In a recent chapter in the Research Handbook on EU Environmental Law, edited by Marjan Peeters and Mariolina Eliantonio, we review a number of initiatives at EU level that seek to integrate environmental sustainability into the decision-making of business. We find strong reliance on various forms of disclosure, but conclude that they are insufficient to mitigate the destructive social norm of shareholder primacy. This Anglo-American, law-and-economics inspired concept, is not rooted in EU law. Rather, it has spread and gradually colonised the discretionary space that European company law gives corporate decision-makers to decide on how to best run companies. The result is a growing tendency towards prioritisation of short-term maximisation of shareholder returns. The chapter concludes that a fundamental shift towards coherent and more stringent regulation is needed to mitigate shareholder primacy and to realise the potential of European business to contribute to sustainability.
We were very happy to write a chapter addressed to environmental lawyers and legal scholars about the steps that are being taken within European company law to steer businesses towards more sustainability. We were rather more disappointed with our conclusion that, information disclosure aside, little has been done to date to harness the potential of companies to contribute to the essential transition towards sustainability in its environmental and social forms. Thankfully, there are signs that this is beginning to change and that economic activity might be brought within the planetary boundaries before it is too late. The Green Deal that has just been announced by the European Commission suggests that significant change lies ahead.
Academic research is also moving in the same direction and reaching the same conclusions. The international Sustainable Market Actors for Responsible Trade (SMART) project coordinated by the University of Oslo is explicitly intended to move away from the silo thinking that has characterised research in the past. Going beyond the recognition that we have a climate emergency, the SMART project recognises that we face a convergence of crises: environmental, social, economic and financial. SMART aims to ensure the contribution of market actors to sustainability, defined as securing the social foundation for humanity, now and in the future within planetary boundaries. In a major report in 2018, it mapped obstacles and opportunities to drive greater sustainability across a range of European and national policy areas. Based on this, SMART proposes a series of policy reforms and its introductory report setting out reform proposals was published in November 2019. Comments on the introductory report are very welcome and final, more detailed reports presenting the reform proposals concerning business, finance and products are forthcoming in 2020. At the same time, a number of academics from a range of disciplines have just given their backing to a new Statement on Corporate Governance for Sustainability. This initiative aims to build consensus around a number of reforms that the European Commission could implement under Action 10 of its Action Plan on Financing Sustainable Growth. It could include an obligation of directors to draw up, publish and implement a sustainability strategy, with enforcement of the duty by shareholders or public authorities. That statement is open for more signatures.
In our recent chapter, we mapped the old paradigm of seeking to harness market forces and to drive companies towards greater sustainability through information disclosure. The common driving force behind both the SMART project and the new Statement on Corporate Governance for Sustainability is the growing recognition that the old paradigm has become obsolete and counterproductive in light of the convergence of crises we face. Whilst some institutional investors, businesspeople and mainstream economists continue to insist that soft law, shareholder empowerment and voluntary action will be sufficient eventually to reorient companies towards sustainability, it is becoming apparent that we can no longer wait for that approach to come to fruition.
At the 24th European Corporate Governance Conference on ‘Company Law and Climate Change?’, held in Helsinki on 12 December 2019, it was apparent that change is in the air. The paradigm is slowly shifting and hard law measures to encourage companies to take the threat of climate change more seriously may be on the horizon. This is most welcome and reflects the growing body of academic work that insists that, if we are to make the economy sustainable, we must take action across a whole range of areas. The widely disseminated social norm of shareholder primacy corporate governance, supported by a number of simplistic economic postulates and assumptions, should not be immune from reconsideration as part of that response. A wide-ranging, global survey of the current state of play in terms of moving company law and corporate governance in a more sustainable direction can be found in the just published Cambridge Handbook of Corporate Law, Corporate Governance and Sustainability, edited by Beate Sjåfjell and Christopher Bruner (Cambridge University Press, 2019).
We hope that these recent developments are just the beginning of a groundswell of academic support for transformative change to bring company law and corporate governance into better alignment with the imperative for greater economic and social sustainability.
Readers who would like to comment on the preliminary SMART project proposals are invited to email Beate Sjåfjell at the University of Oslo. Academic readers who would like to add their support to the Statement on Corporate Governance and Sustainability are encouraged to email Andrew Johnston at the University of Sheffield or Jeroen Veldman at Nyenrode Business University.
Andrew Johnston is Professor of Company Law and Corporate Governance at the University of Sheffield.
Beate Sjåfjell is Professor of Law at the University of Oslo and Adjunct Professor at the Norwegian University of Science and Technology