The Impact of CSR on Corporate Governance. Real Examples.

By Natalie Popova, Legal Consultant | Express Law Solutions

Disclaimer: This article is for general information only and does not constitute legal advice. For specific guidance, contact Express Law Solutions.

1. CSR influencing Governance

Example: A UK retail company launches a sustainability programme, committing to reduce carbon emissions by 50% in five years.

Legal link: Under Companies Act 2006, s.172, directors must consider long-term consequences and environmental impact.
Outcome: The board creates a Sustainability Committee, integrates ESG KPIs into executive bonuses, and strengthens risk reporting. Governance is improved by embedding CSR in decision-making.

2. Governance affecting Financial Performance

Example: A mid-sized tech firm restructures its board to include three independent non-executive directors.

Legal link: UK Corporate Governance Code 2018 (FRC) encourages board independence and transparency.
Outcome: The company gains investor confidence, lowering its cost of capital and improving ROA. Stronger governance directly correlates with better financial performance.

3. Legal challenges from CSR claims (“Greenwashing”)

Example: A UK clothing brand advertises “fully sustainable” supply chains. Later, it’s discovered some suppliers violate labour standards.

Legal link: Misleading claims can trigger enforcement by Advertising Standards Authority (ASA) and civil claims. Section 172 duties may also apply to directors.
Outcome: Regulatory investigation, reputational damage, and possible shareholder litigation. The board must strengthen oversight and ensure CSR disclosures are verified.

4. Employment disputes in governance

Example: A company dismisses an employee for whistleblowing on environmental violations.

Legal link: Employment Rights Act 1996 protects whistleblowers; unfair dismissal claims can go to the Employment Tribunal.
Outcome: The company faces a tribunal case. Governance structures, including HR and compliance oversight, are reviewed to prevent future liability.

5. Financial penalties and legal exposure

Example: A business fails to meet statutory reporting deadlines under Companies Act 2006 and Finance Act 2008, resulting in HMRC fines.

Legal link: Section 455 & 456 Companies Act 2006, Taxes Management Act 1970.
Outcome: The directors face financial penalties. Proper governance mechanisms, including internal audits and compliance checks, could have prevented this.

6. Crisis governance and insolvency

Example: A UK manufacturing firm faces liquidity issues and delays CSR initiatives.

Legal link: Corporate Insolvency and Governance Act 2020 obliges directors to act in the company’s best interests during financial distress.
Outcome: Directors must balance financial recovery with stakeholder obligations, ensuring legal compliance while maintaining governance and CSR standards.

7. Board accountability and ESG reporting

Example: A publicly-listed company fails to report ESG metrics accurately. Investors discover discrepancies.

Legal link: UK Corporate Governance Code 2018, Companies (Miscellaneous Reporting) Regulations 2018.
Outcome: Shareholders demand corrective action; independent directors review reporting process; governance is strengthened to prevent litigation.

1. UK Post Office Scandal

Description: Thousands of Post Office employees were wrongfully accused of theft due to faulty accounting software, resulting in financial losses and severe personal consequences, including suicides.

Legal Aspect: The scandal highlighted critical failures in corporate governance, including lack of oversight and failure to acknowledge mistakes, leading to serious legal consequences and liability for the company.
Outcome: The Post Office was forced to compensate victims and implement significant reforms in governance and oversight.

2. Thames Water: £123 Million Environmental Fine

Description: Thames Water was fined £123 million by Ofwat for systematic failures in wastewater treatment and paying dividends despite poor performance.

Legal Aspect: This case emphasizes the importance of effective corporate governance and the responsibility of directors to comply with environmental standards and maintain financial stability.

Outcome: The company had to submit a detailed improvement plan and reconsider its management and reporting strategies.

3. Shein: OECD Criticism for Non-Compliance

Description: The fast-fashion retailer Shein was criticized by the OECD for violating international standards regarding human rights, fair wages, and environmental responsibility.

Legal Aspect: This case highlights the importance of compliance with international regulations, particularly for companies operating in the UK market.

Outcome: Shein faced significant regulatory and public scrutiny, leading to revisions in policies and operational practices.

4. Currys: Dissolution of ESG Committee

Description: Electronics retailer Currys disbanded its Environmental, Social, and Governance (ESG) committee, raising concerns about the company’s commitment to sustainability initiatives.

Legal Aspect: The decision raised questions about adherence to corporate governance principles and responsibility toward stakeholders.

Outcome: The company faced public scrutiny and criticism, which could potentially affect its reputation and financial performance.

Legal Challenges in CSR and Governance

Implementing CSR initiatives introduces legal responsibilities and potential risks.

Key Issues:

Director Duties: Ignoring environmental or social risks may breach Section 172 duties.
Disclosure and Greenwashing: Misleading CSR claims can trigger enforcement by the Advertising Standards Authority (ASA) or shareholder litigation.
Non-financial Reporting: Listed companies must comply with the Companies (Miscellaneous Reporting) Regulations 2018 and the Corporate Governance Code, with failure resulting in regulatory scrutiny.
Crisis Governance: Under the Corporate Insolvency and Governance Act 2020, directors must act responsibly during financial distress while maintaining governance and CSR standards.

Example – Shein (fast fashion retailer): Criticized by OECD for labor and environmental violations, the company faced public and regulatory pressure. The case demonstrates how CSR failures can create both legal and reputational risk.

Example – Currys: The disbanding of its ESG committee raised questions about the company’s commitment to governance and CSR, illustrating the reputational and potential financial consequences of governance decisions.

Strategic Implications for Companies in England & Wales

Embed CSR into governance frameworks and document compliance with Section 172 duties.
Ensure transparency, board independence, and risk oversight.
Link governance practices and CSR initiatives to measurable financial performance indicators.
Verify CSR disclosures to avoid misleading claims or greenwashing.
Act proactively in cases of financial distress, ensuring compliance with the Corporate Insolvency and Governance Act 2020.

Conclusion

In England & Wales, CSR, governance, and financial performance are interconnected. Legal obligations such as the Companies Act 2006, Corporate Insolvency and Governance Act 2020, and UK Corporate Governance Code create a framework in which ethical and sustainable practices are not just strategic advantages but legal responsibilities. Companies that align governance, CSR, and financial objectives reduce legal risk, protect reputation, and improve long-term performance.

For more comprehensive insights, explore our Legal Cases page and review the applicable UK legal framework.

Disclosure Notice: All names and identifying details in the following case studies have been changed to protect client confidentiality. These examples are based on real scenarios, but any resemblance to actual persons or entities is purely coincidental.

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