Are Company Takeovers Destroying Sustainability Initiatives?
Because executives want to keep their jobs and their reputations, a rising threat of a takeover creates massive panic in the boardroom. To defend themselves, managers often focus intensely on short-term financial metrics to make the company look as profitable and efficient as possible.
A fascinating 2026 study titled "Takeover Vulnerability and the Discipline of ESG Overinvestment" by researchers Abongeh Tunyi, Ruth O. Sagay, and Reon Matemane dives deep into this exact conflict. The study asks a critical question: Does vulnerability to corporate takeovers influence a firm's Environmental, Social, and Governance (ESG) decisions?
To understand how companies react under pressure, researchers looked at a massive dataset: 19,564 firm-year observations from 2,545 US-listed companies (NYSE and NASDAQ) spanning 25 years, from 1994 to 2019.
The researchers based their study on two major theories of business psychology:
Agency Theory: This theory suggests that managers are human and often act in their own self-interest. Because takeover threats threaten a manager's career, they become "myopic," meaning they focus obsessively on the short term. They will cut long-term investments—like R&D or ESG—just to boost short-term earnings and look competent to investors.
Resource Dependence Theory: This theory states that companies rely on outside resources (like capital and cash) to survive. When a takeover threat looms, financial uncertainty spikes. To survive, the company scales back on discretionary spending (things that are "nice to have" but not strictly required) to preserve cash.
ESG Practices Lose Out To Takeovers
When companies face high takeover threats, they systematically reduce their engagement in ESG initiatives compared to firms that are safe from takeovers. This makes sense. ESG requires a lot of discretionary spending, and the financial benefits of these projects often take years to materialize. When you might get fired next month, you don't care about a payoff that is five years away.
Companies that brag the loudest about their massive ESG initiatives might just be building up "ESG credit". The data shows these are the exact same companies that will secretly slash those budgets the moment Wall Street applies pressure.
“As a firm's vulnerability to a takeover bid increases, its ESG performance declines in the following year.”
For every unit increase in a company's vulnerability to a takeover, the decrease in the Social pillar is more than twice as much (-3.060 units) compared to the Environmental pillar (-1.267 units) or the Governance pillar (-1.553 units).
Social initiatives, like community building and employee diversity programs, are heavily focused on the long-term. When external pressure mounts, these long-term community investments are usually the first items thrown overboard to keep the ship afloat.
One of the most fascinating concepts in the study is the idea of ESG Overinvestment and ESG Credit.
Some companies spend a lot on ESG—more than what is expected for a company of their size and industry. Sometimes, this is just a CEO pursuing pet projects to boost their own personal reputation, which the study refers to as "agency-driven private benefits or symbolic behaviour".
When these companies sustain high ESG investments over time, they build up what researchers call "ESG credit"—a stockpile of reputational capital and stakeholder goodwill. It's basically an insurance policy made of good vibes.
Who Cuts Back On ESG The Most?
The study found a very interesting dynamic: The negative effect of takeover vulnerability on ESG engagement is much stronger among firms that have previously overinvested in ESG.
If a company is already doing the bare minimum to obey the law, they can't cut much without getting sued. But if they are overinvesting, they have plenty of "fat" to trim.
Because they have built up "ESG credit" over the years, they can quietly slash their ESG budgets without immediately losing the public's trust or triggering a backlash.
Cutting back on excessive ESG spending actually makes the CEO look incredibly disciplined to Wall Street investors. It shows the market that the managers are cutting wasteful spending and focusing purely on shareholder value, which helps deter the takeover.
Strong governance mechanisms can act like a shield for valuable ESG projects. The researchers found that the tendency to slash ESG is significantly weaker in firms led by highly capable managers and those backed by large institutional investors (like huge mutual funds).
Great managers and active, large investors know the difference between "fluff" ESG (projects done just for good PR) and "strategic" ESG (projects that actually lower risk and make the company stronger in the long run). When a takeover threat hits, these high-ability leaders don't just panic and cut everything. Instead, they strategically trim the low-value fluff while protecting the ESG programs that truly add to the company's value.
When a CEO has massive power over their Board of Directors, they are much more likely to panic and cut long-term projects to save their own job. The study found that ESG cuts are significantly deeper when CEOs exert stronger control over the board.
The study noted an interesting demographic trend based on prior research, which suggests female directors and executives tend to be more risk-averse and conservative in corporate decision-making. In high-stakes takeover environments, this risk-aversion heightens the pressure to show pure financial discipline. As a result, firms led by a female CEO, or firms with a critical mass of female directors, actually reduce ESG spending more aggressively in response to takeover threats. This is surprising as Boards with more women tend to invest more in ESG initiatives.
