How far it is sufficient for business sustainability to be built into company reporting, and whether this is also necessary in respect to board obligations, will reach a watershed moment in the forthcoming European initiative on sustainable corporate governance.
A “call to action” for Europe and other regions in the world to have courage to do this has been published internationally today, Tuesday 9 March, and is authored by some of the most renowned world leaders in business, investment and corporate governance.
The letter argues integration of sustainability concerns in corporate governance frameworks is absolutely necessary, stating: “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 authors argue incentives and mindsets towards short-term profit maximisation will only change in this context, if action is taken on the current European Union consultation, specifically endorsing measures for board oversight on sustainability, mandatory due diligence and aligning board and executive remuneration to sustainability objectives.
The letter is signed by Professor Judge Mervyn King, author of the King Codes; Paul Polman, surely the world’s greenest business CEO; Kerrie Waring, International Corporate Governance Network CEO; Bob Moritz, global chair of accountancy giant PwC; and Gilbert Van Hassel, CEO at international asset manager Robeco. Furthermore, it is co-signed by more than 90 academics and leading experts specialising in company law.
A mixed response
This is a notable intervention following a surprisingly mixed response in the public consultation to the European Commission proposals. Although backed by many including investor interests led by the European Fund and Asset Management Association, many business responses chose to attack one of the research studies on which the Commission based its consultation, repeatedly using the word “pre-conceived”.
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.
It is also disappointing to hear repeated the outdated notions that sustainability impairs business competitiveness, instead of recognising that it actually improves risk management for companies and enables them to be more resilient, at a time of unprecedented change.
The appearance of a “lobby” against the proposals also takes me back to some of the polarisation which existed over the original proposals for EU non-financial reporting rules at the start of the last decade. Hard-fought at the time but widely accepted today, I predict that if reforms for sustainable corporate governance are agreed now, they will be considered part of a new consensus in only a few years’ time.
These arguments must also be heard elsewhere in the world, including as part of the agenda-setting debates for the new Biden administration in the US.
In the UK, more recent reforms have focused on the reporting on the section 172 obligations for directors’ duties, rather on changing a clause which still defines company success as promoting the interests of shareholders, while only taking account of those of stakeholders.
Whether the Business Roundtable statement on corporate purpose from 2019 or this year’s World Economic Forum commitment to stakeholder capitalism, such business declarations will be assessed in the light of how the very same businesses respond to this debate on sustainability in corporate governance, which the authors of the call to action identify as a root cause of unsustainable business models.
It is also an opportunity to debunk the false notion that good corporate governance is only an Anglo-Saxon concern. Already the Dutch Corporate Governance Code specifies the need for dialogue by the company with its stakeholders, while the French PACTE law promotes corporate purpose to be introduced by the company in its by-laws/articles of association. This provides further justification for the European Union to “level up” in this area as a whole.
Integrating sustainable corporate governance
In line with the Purpose of the Corporation project with which I was associated, I would go further than the current European proposals, by prescribing stakeholder engagement for companies, explicitly defining fiduciary duty as long-term value creation, introducing incentives for longer shareholding periods, requiring the integration of sustainability in business strategy and providing for board expertise on sustainability.
However, the current European proposals and similar debates which will hopefully also take place in other jurisdictions, as expressed in today’s call to action, must be supported in the light of the clear failings under current arrangements.
Board Agenda’s own survey with Mazars and INSEAD saw current board members rank sustainability last out of nine risks in order of priority and found that two-thirds of sustainability reports today don’t receive board approval.
Research from the Alliance for Corporate Transparency shows only 14% of companies disclose sustainability being addressed at board level at all.
The UN-backed Principles for Responsible Investment says only “few companies” link remuneration policy to environmental, social and governance performance.
According to the European Commission research itself, only 17% of company directors have sustainability competence.
A study in the journal Sustainability last year said a majority of corporate governance codes in the EU enshrine shareholder primacy and exclude a stakeholder focus.
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.
Richard Howitt was Member of the European Parliament with key responsibility for the EU Non-Financial Reporting Directive, a former CEO of the International Integrated Reporting Council and is now strategic adviser on corporate responsibility and sustainability and senior associate at public interest law firm Frank Bold.