Designing Governance for ESG: Incentive and Oversight Complementarities in Corporate Sustainability Performance

Abstract

This study investigates how internal governance design supports credible ESG performance by distinguishing between Incentive and Oversight Architectures. Using 13,993 firm-year observations of US nonfinancial firms from 2018 to 2024, we estimate fixed effects and two-step system GMM models. Results indicate sustainability-linked incentives, CSR committees, committee independence, and board gender diversity are positively associated with ESG performance, whereas CEO duality is negatively related. Pillar-level analyses show governance scores reflect structural compliance, while environmental and social scores depend on combined incentives and resource-rich oversight. Industry analyses validate incentives and independence as consistent drivers. Carbon intensity moderates the relationship between committee independence and ESG performance. Restricted stock units specifically improve ESG outcomes. Overall, stronger sustainability outcomes are more likely when Incentive and Oversight Architectures operate as a bundle. Credible ESG performance requires aligning incentive structures with independent oversight, offering insights for policymakers seeking to foster substantive sustainability.