Things need to change, but how exactly? Most directors understand that within the foreseeable future, companies are expected to make great changes in the field of sustainable corporate governance. A flood of new, including European, regulations is expected. Time will have to tell what exactly these big changes entail and what the consequences will be for companies and directors. However, given the impact the transition will have on companies and given the fact that we know already that things must change radically, the question is whether we can just wait for instructions of Europe or the Dutch government.
In order to keep an overview, we will be watching and monitoring the developments and plans in the field of corporate responsibility, starting with the Directive for sustainable corporate governance that is in the making.
At a European and national level, the way in which corporate governance can contribute to sustainability has been the topic of considerations for a long time. In December 2019, the European Commission published its plans for a European Green Deal. The target of one of these plans was to make the European Union climate-neutral by 2050. The European Green Deal argues that sustainability must be integrated further into the corporate-governance framework. The European Commission has announced that this will be effected by a policy initiative including the European COVID-19 recovery plan, the Circular Economy Action Plan, the Biodiversity Strategy and the Fork to Farm Strategy.
On 17 December 2020, the European Parliament passed a resolution on sustainable corporate governance. With this resolution, Parliament intends to create a culture within the administrative bodies of companies that takes into account, and acts according to, sustainable corporate governance. The intended developments concern three interests of society: climate, human rights, and diversity. It is expected that the initiative “sustainable corporate governance” will result in a proposal for a directive. The contents of this proposal are not clear yet, but the information available to date does offer an indication. What will this proposal imply and which consequences will it have for the governance of businesses?
Sustainable Corporate Governance
Sustainable corporate governance is intended to enable companies to focus not only on short-term benefits, but also to take into account social interests like the environment, society, human aspects and the economy. In addition, the long-term consequences for the development of the company will have to be paid more attention to in decision-making.
Consequences for Shaping of Governance
In all probability, the Directive will i) implement human rights due diligence obligations and ii) make the board’s duty concrete, with a more far-reaching duty of care for directors.
The human rights due diligence obligations are intended by the Commission to oblige companies to identify risks of business operations for the climate or human rights, among other things, to implement their findings, and to limit any adverse consequences thereof.
Making the board’s duty more concrete is a clarification. It extends the duty of the directors to act in the corporate interest. Directors must not only take into account the interests of all stakeholders that are relevant to the company, but also the broader interest of society.
Conclusion
What was described above is still very broad and general, but it is clear that the future Directive on Sustainable Corporate Governance will entail drastic changes for the set-up of the board’s duty. The boards of companies will have to have more eyes for society interests. As soon as the contours of the Directive will be come visible, we will let you know.
If you have questions, please feel free to contact Ginou van den Berg.
