Signaling Social Responsibility

One of the oldest bits of legal folk wisdom is that environmental, health and safety laws are only as strong as their enforcement by public regulators and private citizen suit litigants. In this article, I argue that this piece of folk wisdom is false. The everyday world of market transactions – purchases and sales of stock and other corporate assets by investors, as well as consumer transactions – significantly enhances the incentives created by regulatory and legal enforcement. Regulatory compliance costs and potential regulatory sanctions for noncompliance are felt in virtually every transaction involving the purchase, sale or restructuring of a company or its assets. Whether deals occur at all, and the price negotiated in such deals, is very often a direct function of the underlying regulatory regime within which firms operate. For an increasing number of investors and consumers, moreover, the decision whether to transact at all – whether to buy a company’s product, or invest in its stock – is made by looking not just at what a company sells – its product, or the risk-return package
presented by a share of its stock – but by looking at how the company does business – at its environmental, health, safety and labor practices. When consumer and investors’ willingness to pay depends not just on “what” but on “how”, product and stock markets may themselves directly reward companies for internalizing regulatory norms.