The Impact of CSR on Corporate Governance. Governance’s Influence on Financial Performance and the Legal Challenges in England & Wales
(A Legal Guide for Those Facing False Allegations)
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.
Introduction
In the modern business environment in England & Wales, the themes of Corporate Social Responsibility (CSR), Corporate Governance and Financial Performance are increasingly intertwined. Boards and directors are under mounting pressure, both from stakeholders and regulators—to not only deliver profit, but to do so ethically, sustainably and in a way that respects broader societal interests. This article examines: (1) how CSR influences governance; (2) how governance mechanisms influence financial performance; and (3) the legal issues firms must navigate in this space.
CSR’s Influence on Corporate Governance
CSR refers to the voluntary or quasi-voluntary initiatives by companies to integrate social, environmental and ethical concerns into their business operations and stakeholder interactions. Though UK law does not impose a single dedicated “CSR Act”, the legal framework incorporates many CSR-relevant duties.
Legal and governance framework
- Under the Companies Act 2006, Section 172 obliges directors to “promote the success of the company for the benefit of its members as a whole” and in doing so to have regard to (among other matters) the likely long-term consequences of any decision, the interests of the company’s employees, the impact of the company’s operations on the community and the environment, and the company’s reputation for high standards of business conduct.
- The Climate Change Act 2008 and the Equality Act 2010, the UK Modern Slavery Act 2015, among others, impose duties on companies which form part of the CSR agenda.
- Corporations listed on the London Stock Exchange must comply with the UK Corporate Governance Code (2018, updated 2024) published by the Financial Reporting Council (FRC). The Code operates on a “comply or explain” basis.
How CSR changes governance
Embedding CSR into governance means that boards must broaden their decision-making beyond immediate shareholder returns. The board must consider wider stakeholder interests—employees, environment, community, supply-chain. This shift influences board structure, committee oversight (audit, remuneration, sustainability), risk management frameworks, and disclosure. For example, where a board takes environmental or social risks seriously, governance is enhanced through more robust oversight, risk identification and stakeholder communication.
Example (hypothetical)
A UK manufacturing company appoints a Sustainability Committee as part of its board governance structure, tasked with reviewing carbon footprint targets and supply-chain labour standards. Because of this CSR initiative, the audit committee reports on climate-related risk, and the annual report includes a detailed non-financial statement. As a result, the board’s governance processes are strengthened—CSR considerations are embedded in strategy rather than treated as peripheral.
Corporate Governance and its Influence on Financial Performance
There is growing academic and empirical evidence that robust governance arrangements can have a positive impact on financial performance, although the relationship is not always uniform.
Empirical findings
- A study of UK firms (Kyere & Ausloos) found that in non-financial listed firms in the UK, the right governance mechanisms had the potential to improve financial performance indicators such as Return on Assets (ROA) and Tobin’s Q.
- Another panel study showed that CSR disclosure, combined with governance mechanisms, is positively related to firm performance across OECD economies, including the UK.
Governance mechanisms and financial outcome
Mechanisms include board independence, audit committee effectiveness, transparency of disclosure, remuneration governance, and risk oversight. These frameworks reduce agency costs, align management and shareholder interests, enhance investor trust, and can lead to improved access to capital, reduced cost of borrowing, and higher valuations.
Example (hypothetical)
A UK service-sector company restructures its board to increase non-executive directors, enhances audit committee composition, improves risk disclosures and integrates CSR metrics into performance evaluation. Over three years this governance strengthening is reflected in improved margins, a rising stock price and stronger investor confidence.
Caveats
However, research also shows that governance alone is not a guaranteed lever for financial improvementcontext, industry, firm size, and execution matter. Some firms may incur upfront investment costs to establish enhanced governance and CSR frameworks, thereby delaying visible financial returns.
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Legal Challenges Arising from CSR & Governance
The integration of CSR and governance gives rise to legal obligations, risks and regulatory scrutiny. Firms must be aware of multiple legal challenges.
Directors’ Duties and CSR
Because Section 172 of the Companies Act 2006 requires regard to environmental, social and governance issues, directors may be subject to scrutiny if they ignore these aspects. Failure to consider long-term environmental or social risks may lead to liability, especially where shareholders or regulators bring claims.
For example, recent legal commentary suggests that UK company directors may be personally liable for failing to assess climate-related and nature-related risks.
Disclosure and “Greenwashing”
Companies making public CSR or ESG claims face regulatory risks if those claims are misleading. The Advertising Standards Authority (ASA) may initiate investigations, and consumer/ investor litigation may follow for misrepresentation. Firms must ensure their CSR statements are accurate, measurable and supported by evidence.
Non-financial Reporting & Governance Code compliance
Under the UK Corporate Governance Code and the related reporting regime, listed companies must provide disclosures on governance practices. Non-compliance or weak governance disclosures may attract regulatory critique or shareholder activism.
Mergers, Insolvency and Governance
The Corporate Insolvency and Governance Act 2020 made permanent some governance reforms and emphasised the importance of directors’ duties during financial distress. Directors must navigate insolvency risk while maintaining governance, CSR and stakeholder interests.
Example (hypothetical)
A publicly-listed UK retailer claims to be “fully sustainable” in its supply chain. Investors later allege this was misleading and bring a claim for damages when supply-chain labour issues emerge, causing reputational and financial loss. Governance audits reveal that the board lacked independent oversight and the CSR claims were not verified. The case results in regulatory inquiry and board-level changes.
The Evolving Role of CSR and Corporate Governance in England & Wales
In England and Wales, Corporate Social Responsibility (CSR) has become a central pillar of corporate governance, shaping not only ethical business conduct but also financial resilience. The Companies Act 2006, particularly Section 172, obliges directors to act in good faith and consider the interests of employees, customers, the environment, and community impact. This legal duty is reinforced by the UK Corporate Governance Code, which links transparency and accountability to long-term shareholder value. Recent developments, such as the ClientEarth v Shell plc [2023] case, demonstrate how directors may face legal scrutiny for failing to align governance strategies with environmental and social obligations. Moreover, the integration of ESG metrics into executive remuneration policies (Code Provision 40) shows a growing recognition that sustainable performance drives financial stability. Whistleblower protections under the Public Interest Disclosure Act 1998 further strengthen corporate ethics, ensuring transparency and internal accountability.
At the same time, UK companies must navigate complex legal challenges, from fraud prevention under the Fraud Act 2006 to compliance with data and AI ethics as outlined in the Data Protection and Digital Information Bill and the AI Regulation White Paper (2023). Post-Brexit, many corporations remain influenced by the EU’s Corporate Sustainability Reporting Directive (CSRD), underscoring the cross-border impact of sustainability law. ESG litigation is also on the rise, with stakeholders demanding accurate climate risk disclosure and responsible governance. Together, these frameworks illustrate a clear trend: in the UK, good governance and CSR are not optional ideals but legal and financial imperatives. Responsible leadership, rooted in law and ethics, now defines sustainable corporate success.
Fraud and Corporate Governance under English Law
Under the Fraud Act 2006, fraud in England and Wales is defined broadly to cover conduct involving false representation (Section 2), failure to disclose information when under a legal duty to do so (Section 3), or abuse of position (Section 4) with the intent to make a gain or cause loss. Within the context of corporate governance, this means that directors or officers who deliberately mislead shareholders, regulators, or the public for example, by falsifying accounts, concealing liabilities, or providing deceptive sustainability or CSR disclosures – may be criminally liable for fraud.
Such conduct also breaches fiduciary duties under Sections 171–177 of the Companies Act 2006, including the duty to act in good faith, to exercise independent judgment, and to avoid conflicts of interest. Civil liability can arise simultaneously under the Misrepresentation Act 1967, exposing the company and its directors to shareholder claims for losses caused by false statements or omissions.
Moreover, regulators such as the Serious Fraud Office (SFO) and the Financial Conduct Authority (FCA) actively investigate and prosecute corporate fraud, with increasing focus on ESG-related misrepresentations and misleading sustainability claims (“greenwashing”). The Corporate Governance Code and FRC Guidance on Risk Management both emphasise the board’s duty to implement robust internal controls and audit mechanisms to detect and prevent fraudulent practices.
In essence, corporate governance in England and Wales is not only a matter of compliance and transparency, but also a preventive framework against fraud and misrepresentation, ensuring that ethical conduct, accountability, and honesty remain central to corporate integrity.
Practical Considerations and Strategic Advice
For UK companies wishing to align CSR, governance and performance, legal and strategic advice can address the following:
- Embed CSR in governance frameworks: Boards should ensure CSR is treated as core, not peripheral. Directors should document how Section 172 duties are met.
- Enhance governance mechanisms: Ensure independent directors, robust audit committees, clear risk oversight (including ESG risks) and transparent disclosure per the UK Corporate Governance Code.
- Link governance to performance metrics: Connect CSR and governance initiatives to financial KPIs e.g., cost savings from sustainability, improved employee retention, brand value.
- Manage legal risks: Review CSR disclosures for accuracy, evaluate director duties and liability exposure, ensure compliance with Modern Slavery Act, Climate Change Act, ASA and other regulatory regimes.
- Disclosure and transparency: Adopt best practice in non-financial reporting; ensure “comply or explain” obligations are met; avoid greenwash by aligning claims with measurable outcomes.
- Crisis planning and governance during distress: Use frameworks like the Corporate Insolvency and Governance Act 2020 to guide governance during financial stress, ensuring CSR and stakeholder interests aren’t ignored.
Conclusion
In England & Wales the interplay among CSR, corporate governance and financial performance is substantial. While CSR can enhance governance and governance can enhance financial results, the legal dimension cannot be ignored: directors’ duties, disclosure obligations and emerging litigation risks must be managed. Boards and advisers must ensure that their CSR and governance strategies are robust and legally defensible. Failure to do so exposes companies to reputational harm, regulatory enforcement and potentially legal liability.
As a UK-based legal adviser, my recommendation is this: treat CSR and governance not as optional add-ons but as integral to the business model and to legal compliance. In doing so, you safeguard not only sustainable performance but legal resilience.
Legal and Regulatory Sources (Primary Law)
- Companies Act 2006 (UK)
- Section 172: Duty to promote the success of the company, including regard for environmental, social, and community impact.
- Sections 171–177: General duties of directors (good faith, independence, avoidance of conflicts).
- Sections 414A–414C: Strategic Report and Non-Financial Reporting requirements.
Legislation.gov.uk – Companies Act 2006
- UK Corporate Governance Code (Financial Reporting Council, 2024 Update)
- Applies to companies with a premium listing on the London Stock Exchange.
- Focus on sustainability, risk management, and board responsibility for ESG oversight.
FRC: UK Corporate Governance Code 2024
- Fraud Act 2006 (UK)
- Defines offences of false representation, failure to disclose, and abuse of position.
Legislation.gov.uk – Fraud Act 2006
- Misrepresentation Act 1967 (UK)
- Governs civil liability for false or misleading statements in contracts.
Legislation.gov.uk – Misrepresentation Act 1967
- Corporate Insolvency and Governance Act 2020 (UK)
- Introduced governance and creditor duties during financial distress.
Legislation.gov.uk – CIGA 2020
- Bribery Act 2010 (UK)
- Covers corruption and bribery within corporate governance frameworks.
Legislation.gov.uk – Bribery Act 2010
- Environmental, Social and Governance (ESG) Disclosure Regulations
- Companies (Miscellaneous Reporting) Regulations 2018.
- Climate-related Financial Disclosure (CFD) obligations for large companies and LLPs (2022).
Gov.uk – Non-financial reporting
Academic and Professional Sources
- Tricker, B. (2023). Corporate Governance: Principles, Policies and Practices. Oxford University Press.
- Mallin, C. (2022). Corporate Governance. Oxford University Press.
- Solomon, J. (2021). Corporate Governance and Accountability. Wiley.
- Ho, V., & Williams, S. (2023). “CSR and the Role of Corporate Boards.” Journal of Business Law, Vol. 44(2).
- FRC (2024). ESG and the Future of UK Corporate Governance. Discussion Paper.
- PwC UK (2023). Sustainability Reporting and Financial Performance.
Deloitte (2024). Corporate Governance and ESG Trends in the UK.
Disclosure / Legal 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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