Turn down the heat: corporate governance and SME environmental and financial performance

With emissions-based climate change posing a serious global threat, corporate governance is critical for a company’s environmental performance. We examine this issue in the context of small- and medium-sized enterprises (SMEs), which represent most businesses and generate significant emissions worldwide. Based on the resource-based view and behavioral theory of firm growth, we argue that as board gender diversity increases, firm environmental performance (in terms of emissions reduction achievements) also improves. We further predict that this main relationship strengthens when companies have more slack resources or higher employee efficiency, reinforcing the ability to achieve these reductions. Finally, we examine whether environmental performance positively impacts their financial performance. Based on a comprehensive panel dataset of European, Canadian, and U.S. SMEs from 2012 to 2021, our results consistently support these arguments. We argue that potential conflicts from funding environmental sustainability initiatives can be buffered with slack and employee efficiency, enabling gender-diverse boards to act with entrepreneurial leadership to put these resources to reduce emissions. We provide new insights on how SME board governance can turn down the heat and improve their firm’s environmental and financial performance.