After decades of being dormant, corporate purpose has become a hot topic of discussion again in company law and corporate governance. In the European Union, the tension between the European societal approach to companies with its long history and the US-originated efficiency-based approach with its much shorter history (and weaker basis) is palpable in the heated debates on both sides of the Atlantic ever since the European Commission launched its Sustainable Corporate Governance initiative in 2020. In this debate, especially shareholder primacy proponents have been very vocal in their contributions, seeking to frame the discussion within what we call a misleading shareholder vs stakeholder dichotomy. We reject the dichotomy as a meaningful framing of the debate. We argue that corporate purpose instead should be taken seriously as a matter of company law and as an element in ensuring the contribution of business to sustainability. In our recent paper, ‘Corporate Purpose and the Misleading Shareholder vs. Stakeholder Dichotomy’, we discuss how such an overarching purpose could be operationalised with a redefinition of duties of the board with sustainability due diligence as a key tool. In this light, we discuss the EU Commission’s proposal for a Corporate Sustainability Due Diligence Directive, launched on 23 February 2022.

The danger of the shareholder vs stakeholder dichotomy

The Anglo-Saxon shareholder vs stakeholder debate is misleading and outright dangerous in the way it takes company law proper out of the discussion and reinforces the shareholder primacy drive, which remains a main barrier to sustainable business. Caught in the choice between shareholder primacy and what we call ‘stakeholder primacy’, there is no room for the broad canvassing of other options that suit better the variety of company law regimes around the world. We see how the shareholder primacy drive continues to constrain, in Christopher Bruner’s words, ‘our collective sense of the possible – even for many who favour pursuing corporate sustainability in the abstract’. 

The challenges societies around the world face today – and which business contributes to – will not be resolved through identifying possible stakeholders and their private preferences. Balancing of interests risks quickly becoming a utopia; in a stakeholder primacy model, the strongest, most strategic or most vocal of stakeholders may get to set business strategies and make decisions for private benefits. The result of stakeholder primacy may accordingly be power-grabbing, entrenching of inequalities and continued unsustainability. Privileged stakeholders may then reap private benefits to the detriment of those with less or no power.

This leaves little or no room for vulnerable groups, such as invisible workers down in global value chains, indigenous communities, future generations, and the environment that we all depend on. We risk people and the environment being subjugated to providers of ‘capitals’ in stakeholder theorisations and reporting schemes. 

The biggest mistake the European Commission has made in its Sustainable Corporate Governance initiative was to speak the stakeholder language. Opponents of change were thereby given the ammunition of being able to postulate that the proposal would mean incorporating some kind of stakeholder primacy into the boardrooms. Shareholder primacy proponents could then use this to argue that their way of seeing the boards as ’agents’ of shareholders is the only way to ensure that companies are run efficiently and well – through the faulty logic of the legal-economic thinking underpinning the still prevailing paradigm. Indeed, we posit that the dichotomy of shareholder primacy or stakeholder theory has been used as a strawman by those who do not wish to see any change, together with one single element of the broad set of reports the Commission has drawn on in its work. This includes very  much the so-called group of Nordic company law scholars, who have chosen to present themselves in a way that has been understood – falsely – as being a statement on behalf of Nordic company law scholars generally, and even further – as representative of Nordic countries. Following up these grandiose statements with claims that the Commission had ‘abandoned its proposal’ and that the reawakened ‘zombie proposal’ is motivated by a desire to harmonise – out of all context – corporate governance in the EU only further underlines the irrational resistance against change. That we are on the right track to resolving sustainability issues because not all environmental news is negative is as poorly founded as strawman claims of extremists declaring the ‘capitalist system’ to be doomed are irrelevant (both in the same ‘zombie’ text).

Taking sustainability seriously: sustainable value creation within planetary boundaries

The question of how to secure the contribution of our businesses to the fundamental transformation to sustainability is not one that should be responded to in the ideological and emotional way as we have seen in some of the responses when the Sustainable Corporate Governance initiative was launched. Now that the Directive proposal is out, we encourage all who wish to participate in the discussion to lay aside any ideological ‘shareholder vs stakeholders’ viewpoints. That is not what is at stake. While the IPCC report on climate change of 2021 has been referred to as ‘code red for humanity’, planetary boundaries research shows that reality is even more grim – we have a whole set of code reds for humanity and they are increasing in number (as the latest planetary boundaries research shows), and the status for the European Union is not good. Working towards sustainability also entails questions of social justice – just as we cannot silo environmental issues into various categories to be dealt with separately, we cannot separate environmental and social issues. These are all interconnected elements. All of these issues must be dealt with simultaneously. The sustainability challenges of our time are complex and interconnected and attempting to silo sustainability work into dealing piecemeal with isolated elements will not work.

While there seems generally to be an increasing consensus among governments and businesses on the need to integrate sustainability into the governance of our globalized businesses, the attempts to do this so far seem to have been based on three principles: a) as few clear and enforceable rules as possible, b) support voluntary measures although they haven’t worked  so far, and c) if we must regulate, be sure to leave company law out of the picture.

However, to get real about integrating sustainability, we need to go to company law, which is the regulatory infrastructure for decision-making in business. As all company law scholars who have analysed the sources know, company law gives a broad discretion to corporate boards and by extension senior management in their corporate governance. There is, in other words, space within the current company law and corporate governance systems to steer businesses in more sustainable directions. This has been used by some as an argument for the sanctity of company law – no need for change, move on, nothing to see here! The problem is that this discretionary space is taken up by the social norm of shareholder primacy. We therefore suggest, on the basis of over a decade of multijurisdictional comparative analyses of the drivers for and the barriers to sustainable business, that company law must take back that space and clarify why we have companies (corporate purpose) and give a principle-based instruction to boards on how to do their jobs in this era that is defined by the extreme unsustainabilities resulting from business as usual.

Sustainable value creation is already an emerging concept in corporate governance all over the world. What needs to be done is to position sustainable value creation within the ecological limits of our planet. We therefore propose both ‘sustainable value’ and ‘planetary boundaries’ as general clauses in company law, the content of which gradually can be firmed up as practice develops. This doesn’t mean we don’t think there should be any guidance in the law – quite the opposite, as we see the need to ensure that business does not take these two concepts and turn them into opportunities for greenwashing, bluewashing or ‘sustainability washing’.  Integrating these concepts into the duties of the board is therefore also paramount, outlining this in a way that provides legal certainty.

Avoiding the shareholder vs stakeholder trap does not mean that we do not in our proposal encompass a wide variety of interests affected by the company’s business. However, while involving affected communities, trade unions, and civil society is crucial, a mere canvassing of ‘stakeholder interests’ and giving priority to the ones that make themselves heard the most is insufficient, misleading and potentially destructive for the overarching purpose of sustainable value creation. The backdrop must always be the interconnected complexities and the vulnerability of the often-unrepresented groups (whether invisible workers deep in the global value chains, Indigenous communities, or future generations), and the aim of a sustainable future within planetary boundaries.

Under pressure: the proposed Corporate Sustainability Due Diligence Directive

The European Commission’s Corporate Sustainability Due Diligence Directive proposal, presented on 23 February 2022, aims to put into place mandatory and harmonised sustainability due diligence rules in the European Economic Area, in recognition of the insufficiency of voluntary action by business and the regulatory chaos that business faces in its cross-border activities.

The proposed Directive is appropriately named ‘Corporate Sustainability Due Diligence’, resonating in title with the proposed Corporate Sustainability Reporting Directive. It is positive that the Corporate Sustainability Due Diligence Directive proposal clarifies which environmental and human rights issues are intended to be included. However, a broader approach is needed, drawing on a research-based concept of sustainable value creation within planetary boundaries.

The proposal builds on a due diligence duty for the members of the board and the chief executive officer of the company. It reflects the international human rights and environmental international law obligations and concretises the steps of the due diligence process. There is, however, a danger of box ticking instead of principle-based evaluations of risks of unsustainability.

There are proposals for both public and private enforcement, including civil liability for the board members and the chief executive officer, which makes this proposal different from much of what we have otherwise seen in the corporate sustainability area. The scope of the proposal is however extremely narrow, excluding in its direct application all small and medium-sized enterprises, and covering only some 13,000 EU companies and some 4,000 third-country companies.

The proposal takes an important core company law step, which we have advocated in our work, namely to clarify that the duty of the board (strangely formulated as a duty, in Anglo-Saxon speak, for all ‘directors’) is to promote the interests of the company. Wisely, there is no attempt to harmonize this (and especially not by including some kind of stakeholder language), rather leaving the content of the interests of the company to the variety of company law regimes in Europe. What is missing, however, is further situating this duty within an overarching purpose of sustainable value creation within planetary boundaries, which would have given a clearer sustainability-oriented framing for the whole proposal. 

The proposal does employ misleading stakeholder language in the consultation duties as part of due diligence, where it would have been better to specify that the consultation should take place with affected communities, groups and people.

The proposed Directive is clearly a product of the tension resulting from, on the one hand, the social norm of shareholder primacy and the drive to keep company law untouched by sustainability issues, and on the other hand, the willingness to make necessary changes to mitigate the extreme unsustainabilities of business as usual. We see this in the way core company law issues are relegated to the end of the proposal. It would have been much more logical to set out clearly in the beginning of the proposed Directive the core duties of the boards to ensure that sustainability due diligence is used as a key tool for integrating sustainability into the entire business of the company.

The Directive proposal needs to be strengthened on a number of points, and it is now to be discussed further by the European Parliament and the Council, before it can be adopted with possible revisions. We strongly recommend that subsequent work with the Directive proposal be based on a research-based concept of sustainability and take company law and corporate governance seriously, rather than allowing the misleading shareholder vs stakeholder dichotomy to set the parameters for continued siloing of core company law as the regulatory infrastructure for corporate decision-making.

This post is the first in a new series on ‘The Corporate Sustainability Due Diligence Directive Proposal’.

Beate Sjåfjell is Professor of Law at the University of Oslo.

Jukka Mähönen is Professor of Law at the University of Oslo.

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