EC Corporate Governance Initiative Series: Sustainable Corporate Governance? — A Response from the Nordic Countries

There is at present a considerable risk that the European Commission and Parliament will fail to appreciate the severity of the criticism that the recent sustainability and corporate governance initiative has been met with by academia and business alike. It is important to emphasise that the strong opposition gathering force across Europe against the initiative has nothing to do with sustainability per se, but concerns the much more fundamental question of how the Union will conduct legislation after Brexit. Is EU law to be based on careful considerations of facts and guided by necessity in line with the subsidiarity principle, or will it be possible to bypass subsidiarity by using any commissioned study as a fig-leaf no matter how discredited, weak and ill-founded it may be? And will sustainability be used to cover for measures openly directed at dismantling the free market economy and property rights—principles that have until now been the foundation of the Union’s prosperity—and even subject private business to political control?

On July 30, the Commission published a commissioned Study and an Inception Impact Assessment of its own making that rested uncritically on its findings. In the following public consultation the Study was thoroughly debunked. The reader is advised to visit the feedback from the public consultation for the many contributions, among them the intervention by a group of distinguished American scholars (Mark Roe et al; the summary is available here). That this consultation is out of the ordinary is emphasised by the European Corporate Governance Institute three-day online policy workshop. This posting lists the main points of the criticism voiced by a broad group of company law scholars from most of the Nordic universities.

Subsidiarity: The Study starts out by admitting that national law on directors’ duties includes a duty to take into consideration all foreseeable risks, including those pertaining to sustainability. Consequently, sustainability is already embedded in national company law. However, the Study then proceeds to argue that EU intervention is nonetheless necessary, because directors’ neglect their duties in order to benefit shareholders’ strive for short-term profits. This bold claim is thus the sole justification for EU intervention, but the Study utterly fails to prove it. It appears mainly to rest on the shaky notion that pay-outs to shareholders increased in the last decades while intra-firm investments decreased relatively; this is just one of many observations in the Study with no connection to reality. Besides confusing the problems of short-termism and externalities and ignoring that correlation is no proof of causation, the empirical data was inconclusive, insufficiently based and severely biased.

While it is always possible to argue that short-termism is rampant after all, there is no denying that the Study is entirely one-sided and fails to prove its allegations. Consequently, there is no basis for EU intervention to set aside the national law of Member States that already deals with sustainability. If the European Parliament ignores this and cites the Study as support for legislation, it will have showed itself to be an institution bereft of reason, and consultations will be proven irrelevant and the Principle of Subsidiarity a defunct relic of the past. 

Directors’ duties: The whole argument that directors should neglect their statutory duties under national law to pursue short-term gains for shareholders reflects a lack of understanding of company law and business reality that is staggering. Shareholders are the residual claimants of the company and for that reason incentivised to strive for the optimal running of the company avoiding foreseeable risks while using society’s resources most efficiently. Competition and the pursuit of economic efficiency are among the best instruments to achieve sustainability and shareholders are the main allies in that effort. For that reason, most of current EU law aims to enforce and strengthen shareholders’ rights and enhance their capability to make sustainable decisions by disclosure of non-financial metrics, just as the Treaty generally strives to enhance competition within the Union. The animosity in the Study towards shareholders as the ‘1 per cent’ is impossible to reconcile with the current EU legislation. It also begs the question whether the Commission has actually noticed this inconsistency and how this fits with its policies on a Capital Markets Union and the drive to secure more equity funding for SMEs in these trying times of Covid-19. 

What is particularly peculiar is the Study’s apparent belief that directors are better agents of sustainability than shareholders, a proposition that seems to completely ignore that the main subject of corporate governance over the past decades has been the very problem that directors’ interests are not aligned with the company, but are self-interested and short-term. This is why company law deals extensively with remuneration, including share incentive programs, and shareholder influence on board composition. The very instruments the Study would like to ‘liberate’ directors from.

Company purpose: The Study would like all companies to profess a ‘purpose’, which should include sustainability and which should also form a mandatory part of its business strategy. Again, the Principle of Subsidiarity suggests that Member States can decide this on their own. The idea of subjecting companies to a politically mandated purpose may sound harmless if one agrees with said purpose, but upon deeper reflection it betrays a totalitarian world view that does not respect the divide between public policy and private life. No person should be a mere instrument of public policy in the Union, nor should the companies they make use of.

Corporate governance is deeply ingrained in the national laws of the Member States and reflects their different traditions as well as private property rights that the Union is treaty-bound to respect. In the Nordic Member States, directors’ duties and company purpose are not subject to statutory provisions but rely on broad principles. We prefer the inclusive flexibility that this offers and do not want to trade it for statutory provisions that are blunt tools compared to general principles and where each new layer of legislative detail raises the question of what was not mentioned and why.

Stakeholders: The Study would like to empower stakeholders, but fails to explain who they are and who should decide on that definition. In company law, employees are a recognised group of stakeholders because their relationship with the company allows a clear identification. It is well known that the interests of stakeholders diverge, eg customers like products to be as cheap as possible, while employees like fair wages and safe conditions. To grant rights to a diffuse notion of ‘stakeholders’ risks jeopardising the rights of employees and the welfare of the company, especially if ‘stakeholders’ can sue the company for violation of ill-defined and vague rights. This would allow interference with European companies by both domestic and foreign interests and create a culture of litigation that will not serve the interest of the Union.

Jesper Lau Hansen is a Professor at the Faculty of Law, University of Copenhagen. The post comes to us from Professor Hansen as a summary of the joint response submitted by the ‘Nordic Company Law Scholars’.

This post is part of the new OBLB series: ‘European Commission Initiative on Directors' Duties and Sustainable Corporate Governance’.