The governance configurations of high firm environmental performance under external audit and political green pressures

We address the lack of research on the interdependent relationships among governance mechanisms and their associations with firm environmental performance. We argue that internal and external governance mechanisms interact complexly such that they cluster together as configurations associated with high environmental performance. To examine these governance configurations, we perform fuzzy-set qualitative comparative analysis (fsQCA) with a sample of 3,215 firm-year observations of S&P500 firms over a 20-year period (2003-2022). Our research highlights that firms employ either stringent or flexible internal governance, characterizing two distinct ways that agency and resource-based mechanisms come together to result in environmental performance. In line with institutional theory, we also find that external mechanisms including external sustainability audit and political context (i.e., Republican- or Democratic-learning states) influence the firm’s choices of internal governance configurations. When firms are not monitored by external audit nor experiencing pressures from the political context, we identify that high environmentally performing firms are those that employ stringent governance. Our work implies external audit and political context as key contextual conditions specifying when agency and resource dependence theory become salient in informing the linkage between governance and environmental performance. We also discuss the implications of our study to governance practices.