The Effects of Country Governance Quality on Corporate Sustainability and Ethical Behaviour

ABSTRACT Using institutional theory, we examine how country governance affects two ESG outcomes: ESG performance and ESG controversies. With Refinitiv/LSEG data for ~146,000 firm‐years in 86 countries (2002–2023) and World Bank WGI, we apply a Mundlak within/between decomposition to test complementarity versus substitution (performance) and prevention versus detection (controversies). Better governance is strongly associated with higher ESG performance—overall and across E, S and G—especially cross‐country. Yet governance also predicts more reported controversies, consistent with detection/visibility rather than worse conduct. Instrumental Variable and DiD tests corroborate these results.