SMART urges reform of EU company law
Contrary to popular belief, maximising returns to shareholders is not a legal obligation. EU law must clarify that it is a requirement for companies to operate sustainably, said professor Beate Sjåfjell in Brussels on 24 January.
SMART project leader Beate Sjåfjell called for the EU to clarify that it is a requirement for companies to operate sustainably at the EU Commission Conference on Sustainable Corporate Governance in Brussels on 24 January. Photo by Iselin Rønningsbakk / CICERO Center for International Climate Research.
“The EU should reform European company law to ensure that businesses create profit in a way that is not based on destroying the environment or exploiting people,” said Sjåfjell at the EU Commission’s Conference on Sustainable Corporate Governance on 24 January.
Sjåfjell is a law professor at Norway’s University of Oslo and the leader of the Sustainable Market Actors for Responsible Trade (SMART) project.
She was invited to this conference to present results the project, which comprises researchers from 25 institutions from around the world and is funded by the EU’s research and innovation programme Horizon 2020.
The SMART results show that company law gives plenty of scope to corporate boards to ensure that business is done in a more sustainable way, but that this scope is not used. The pressure to maximise returns for shareholders, the so-called shareholder primacy drive, keeps business on an unsustainable path.
“Based on our research in the SMART project, we know that the drive to maximise returns for shareholders remains a barrier to sustainability. Current rules are insufficient to change this. A clarification and redefinition of the duties of the board is therefore crucial,” Sjåfjell said.
“While the EU’s Non-Financial Reporting Directive has potential, it is not enough to mitigate shareholder primacy. A company law on EU level can realise the potential of the reporting rules and contribute to giving the EU the market leaders of tomorrow”, she added.
Input for future EU legislation
The European Commission has recognised that undue focus on shareholder returns over the past 20 years appears to have led to underinvestment in innovation and human capital, both of which are “crucial for the sustainability transition”.
As a follow-up to the EU’s Action Plan on Financing Sustainable Growth, the Commission conference initiated a discussion of how to ensure sustainable corporate governance through redefining corporate board duties.
The conference aimed at discussing recent policy developments and proposals, in order to get input for future EU work on sustainable corporate governance. Present at the event were policymakers, academics, and representatives from various business organisations, companies, investors and NGOs.
Difficult to do it alone
Many companies have started becoming more aware of their social and environmental footprints and are increasingly showing a willingness to operate in a more sustainably. But to do this without losing the support of their shareholders and putting their competitive position at risk, they need legal backing, Sjåfjell argued.
“We need a clarification and a redefinition of European company law that states that the duty of the board is to ensure sustainable value creation within planetary boundaries,” she said.
“Many businesses operate across borders, and it would therefore be very difficult for one country alone to do this by itself. That is why we need the EU to act on this,” she added.
“The EU must move first”
This view was supported by several of those present at the conference.
“I very strongly welcome a firm EU initiative… There’s a lot of work to do, but we have no choice… and we need the EU to move first when it comes to corporate sustainability norms,” said Mathilde Mesnard, Deputy Director of the Directorate for Financial and Enterprise Affairs of the OECD.
“There needs to be clear rules because otherwise those that make an effort will be at a disadvantage compared to those who do not care,” added Claudia Saller from the European Coalition for Corporate Justice (ECCJ).
“If companies must do this all alone, it will just lead to delays,” said Judith Sargentini, a member of the European Parliament representing the Dutch GreenLeft party.
“It’s like trying to get smoking out of bars. For a long time, the tobacco industry said that cafés could chose themselves [whether to let people smoke there], and that delayed the end of smoking in cafes,” Sargentini said.
Change is urgent
We know from the latest report by the UN Climate Panel (IPCC), that we urgently need to change the way companies operate, argued Olivier Boutellis-Taft, CEO of Accountancy Europe, an organisation that represents 1 million accountants and auditors from across Europe.
According to the IPCC report, published in October last year, we need to cut carbon emissions by 45 percent by 2030 if we are to be able to limit global warming to 1.5°C by 2100.
“We basically have 12 years to change, and that is an extremely short time. It’s expensive to change, but no one has ever measured the costs of not changing,” Boutellis-Taft said.
“Hard law has until now not worked… We need to reform the board and incentivise everyone to move,” he added.
The conference was streamed online, and you can watch it here.
The discussion on how to achieve sustainable business continues at the conference Corporate Sustainability Leadership? The Nordics and California in Berkeley, California on 21-22 March, co-organised by the SMART project and partners at the University of Oslo and the University of California, Berkeley.