We need a new approach to corporate governance. Companies cannot just be a vehicle to create shareholders’ value – i.e. to pay high returns to those holding the capital. They must be accountable to society, local communities must be better off as the result of their intervention. Companies must serve the surroundings in which they are operating, not the opposite – people and environment being exploited to increase companies’ profits.
That was the common thread of an enthralling event organised a few days ago in Brussels by Frank Bold law firm. This is also at the core of the recently released annual report of UNCTAD: Shareholders’ primacy over environmental and social considerations and short termism in corporate governance is forcing the world onto a disastrous path. If this does not change, the coming years will witness more inequality, conflicts, sky-rocketing unemployment and more natural disasters, and of course larger numbers of people forced to leave their country.
But how to create a conducive environment for a new approach to corporate governance? This is what was discussed in the event, which brought together company representatives, NGOs, academics and EU officials.
Recent steps in the right direction in Europe have been highlighted, such as more transparency through reporting obligations by companies about their approach to social and environmental issues. The establishment of an expert group a couple of weeks ago by the European Commission to propose a strategy on sustainable finance also goes in the right direction. But all participants converged – including Commissioner Vera Jourova, in charge of Justice, Consumers and Gender Equality, to say that much more needs to be done. We need a “smart mix of soft and hard law” (i.e. a combination of voluntary approaches and regulation) to ensure that social and environmental concerns are part of business strategies and decision making. As one of the speakers put it: “There is a real challenge to capitalism”. And that is indeed the core of the issue. As another speaker exclaimed: “We speak about administrative burden for business – but what about the burden of capital?” - whereby companies feel pressured to provide high returns to their shareholders, and therefore try reducing the costs related to labour or environmental protection…
Regulations to prevent tax dodging must be much more precise and stringent for sure. But other areas were mentioned, such as the detrimental role of business associations and individual companies in dissuading decision-makers from regulating; or the fact that corporate boards should be opened to external stakeholders such as local communities, local authorities, trade unions – to name but a few; or the need for a much stronger corporate engagement with the communities, including in the Global South, where rule of law and space for dissent may be restricted. But that engagement raises many questions related to power imbalance between local communities and companies, often resulting in unfulfilled promises and grabbing of natural resources… Other requirements mentioned to create a conducive environment for responsible corporate behaviour included the transparency and regulation of executives’ pay and deep reform of our financial system, so that finance is deployed in a sustainable way. As Commissioner Jourova put it, “sustainability must be Europe’s competitive advantage”.
Some voluntary initiatives were discussed, such as the chemical giant Solvay’s efforts to integrate social and environmental performance in the calculation of bonuses for their employees, from the most junior to the CEO. The complexity of establishing a ratio between the lowest and the highest wage for companies operating in many countries with different wage scales and purchasing power was also discussed.
As the Aviva (an insurance, savings and investment company) representative mentioned in his concluding remarks: “There is an unprecedented generational opportunity to make capital markets sustainable”. I would add: the reform we need of our capitalist system is actually so deep that maybe it couldn’t be called capitalism anymore. But whatever the name of the society we will build now for our kids, it can’t be based on the primacy of shareholders’ financial returns and the innumerable loopholes in legislation that generate today’s widespread inequalities and injustice.
 EU directive on non-financial reporting for large companies, or the forthcoming directive on shareholders’ rights in the making at the moment.