At a recent summit in Brussels organised by Frank Bold and Cass Business School, a group of SMART scholars (Beate Sjåfjell, Tineke Lambooy, Jay Cullen and Andrew Johnston) set out to discuss post-crisis corporate governance in Europe and to launch a report that concludes a series of global roundtables on corporate governance.
The report clearly recognizes that sustainability challenges cannot be met within the current economic, financial and corporate governance paradigms. The report contains a number of recommendations drawn from the global roundtables which will potentially serve as a useful starting point for research carried out within the framework of the SMART project, including far-reaching proposals on stakeholder engagement and incentives for long-term shareholders.
Commission to set up an expert group
In her talk, Commissioner Jourová emphasized the fundamental challenges confronting the world, including economic and environmental crises. Her talk resonated with the goals of the SMART project.
-We need well-governed companies that are resilient, responsive and responsible. We need investors that deploy finance in ways that create dynamic, inclusive and sustainable economies, Jourová said.
She emphasized that sustainability could be Europe’s competitive advantage, and identified the failure of many investors to integrate ESG into their decision-making as a key challenge. The Commission’s first response to the report would be to set up an expert group on green finance.
The report itself concludes that a stronger corporate governance would focus on creating value for customers and wealth for shareholders, whilst integrating environmental sustainability, societal well-being, systemic risks and opportunities, and developing financial and ESG benchmarks to measure long-term performance. The report calls for clarification of corporate purpose, and ultimately, the obligations of directors, companies and investors in relation to sustainability issues.
Clarifying fiduciary duties
The summit agreed that fiduciary duties encompass environmental and social impacts, and should be extended through the investment chain so that they are acted upon by asset managers. This means that asset managers should be required to report to asset owners on ESG impacts and that investee companies must provide reliable data on ESG issues for these purposes.
There is clearly growing pressure from a number of sources for a broadening – or perhaps, clarification – of fiduciary duties, which in principle would allow for better alignment between the actions of asset managers and the long-term interests of beneficiaries. A recent University of Oslo Faculty of Law Working Paper on fiduciary duties sets out possible actions that the European Commission could take. There are, however, considerable barriers to trustees identifying the wishes of their beneficiaries, not to mention possible conflicts.
-Corporate law needs a reform so that we can redefine the purpose of the corporation and the role and duty of the board, Beate Sjåfjell said during the session.
-The space corporate law has left open to the discretion of the board, and by extension the management, has been taken over by the social norm of shareholder primacy. Corporate law needs to take back the power of defining why society allows corporations to exist and dominate as a legal form of doing business, Sjåfjell continued.
Her proposal includes thoughts on how to operationalize such a reform and bridge the gap between board’s perceived duty to maximize returns to shareholders and the EU’s non-financial reporting requirements.
Voting and employee participation
In the session on long-term investment, Andrew Johnston canvassed the possibility of using ‘nudges’ in the form of default allocations to steer investments towards green or sustainable investments. Participants suggested that investors should be required to disclose their voting on all issues, and that asset owners might be encouraged to write letters to companies asking them to abandon the practice of quarterly reporting. The London Stock Exchange allows companies to abandon this practice, but so far, only two have done this. There was little support, at least from the more vocal participants in the discussion, for regulatory changes, such as increased voting rights, for long-term shareholders.
Following Brexit, the question of employee participation on boards has become mainstream, and the UK government recently launched a consultation on very broad reforms to corporate governance. If, and when, the UK (which was the main opponent of any move towards a stakeholder model) leaves the EU, the EU will also have scope to move to a more pluralist vision of corporate governance. This emphasises the myriad possibilities for projects like SMART to have an impact on the corporate governance reform agenda.
Driving Change
On a more general level, there is a need for collective endeavour on the part of companies, investors, asset managers, legislators and academics to build on this momentum and drive forward the shift to long-termism and a clear view of corporate purpose. This is in line with the aims of the SMART project. It is also a timely reminder that we must not only carry out excellent research, we need to ensure that our conclusions are understood by both policy-makers and private actors.
An encouraging take-away from the summit is that there is growing consensus that sustainability considerations must be integrated into finance and corporate governance, and that those who are opposed to the short-term shareholder primacy and financialized models of business are working to mitigate their harmful effects in an increasingly vocal and organised manner.
