How Institutional Investors on Boards Impact on Stakeholder Engagement and Corporate Social Responsibility Reporting

Abstract

Institutional investors are relevant dominant owners with a very high representation on the boards of European firms. Despite their prevalence, research on the role of institutional directors and their impact on firm disclosure policy is scarce. We examine the association between institutional directors and corporate social responsibility (CSR) reporting, distinguishing between pressure-sensitive (e.g. banks) and pressure-resistant directors (e.g. funds). We find that institutional directors show different incentives and conflicts of interests towards increasing CSR reporting. Specifically, we note that directors representing banks are likely to promote additional information about the firm's environmental and social commitments in order to lower the risk faced by lenders, minimise the probability of default, and maintain their prestige and professional reputation. On the other hand, directors representing fund institutions overweight short-term earnings potential, which decreases their incentives to improve a firm's CSR reporting. Our findings confirm the importance of institutional investors on CSR reporting policy of firms