I found evidence that larger firms with higher quality audit committees make higher quality disclosures. These firms enhance their reputations by virtue of their size, the quality of their audit committees, the quality of their disclosures, and their board size. Larger firms with block shareholders tend to have greater volume of disclosures, whilst audit committees and larger boards tend to have no role in promoting such disclosures. Higher disclosure volume alone does not lead to increased reputation. These results therefore show support for the RBV quality signalling approach. Larger firms possess a greater resource base and, therefore, have the ability to invest in non-replicable corporate social responsibility (CSR) strategies. Audit committees, which possess Smith Report compliant features, promote reputation directly and through their determination of better quality disclosures that are difficult to replicate by competitors, thereby signalling the firm specific competitive advantage investments to the market.
When revisiting the relationship between environmental reputation and financial performance, results indicate a positive impact of corporate environmental reputation on financial performance measured by both accounting and market-based measures, and were consistent with the RBV of the firm. Findings in this study have implications for managers in terms of disclosure practices where the quality of disclosure is an important aspect and of a higher value due to the difficulty of replication by companies not genuinely committed to environmental good practice. Moreover, the study aims to provide managers with a better view of how governance and specifically audit committee can impact the setting of environmental goals and enhance accountability. Finally, corporations looking to regain trust with investors and other stakeholders need to take steps towards an environmental agenda.