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

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. | IntroductionFirms today operate under intensifying scrutiny as stakeholders demand greater environmental, social, and governance (ESG) accountability.This pressure reflects heightened societal expectations, evolving regulatory regimes, and the growing influence of ESG considerations on firm valuation, access to capital, and reputational standing (Chouaibi and Affes 2021).At the same time, firms are becoming increasingly complex.International expansion, fragmented regulatory environments, outsourcing, and extended supply chains have substantially increased the scale, scope, and structural sophistication of modern corporations (Casson and Li 2022;Eriksson et al. 2023).While such complexity may generate strategic advantages, it also complicates coordination, weakens internal controls, and raises exposure to ESG-related risks.Understanding the ESG implications of business complexity is therefore critical.As firms grow larger, more geographically dispersed, and organizationally layered, agency problems intensify, accountability becomes diffused, and stakeholder engagement becomes uneven.These conditions create fertile ground for ESG controversies, namely, publicly disclosed incidents involving environmental harm, social misconduct, or governance failures.ESG controversies are not only manifestations of corporate irresponsibility (Utz 2019) but also salient