Directors’ and officers’ (D&O) liability insurance is designed to protect the directors, supervisors, and senior management from personal liability that may stem from negligence or misconduct in the course of performing their regular duties (Lin et al. 2013; Aguir and Aguir 2020). D&O insurance has gained mature practice in developed countries. According to a survey by Tillinghast-Towers Perrin, 96% of U.S. companies and 88% of Canadian companies have purchased D&O insurance. In 2002, the China Securities Regulatory Commission issued the Code of Corporate Governance, which sets forth that listed companies can purchase D&O insurance for their directors and officers to protect their assets in the event of a lawsuit. However, as of November 2021, no more than 15% of listed companies in China have purchased D&O insurance. In 2020, the Luxin coffee’s financial fraud incident broke out suddenly, and then it was revealed by investors that they had bought directors and executives with a large amount of D&O insurance. Whether the insurance can obtain claims and help investors recover losses has sparked a lot of discussions. D&O insurance has also received more attention from listed companies and academics as a result of Luxin Coffee. With the establishment and improvement of the legal and capital market systems, D&O insurance has gradually gained popularity among emerging countries.
At the same time, with the gradual deterioration of the ecological environment and the acceleration of the global integration process, the world has shown an unprecedentedly high concern for sustainable development. The concept of sustainable development and corporate social responsibility has gained widespread public attention and recognition. As a systematic methodology to promote enterprise sustainability, ESG is a non-financial enterprise evaluation system focusing on the environment, society, and governance. It promotes enterprises to move from the pursuit of self-interest maximization to the pursuit of social value maximization, which is both a core framework and an inherent requirement for companies to pursue green development.
The growing focus on environmental changes, social events, and corporate responsibility have triggered a trend that a substantial body of literature developed to monitor ESG performance. By combing through the extant literature, we found most previous research on the factors influencing ESG performance has been based on the perspective of market, firm leadership, and ownership. As for market characteristics, many studies have provided evidence that a country's economic development (Cai et al. 2016), industry (Borghesi et al. 2014), political leanings of the state’s citizens, the social capital of the county (Jha and Cox, 2015) affect ESG performance. Firm leadership characteristics include multinational board members, women leaders (McGuinness et al. 2017), married CEOs, CEO confidence (McCarthy et al. 2017), and CEO pay (Ikram et al. 2019). Other studies argue that ESG performance is associated with the size of institutional ownership, family ownership (El Ghoul et al. 2016), and state ownership. However, few empirical studies on enterprise ESG governance are based on the perspective of insurance contracts. Insurers cover the risk of decision-making failures by providing D&O insurance, which has more direct incentives and is more likely to exert ESG governance influence. So, can D&O insurance promote companies to improve ESG performance? What is the transmission mechanism? Does the impact of D&O insurance on ESG vary with corporate characteristics? Answering the above questions has a practical guiding role in improving corporate governance, restraining management opportunistic behavior, and promoting sustainable development of enterprises.
Using a sample of Chinese A-share listed companies from 2011 to 2020, this study investigates the impact of D&O insurance on corporate ESG performance. From a regression analysis of the data, followed by robustness tests, we reached the following conclusions. D&O insurance significantly improves corporate ESG performance. Meanwhile, this positive relationship is affected by economic policy uncertainty and industry competition. Additional analysis suggests that the contribution of D&O insurance to ESG performance is achieved by improving independent director function-performing effectiveness and increasing corporate risk-taking.
This paper contributes to the literature in three ways. First, our study enriched the literature on the factors influencing corporate ESG performance. Previous studies mostly discuss this issue from the perspective of market, firm leadership, and ownership. Empirical studies focused on the insurance perspective are insufficient, our study takes the D&O insurance as an example, which uncovers a new factor affecting corporate ESG performance and further enriches the literature on ESG performance. Second, our study provides a new perspective to study the consequences of D&O insurance. Extant literature on the governance function of D&O insurance tends to focus on the economic consequence of D&O insurance (Yuan et al. 2016; Wang et al. 2020). We, however, analyze the comprehensive governance consequences of D&O insurance from the perspective of ESG, expanding the research horizon of relevant literature. Third, our study revealed the transmission mechanisms of D&O insurance to ESG. It deepens the understanding of the relationship between D&O insurance and corporate ESG performance. Our study also provides practical guiding significance for management to improve ESG performance.
The remainder of this paper is organized as follows. The “Theoretical analysis and hypothesis developments” section develops our main hypotheses, the “Research Design” section refers to research design, and the “Empirical results” section presents the main empirical results and robustness tests. The “Additional analyses” section provides the intermediary mechanism tests. Finally, the “Conclusions and future perspective” section gives conclusions and policy suggestions.
 Towers Perrin is one of the world's largest global management and human resource consulting firms. Tillinghast - provides business management and actuarial consulting services to the insurance and financial industries, as well as risk management consulting services to a variety of public and private institutions.
 In April 2020, the fraud incident of Luxin Coffee suddenly broke out. Subsequently, investors discovered that Luxin Coffee had previously purchased D&O insurance with a large insured amount. Whether Luxin Coffee could get claims from the insurance company to help the majority of investors to recover part of the loss has become a hot topic of discussion for a while.