Institutional Investors, the Political Economy of Corporate Disclosure, and the Market for Corporate Environmental and Social Responsibility: Implications from the UK Companies Act (2006)

Abstract

Shareholder scrutiny of reported income and stock price appreciation, nongovernmental organisations, activists, and the public-at-large hold large firms accountable on many issues including their environmental footprints and the social standards of their suppliers around the world. For those coming from European social democratic traditions, stakeholders have a legitimate voice in the affairs of the corporation especially in two-tiered governance regimes that separate supervision from management. Notwithstanding attempts to re-write their proper roles and responsibilities, the Anglo-American corporation is widely believed to be the medium for the accumulation of shareholder value. Recently, however, a counter-argument has emerged suggesting that the UK Companies Act of 2006 broke with this tradition to embrace the European model if not wholly then at least in terms of giving legitimate voice to social and environmental issues. We note that the UK Companies Act owes much to the EU Modernisation Directive but argue that the disclosure of social and environmental factors relevant to understanding the risks faced by the corporation owes more to the interests of institutional investors than community activism. We also suggest that there remains deep-seated divisions amongst institutional investors (especially different types of pension funds) that may have long-term consequences for UK disclosure policy and the power of markets to affect corporate social and environmental responsibility.

Keywords: Disclosure, institutional investors, UK company policy, social and environmental standards

JEL Classification: D23, G18, G23