CEO diversity, status quo bias and environmental audits in the EU

Abstract

This study seeks to empirically investigate the effects of CEO characteristics on the likelihood that firms adopt environmental audits in the EU member countries by incorporating the mediating role of status quo bias (SQB). This study utilizes World Bank Enterprise Survey data for the 2018-2020 period. Using the logistic regression model and Generalized Structural Equation Modeling (GSEM), this study analyzes the direct and indirect effects of CEO diversity on four types of environmental audits: water, energy, pollutant, and carbon. SQB is measured with product and process innovations. The results demonstrate that CEO diversity (work experience and political connections) motivates firms to engage in all types of environmental audits. Nevertheless, female CEOs only motivate firms to engage in energy audits. Next, firms with more diverse CEO tend to exhibit lower SQB. Our findings also reveal the indirect effect of CEO diversity on environmental audits through SQB, especially energy and carbon audits. This research is unique because it integrates behavioral dimensions, highlighting that sustainability-related decisions are influenced not only by leaders' demographic characteristics but also by their cognitive biases. Standard setters like the European Financial Reporting Advisory Group (EFRAG) and the International Sustainability Standards Board (ISSB) need to consider organizational culture and psychological aspects when proposing more effective sustainability reporting and audits. This paper extends the Upper Echelons Theory by showing how SQB mediates the relationship between CEO diversity and environmental audits. The findings highlight the importance of behavioral factors in sustainability decisions among firms operating in EU member countries.