From Compliance to Commitment: Examining the Influence of Corporate Governance and Social Performance on Firms’ Circular Economy Initiatives

Abstract This study examines how corporate governance and social performance drive the adoption of Circular Economy (CE) among UK non-financial firms, addressing a critical gap in understanding the organisational mechanisms that facilitate sustainable business model transitions. Using panel data from 2013 to 2022 and guided by stakeholder-agency theory, we develop a comprehensive CE index that captures recycling, product eco-design, and resource utilisation practices. Through robust econometric methods, including panel data analysis, 2SLS, and quantile regression, we show that firms with strong governance practices and social responsibility commitments demonstrate significantly higher CE engagement. This relationship supports stakeholder-agency theory, suggesting that effective governance mechanisms align managerial decisions with diverse stakeholder interests, promoting sustainable resource management. Our analysis identifies key determinants of CE adoption, focussing on specific board characteristics. Notably, gender diversity, director busyness, and the presence of ex-CEO chairs play significant roles. Also, there is some evidence suggesting that board size and independence also contribute to CE adoption. These results appear consistent under different analytical conditions and checks. The study contributes to theory by extending stakeholder-agency perspectives to CE implementation, offering both ethical and practical insights. Managers can leverage governance structures and social responsibility initiatives to accelerate CE adoption, while policymakers can design targeted regulations that harness these governance-performance linkages to promote economy-wide circularity transitions.