This week a fightback began in support of European Commission effort’s to redraw corporate governance so it promotes sustainability.
In an open letter, business luminaries such as former Unilever chief executive Paul Polman, PwC global chair Bob Moritz and International Corporate Governance Network CEO Kerrie Waring—as well as list of academics from around the world—offer their support to the Commission after a study at the heart of its current reform campaign came under a barrage of criticism.
Led by South African corporate governance icon Prof Mervyn King, the letter calls on business to back reform efforts because “incentives” at the centre of many current governance models often prevent corporate leaders from acting on sustainability issues.
“Unless and until the systems of corporate governance are reformed to reflect these challenges, they will act as countervailing forces against achieving sustainability objectives,” the letter says.
It adds: “This is not simply about business adopting sustainability reporting or strategy, but about corporate governance systems redirecting focus towards how companies create and preserve value—for themselves and their stakeholders.”
The commission’s consultation was launched in November proposing mandatory human rights due diligence and new obligations on company directors to balance the “interests of all stakeholders”.
The move followed publication of a report compiled by EY for the commission which claimed short-term thinking was still rife among business leaders in Europe.
“Short-term time horizons that fail to capture the full extent of long-term sustainability risks and impacts could amount to overwhelming environmental, social and economic consequences for companies, shareholders, investors and society at large,” the report said.
But there then came a backlash claiming EY’s report and its methodology contained “deep flaws”.
The first—and perhaps most significant—came from four Harvard academics, who argued the report confuses the definition of the problem. In focusing on the issue of “short-term” business thinking, they say the report “conflates” timeframes with problems stemming from “externalities” and the “distribution” of benefits. “No EU policymaker should rely on this report,” they added.
‘Now is the time for this to change’
This week Richard Howitt, a former MEP and former chief executive of the International Integrated Reporting Council, rounded on critics and offered his support for the letter’s signatories and the European Commission’s reform agenda.
“It strikes me as odd that critics seem more concerned with the methodology through which ‘short-termism’ is defined in the study, rather than its devastating consequences for our world and the action needed to change this,” he writes.
He adds: “For those of us who have advocated genuine integration of sustainability in business model, strategy and reporting, the fact that financial performance is considered a ‘first order’ issue in corporate governance while sustainability is relegated as a subsidiary concern, will always be an obstacle to success.
“As some of the world’s foremost voices in corporate governance are saying today, now is the time for this to change.”