Finland Chamber of Commerce appreciates the opportunity to comment the European Commission’s inception impact assessment (IIA) relating to sustainable corporate governance.
Finland Chamber of Commerce is an organisation promoting entrepreneurship and a favourable business environment and coordinating the operations of the nineteen independent regional Chambers of Commerce in Finland. The 19 Finnish Chambers of Commerce have more than 20,000 member companies, including SMEs.
Finland Chamber of Commerce fully supports the objective to embed sustainability into companies’ decision-making. Directors acting in the interest of the company are already doing so. We also support EU legislation on due diligence requirements in the value chain although we do not consider this to fall under company law.
However, we object certain policy options presented in the IIA. Policy options affecting the core of company law, such as the directors’ obligation to take into account all stakeholders’ interests and related enforcement mechanisms, including directors’ liability are in our view unnecessary and unproportionate. They would distort the clarity of the chain of accountability, be detrimental to the competitiveness of European companies and make European companies less attractive as investment targets.
As shareholding structures and corporate governance regimes across the EU vary significantly, we prefer soft law measures in the area of company law. This would better allow accommodation of the measures to national corporate governance frameworks. Naturally, any policy proposal should also respect the principle of proportionality and should not create unlevel playing field between listed and non-listed companies.
Finland Chamber of Commerce fully supports the objective to embed sustainability into companies’ decision-making. Directors acting in the interest of the company and its shareholders are taking stakeholders’ interests into account. Indeed, studies have shown that in the long term sustainable companies perform better and create more value for shareholders than their less sustainable peers. Moreover, investors, customers and other stakeholders also already encourage companies to act in a sustainable manner.
To a certain extent, we consider EU action necessary to promote single market and to achieve level playing field. This applies especially to due diligence obligations in the value chain where EU legislation is clearly preferred over patchwork of national laws with differing requirements. However, we do not consider this to fall under company law.
We object certain policy options presented in the IIA. Policy options affecting the core of company law, such as the directors’ obligation to take into account all stakeholders’ interests and related enforcement mechanisms, including directors’ liability are in our view unnecessary and unproportionate.
Moreover, we remind that any policy proposal should respect the principle of proportionality and should not create unlevel playing field between listed and non-listed companies.
Comments relating to the study on directors’ duties and sustainable corporate governance
Comments relating to the study on directors’ duties and sustainable corporate governance
The IIA refers to a recent study on directors’ duties and sustainable corporate governance. It is our understanding that many of the policy options presented in the IIA are based on this study. The study claims that there is undue short-terminism in corporate decision-making and presents several policy proposals to address this.
In our view, the evidence relating to short-terminism presented in the study is vague. A comparison between shareholder payouts and investments in capital expenditure and R&D in listed companies is simply not sufficient for such a conclusion.
The basic function of the capital markets is to allocate risk capital. Risk capital is also needed for funding of innovations and investments in sustainable growth. Payouts to shareholders are an indication that the markets are functioning properly. A significant proportion of payouts to shareholders is reinvested to capital markets, including to those companies in the need of new risk capital.
Focus on listed companies is not sufficient either, as markets have developed significantly over the last three decades. The role of venture capital has increased significantly. Increasing proportion of R&D investments are concentrating to unlisted growth companies funded by VC investors. Public listing takes nowadays place at a more mature stage of the company life cycle. Narrow look at listed companies only can lead to false conclusions.
We also note that the study seems to omit the role of different shareholding structures and corporate governance regimes across the EU. To our understanding, a significant proportion of the sample of companies covered by the study were UK companies, i.e. companies which no longer are EU companies. The ownership structure of UK companies is much more dispersed than in many other parts of the EU. For example, the Nordic corporate governance model is characterised by active governance role of major shareholders and strong shareholder rights. There are studies suggesting that this kind of governance model reduces the risk of undue short-terminism. This also speaks for soft-law measures rather than EU legislation, as negative effects on well-functioning national corporate governance frameworks would be less severe.
It seems to us that the findings of the study deviate from the findings of the reports of ESMA, EBA and EIOPA published in December 2019 on undue short-terminism in the securities, banking and insurance sectors respectively. As these reports did not highlight any major corporate governance related issues which would merit rewriting of rules relating to directors’ duties and liability, the findings of the study should not be taken for granted.
Moreover, one has to bear in mind that during the past few years there have been several initiatives that support the integration of sustainability into companies’ decision-making. In line with better regulation principles, the legislator should allow the effects of new legislation to materialise before introducing new initiatives. The recent amendments to the Shareholders’ Rights Directive encourage long-term engagement of shareholders and strengthened the link between the directors’ remuneration and long-term interests and sustainability of the company. Similarly, sustainable finance taxonomy will harmonise the concept of sustainable business, the sustainable finance disclosure regulation will enhance transparency of how financial market participants and financial advisers integrate sustainability risks in their processes, the ongoing review of the Non-Financial Reporting Directive will likely lead to more harmonised sustainability reporting and the renewed sustainable finance strategy will likely increase capital flows to sustainable investments.
Directors’ duties and accountability should remain clear
The purpose of company is often linked to promotion of shareholder value (the so-called shareholder primacy norm). Directors of a company are required to act in the best interest of the company. In carrying out this duty the directors are accountable to shareholders.
In our view, there is no contradiction between the shareholder primacy norm and the objective to promote sustainability. Companies acting in sustainable manner often perform better in the long term than their less sustainable peers. It is thus in the interest of shareholders that directors of a company take stakeholders’ interests into account in their decision-making.
However, we object the suggestion of the IIA to in include in company law an explicit requirement for directors to take stakeholders’ interests into account. In our view, this would distort the clarity of the chain of accountability. Directors’ liability towards shareholders would be reduced. This would make it more difficult to align the interests of directors with the interests of the company and would affect negatively to the value creation of the company.
We also note that interests of various stakeholders can diverge significantly. It would be practically impossible to prescribe at the level of company law how such diverging interests should be balanced. A legal requirement to take stakeholders’ interests into account combined with risk of personal liability would create significant legal uncertainties. Such a requirement might also lead to a higher level of compensation to directors, as potential directors would seek compensation for the risks they are exposed to.
Objectives of the Capital Markets Union should not be forgotten
We strongly believe that Europe needs better functioning and more integrated capital markets. Investments required by the objectives of the Green Deal and the EU climate target cannot be funded without well-functioning capital markets. In our view, policy options presented in the IIA relating directors’ duties would undermine the objectives of the Capital Markets Union.
If these policy options were implemented European companies would become less attractive as investment targets. The cost of capital for European companies would increase and the availability of risk capital decrease. Moreover, any legislation aimed at listed companies only would increase the barriers for listing, which would also be against the CMU objectives.
To conclude, we would wish to stress that sustainability is already a major topic in each boardroom even without additional pressure from legislators. Institutional investors, retail investors, customers and other stakeholders are all encouraging companies to adopt sustainable business models. Legislative changes affecting the core of company law are therefore not required.
Johtava asiantuntija, yhtiö- ja arvopaperimarkkinaoikeus, corporate governance
+358 50 376 1460