High stakes for the future of European sustainable corporate governance

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

The EU’s upcoming initiative on sustainable corporate governance must address two issues: the overarching Duty of Care of company directors and the definition of Due Diligence considerations as part of supply chain management, write Wojciech Baginski and Katie Hill. [cate_89 / Shutterstock]

Europe needs a Copernican Revolution in corporate behaviour to tackle the climate crisis and social disparities, write Wojciech Baginski and Katie Hill. To do that, the EU should start with clarifying the fundamentals of corporate law, they argue.

Wojciech Baginski is co-founder of the Interdependence Coalition, an organisation that aims at transforming the way we do business in Europe. Katie Hill is CEO of B Lab Europe and co-founder of the Interdependence Coalition.

There are high stakes for the future role of business in Europe right now. The EU has agreed on ambitious, essential goals: to achieve climate neutrality in Europe by 2050 and simultaneously, to build an inclusive and equitable economy for the citizens of Europe.

To realise these, the role of business, as reflected in existing corporate governance models, needs to be shaken up and put to work.

Currently, the dominant regulatory framework allows for but does not incentivise management boards of companies to consider the interests of all those that contribute to and are impacted by the business’s operations. This is the fatal flaw that needs addressing. In some countries, corporate law and its interpretation may be perceived as favouring the now-infamous “shareholder primacy” model – where the interests of shareholders dominate over all other stakeholders’ interests.

To address this, the EU Commission is proposing a wide range of initiatives for businesses and investors to act in the best interest of society and the environment. An overarching aspect of this architecture is the proposal for a Directive on Corporate Due Diligence and Corporate Accountability (or, in a wider sense, the EU initiative on Sustainable Corporate Governance). The consultation closed one year ago, attracting over 500,000 responses, plenty of debate and several delays.

Twice, the draft proposals have been red-flagged – a rare occurrence – by the Regulatory Scrutiny Board, but no details have been made public. We are still in the dark about what is holding things back.

Two key components are expected to be addressed in the proposed Directive. The first is to redefine the overarching Duty of Care of directors of companies, mandating them to consider the interests of all stakeholders affected or contributing to the business. The second component is to define the Due Diligence considerations required as part of supply chain management.

Clearly, these elements are connected and serve each other. We see both are crucial to a future progressive role for business in our European economy, we created the Interdependence Coalition (which has over 100 signatories) to advocate for a mandatory, pan European Duty of Care of Directors, aligned with the EU regulations on sustainable finance. This way, the use of capital and the behaviour of businesses are aligned and embedded all across Europe.

The duty of care of management boards is an overarching principle in corporate law as it regulates the behaviour of leaders, who usually drive culture change in the company. If the incentives are misplaced at the top, the whole organisation suffers. This revised duty of care will drive an agenda in which benefits our environment and society would be planned for and incentivised, such as through compensation. It’s a north star in corporate law. Introducing other social and environmentally oriented legislation around reporting and use of finance, without making this change to corporate behaviour, would increase the risk of greenwashing or piecemeal adoption by member states, creating divergence and uncertainty.

Without this, there are two options. Either European businesses adopt a company by company
approach (as B Corps or benefit corporations do) by revising their corporate documents to include stakeholder governance. OR, the EU member states rely on the courts to interpret the current rules in a way that infer the obligation to consider stakeholder interests by the management boards in their decision-making process. Both approaches are inefficient and too slow to drive meaningful change at the speed we need.

Concerns for this Directive appear to cluster around the additional cost involved in measurement and scrutiny and the potential impact on the competitiveness of EU companies. The B Corp movement has much to contribute to this whole debate. Over 4,600 B Corps globally and nearly 800 B Corps in Europe have voluntarily committed, in their governing articles, to run their companies with consideration of the interests of all their stakeholders: always, not only in specific scenarios. And investors buy into this.

Most B Corps do not consider measures taken as supplementary costs but rather as a necessary component of managing risk with integrity. And in terms of competitiveness, B Corp data shows that those European B Corps that have been certified for three years and then recertified (as is required to maintain B Corp status) have shown average annual revenue growth of over 30%.

Key indicators around employee attraction and retention rates, customer loyalty levels, and even access to finance are shown to improve with B Corp certification. Even the cost of capital can be favourable as investors see the benefits in companies mitigating a range of risks that relate to their broader stakeholder governance. We see innovative investment vehicles in which the higher its B Corp impact score is, the cheaper was the cost of the loan.

And businesses are demanding this – partially as they see the pressure from civil society to play a positive, regenerative role. The demand for B Corp certification in Europe has grown at over 37% in the last two years. Over 150,000 companies use the B Impact Assessment across the globe, and a further 10,000 companies globally have voluntarily embedded a stakeholder governance commitment either by amending their articles of association or adopting a benefit corporation legal form or similar, where available.

The conclusion we bring from the examples of the B Corp community’s trajectory is that operating sustainably with care for all stakeholders is popular and correlated significantly to their success.

Therefore, we implore the Commission to include a broad definition of the directors’ duties in this directive; there is an actual window of opportunity for the EU to drive behaviour change globally by altering the norms and expectations of the business. It is no longer reasonable for those that voluntarily adopt a general duty of care in considering all stakeholders in the running of their companies to carry the load for all the other companies, for whom short term gain is rewarded.

There are high stakes here – the future of our planet and society. We need a Copernican Revolution in corporate behaviour to meet these challenges; we should start by clarifying the fundamentals of corporate law.

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