A body representing business directors across Europe has called for a more nuanced viewed of “stakeholder” business models saying boards should not be forced into becoming “bargaining bodies” for competing interests which could handicap their ability to make decisions.
The view comes from ecoDa, the European association of directors institutes, in a submission to a report from the EU’s SMART Project, an initiative designed to find reforms that would make corporate activity within the EU more sustainable.
In its own report on the issue, ecoDa suggests the project’s approach to balancing shareholder with stakeholder interests should be redrafted, because the project has misconceived how stakeholder interests can be addressed.
“Taking into account all stakeholders’ interests on an equal footing should not be the ultimate goal of companies,” said ecoDa’s report, observing that some stakeholders have conflicting interests, such as customers wanting low prices while employees seek high wages that push up costs.
“Boards should not be turned into bargaining bodies where different, often probably mutually conflicting, interests are turned against each other, thus hampering efficient decision-making.”
‘Arbitrating between interests’
EcoDa says boards should be “arbitrating” between interests to determine those they will accept and those they ignore.
“Boards should take into account the interests of both shareholders and the relevant stakeholders of the company which need to be clearly identified and can be specific to certain sectors and companies.”
The association also disputed an assumption in the SMART report that there is an “entrenched” belief that companies and boards exist only to maximise shareholders’ returns.
EcoDa maintains that the law in most European countries defines the “key obligation” of directors as a “duty of care and loyalty to the company”.
According to ecoDa’s submission: “In other words this is the duty to promote the interest of the company…” and “…this does not mean the purpose of the company must only be to make a profit.”
Shareholder vs stakeholder
The intervention comes at a moment when discussion of the interplay between “shareholder” and “stakeholder” interests in business has never been more intense. Indeed, the recent World Economic Forum conference in Davos was devoted to the topic with speaker after speaker calling for a rebalancing of business models towards stakeholders.
And this week the annual Edelman Trust Barometer launched its 2020 report in London with news that 93% of the British public believes stakeholders were the “most important to long-term company success”. The survey also revealed that 53% believe capitalism does more harm than good.
The SMART Project is an EU-funded research initiative at the University of Oslo looking at major strategic reforms that would make business more sustainable. Among other proposals, the project looked at reforms in the way free trade agreements are structured; the use of the UN Sustainable Development Goals in trade policies; the role of labour and human rights; and the role of NGOs and trade unions.
EcoDa also defended the role of corporate governance codes around Europe after the SMART report labelled them drivers of “shareholder primacy”, produced “without legislative control” and “without a sound research basis”.
EcoDa argues codes have been developed to enhance the independence of boards precisely to avoid “concentration” of power in the hands of shareholders, had influenced case law and “created” transparency requirements.
“Recently, corporate governance codes have shown that they can respond quicker than legislative initiatives to new concerns,” said ecoDa. “New initiatives have been taken to emphasis a multi-objective duty for board members.”
It added that reports from governance watchdogs “incentivise best practice through market pressure”.