Complex Firms, Controversial Outcomes: Global Evidence on ESG Failures and Remedies

ABSTRACT We examine whether business complexity increases firms' exposure to negative environmental, social, and governance (ESG) outcomes, specifically ESG controversies, using a global panel of firms from 37 countries over the period 2002–2021. We further investigate the moderating roles of external monitoring by financial analysts; internal governance mechanisms, including board independence and workforce gender diversity; and international policy frameworks, with particular emphasis on the Paris Agreement as a regulatory tightening mechanism. Our results show that business complexity is strongly and positively associated with ESG controversies worldwide. Analyst scrutiny amplifies, rather than mitigates, this effect, indicating that external capital market monitoring does not effectively discipline ESG risk in complex firms. In contrast, stronger internal governance, reflected in greater board independence and a higher proportion of female employees, significantly attenuates the complexity controversy link. We also find that the positive effect of complexity on ESG controversies weakens in the post‐Paris Agreement period, consistent with heightened regulatory pressure and compliance expectations imposed on firms following the Agreement. Overall, the study provides novel cross‐country evidence on how organizational structure shapes negative ESG outcomes, integrating insights from complexity and agency theories with important implications for managers, policymakers, and investors.