ESG and Shareholder Value : The Role of Board Facial Impressions and Perceived Trustworthiness

We propose that when firm agents, such as managers and employees, perceive the board to have congruent values about ESG activities with them, then they are more willing to commit their human capital and effort to the ESG activities to increase firm value. Potentially positive NPV ESG projects that have delayed net benefits are risky for myopic agents. Firm agents’ trust that the board is committed to the ESG projects can help to motivate agent effort, reduce free riding problems and encourage better information flow to and from board and agents, all of which help improve the likelihood of success for the ESG projects. Using AI algorithms from the cognitive science literature, we extract agents’ perceived trustworthiness of the board from board member facial features. We document that the interaction of high ESG ratings and high board trust predicts high future abnormal stock returns, sales, and accounting profitability. The predictive relations are especially strong in firms with newly appointed CEOs and for the social component of ESG activities