EC Corporate Governance Initiative Series: Sustainable Corporate Governance and Soft Law

The public consultation launched by the European Commission in 2020 and the related studies by EY and the British Institute of International and Comparative Law suggest that reform of EU company law would make corporate governance more sustainable. However, the proposed EU reform of the law concerning directors’ duties has been heavily criticized by scholars in several papers including one by M. Roe, H. Spamann, J. Fried and C. Wang,  a summary of which was posted to this blog.  In a recent paper, we further develop this criticism by showing that most of the questions asked by the Commission in its public consultation already find an answer in most corporate governance codes and other soft law instruments of international origin. We claim, therefore, that an EU reform of directors’ duties is not warranted, given that such duties are already defined by national laws and further specified in corporate governance codes which take sustainability into account.

In principle, there should be two reasons for a reform of this type. One is to protect directors from liability towards the company and its shareholders when taking corporate decisions by reference to the interests of stakeholders. The other is that company law should play an education function with respect to corporate directors and managers by leading them to consider sustainability issues in the performance of their duties. However, the adoption of EU measures in this area should be motivated by the need to establish a level playing field for companies in the internal market and/or by the willingness of legislators to control externalities across-borders. In our paper, we object that Member States already provide rules on either corporate purpose or the company’s interest that are sufficiently flexible and therefore compatible with sustainability goals. Some jurisdictions (like Germany) follow a multiple approach to corporate purpose, which refers to both shareholders' and stakeholders' interests in defining corporate goals. Other jurisdictions follow a shareholder primacy approach but allow or require companies to consider stakeholders' interests in view of maximizing long-term profits. Therefore, there is no need for EU company law to harmonize approaches to corporate purpose which are sufficiently flexible and substantially convergent, nor to define corporate purpose and directors' duties in ways that clarify what already seems adequately clear at Member States' level.

Moreover, the Commission overlooks that most corporate governance codes in the EU Member States already deal with corporate purpose and directors’ duties concerning sustainability. In a forthcoming book chapter, two of us show that 20 out of 27 corporate governance codes mention stakeholders, with 12 of them also including a more or less detailed definition of them. Most of the definitions provided refer to the OECD Principles’ definition of stakeholders and identify them as employees, clients, investors, suppliers, local communities, and regulators. In addition, some codes include an entire chapter describing the duties of the company towards its stakeholders. Several corporate governance codes not only recommend boards to maximize shareholder value in the long-term taking into account stakeholders’ interest, but also encourage them to adopt CSR policies, linking the variable component of executive remuneration to CSR criteria and assigning CSR functions to a pre-existing board committee or to an ad hoc committee.

Rather than proposing a fully-fledged reform of directors’ duties, the Commission could issue a recommendation on how corporate boards and executives should take stakeholder interests into account, similarly to what was already done with the 2004 and 2009 Recommendations on directors’ remuneration and with the 2005 Recommendation on the role of non-executive (supervisory) directors. A Commission Recommendation could make national codes of corporate governance converge towards common standards in the areas of corporate purpose and sustainable governance along the lines of international documents issued by organizations like the OECD and the UN. A similar outcome could be reached through a Directive defining corporate purpose and/or directors’ duties with regard to sustainability, but leaving companies free to opt-in the relevant regime as adopted in their Member State.

At the same time, we think that corporate due diligence obligations should be recognized at EU level so as to enhance the compliance with international standards by corporations. In line with a recent comment by the ECLE Group, we would support legislative initiatives ‘pushing human rights, environmental and good governance standards up the corporate agenda when complex decisions have to be taken involving many competing considerations’. Nonetheless, we share ECLE’s criticism of the draft directive on corporate due diligence recommended by the European Parliament given ‘the wide range of imprecise standards which are to be applied to companies and the highly constrained context in which companies decide how those standards are relevant to their businesses’.

We conclude by arguing that the broader context of company law should be also taken into account by the EU legislators when considering reform of directors’ duties. Several measures have been adopted in recent years, such as the Non-Financial Disclosure Directive, the Taxonomy Regulation, the Sustainable Finance Disclosure Regulation and the Shareholder Rights Directive II, which address corporate short-termism and try to promote sustainability in the governance of firms. They offer better prospects for sustainable governance than the reform of directors’ duties that the Commission is planning. Focusing on the full implementation and enforcement of the reforms already made would be for the Commission a better choice than further amending company law in the direction just criticized.

Guido Ferrarini is Emeritus Professor of Business Law at the University of Genoa, an Academic Member at the EUSFiL and a Fellow and Research Member at the ECGI.

Michele Siri is a Full Professor in Business Law and holds the Jean Monnet Chair on European Union Financial and Insurance Markets Regulation at the University of Genoa (Law Department).

Shanshan Zhu is a Post-Doctoral Research Fellow at the University of Genoa (Law Department).

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