Reforms to corporate governance and EU company law could support the Union’s recovery efforts and promote a sustainable economy at the same time.
This Policy Brief assesses two instruments in the EU corporate governance toolbox: the Non-Financial Reporting Directive (NFRD), which requires large companies to disclose information about how they are run and how their activities impact the environment and human rights, and the Shareholder Rights Directive II (SRDII), which aims to strengthen the position of shareholders and reduce short-termism and excessive risk-taking by companies. It also covers the principle of shareholder primacy – the idea that shareholder interests should take precedence over all else – and executive remuneration.
To enable a green recovery from the COVID-19 crisis, the paper recommends the following reforms:
- As long as companies can decide how they report on their activities and what they disclose, boardrooms will be less encouraged to consider Environment, Social and Governance (ESG) factors in their decision-making. The revision of the NFRD should, therefore, introduce an independently developed, legally binding, standardised, and detailed set of reporting requirements for businesses to assess the impact their operations, and their supply and subcontracting chains have on the climate and on society.
- The SRDII needs to go further in discouraging company practices that hamper sustainability. Rejecting the principle of shareholder primacy, and its implications for executive remuneration, must be put at the top of the agenda. To ensure executives take into consideration ESG criteria and focus on more than immediate financial gains, employees should be given a say in a company’s policy on executive remuneration. This could be achieved by putting them on an equal footing to shareholders and through representation in the boardroom.
The ongoing COVID-19 pandemic has shown the critical necessity to strengthen the sustainability and resilience of our societies and fundamentally change how our economies are run. By reforming corporate governance and EU company law along the lines mentioned above, the EU would be a big step closer to truly sustainable development.
Read the full paper here