Corporate governance for sustainability: a popular but still unfulfilled agenda for change

In 2019, the European Commission was wavering in its commitment to its Action Plan on Financing Sustainable Growth, and in particular to reforming corporate governance to promote sustainability. Andrew had been working for several years with Jeroen Veldman of Nyenrode Business University, Filip Gregor and Frank Bold on the Purpose of the Corporation project, which sought to challenge the short-termism and unsustainability associated with the practices of shareholder value corporate governance.

Andrew and his collaborators decided it would be useful to try to advance a clear agenda for embedding sustainability across finance, non-financial reporting and, especially, directors’ duties, the area where the Commission was particularly wavering. The aim was to produce a clear and concise statement of changes to law at EU level that would steer companies and institutional investors in the direction of more sustainable behaviour.

Steering corporate practice towards sustainability

The key proposal was that companies should be required to develop, disclose and implement a sustainability strategy that identifies and addresses material impacts connected to the company’s business model. A specified percentage of executive remuneration would be linked to achievement of measurable targets in the strategy. The board would then sign off on and publish an annual progress report. At the extreme, directors could be held liable for breach of duty where they failed to implement the sustainability strategy that they had drawn up.

Wide collaboration

In addition to the Purpose of the Corporation project, the Statement drew on other collaborations including the Sustainable Companies and SMART projects at the University of Oslo, the Sustainable Company project at the ETUI/GOODCORP and the Alliance for Corporate Transparency led by Frank Bold. After it was drafted, a number of leading international academics working in the interdisciplinary field of corporate governance were invited to express their support for the statement and to circulate it more widely.

Shaping European policies

The proposal was well received by the European Commission. Andrew presented aspects of it at a very well-attended Frank Bold webinar on 9 February 2021 alongside Commissioner Reynders, a number of institutional investors and an MEP from the European Parliament working group. This event took place just after the end of the European Commission’s consultation on Sustainable Corporate Governance.

Whilst it can’t be said that the Statement was the main influence on the Commission’s Proposal for a Directive on Sustainability Due Diligence, that Proposal did include directors’ duties to oversee the implementation of due diligence and its integration into the corporate strategy, as well as linkages of remuneration to the strategy. The Commission’s proposals led to intense debate, which, amongst other things, led to the dropping of references to remuneration and directors’ duties in the recently agreed Corporate Sustainability Due Diligence Directive (CSDDD).

Andrew Johnston writes:

“Despite the compromises it contains, the Corporate Sustainability Due Diligence Directive is an important step on the road to integrating sustainability into corporate governance and remains closely aligned with the ideas set out in the Statement on Corporate Governance for Sustainability.  Jeroen, Filip and I will be revisiting the Statement in the coming months as part of our continuing engagement with these issues.”