Upcoming Events: New Visions for the Corporation

There are quite a number of events in the coming months charting the future of organisations with purpose. Here are a few:

  • Panel on the relationship between corporate governance and human rights at the EU Roadmap to Business and Human Rights conference (May 11, Amsterdam) – I will be moderating a great set of speakers with Marcello Palazzi discussing the expansion of B Corp labelling to publicly traded companies, Herman Mulder giving his experiences at GRI, Rosl Veltmeijer speaking about Triodos’ role as a responsible investor and Jeroen Veldman from Cass Business School giving a critical academic commentary on the challenge of balancing the interests of investors and other stakeholders.
  • University of Bristol conference on June 14-15 about ‘Shaping the Corporate Landscape’ – registration is free here.
  • European Social Enterprise Law Association (ESELA) conference in London on June 17 on connecting social value with law.
  • Conference in London on September 16-17 on ‘Organisations with Purpose’ (deadline for papers May 15).
  • Conference of the Purpose of the Corporation Project tentatively scheduled for September 20 with Commissioner Jourová (DG Justice) giving a keynote. I will update more information about this shortly.

Three years after Rana Plaza: Progress on corporate responsibility remains modest

Reprinted from EurActiv.

More than one thousand workers died in the Rana Plaza factory collapse. Responsible business initiatives have since emerged, but EU companies are still not obligated to prevent human rights abuses in their supply chain, write Paige Morrow and Jérôme Chaplier.

Paige Morrow is head of Brussels Operations at Frank Bold and Jérôme Chaplier is coordinator of the European Coalition for Corporate Justice (ECCJ).

Since the tragedy in Bangladesh, a global trend started developing towards the implementation of a legal framework compelling Western companies to address their potential negative human rights and environmental impacts – throughout their supply chains.

For instance, the 2015 UK Modern Slavery Act requires large British and foreign companies to publish annual reports on measures taken to prevent or eliminate slavery and human trafficking from their supply chains. Similarly, US companies have heightened requirements under the Dodd-Frank Act to ensure their supply chains are conflict mineral-free.

A precedent-setting bill of law known as devoir de vigilance is under legislative discussion in France, inspired by the Rana Plaza garment factory collapse. When passed, it will be the first national bill requiring large companies to develop a due diligence plan to prevent negative impacts relating to their business operations in their entire supply chain, including subsidiaries and subcontractors, both in France and abroad.

Under the French bill, when a company fails to adopt and publish a due diligence plan, a judge may apply fines of up to 10 million euros and order the publication of a civil sanction. However, the court will not assess the quality of the due diligence plan or the thoroughness of its implementation.

Nevertheless, this new law represents an important step towards responsible behaviour. Businesses are under increasing public and consumer pressure to improve their efforts to respect human rights. Some mainstream companies are already responding to these new expectations. Due diligence legislation helps them by clarifying their responsibilities, rather than being an additional regulatory burden.

French National Assembly delegates supporting the ‘devoir de vigilance’ bill have called for similar due diligence requirements to be adopted by the EU, while encouraging other national parliaments, especially from EU Member States, to develop comparable resolutions.

Cecilia Malmström, EU Commissioner for Trade also highlighted the importance of acting responsibly at a conference last December. Ms Malmstrom stated that “as the world’s largest market of consumers of goods and services, our choices in the EU are affecting many hundreds of millions of people every day. We therefore have a responsibility to ensure that those choices do not undermine human rights, labour rights, the protection of the environment and economic opportunity”.

Some steps have already been taken in this direction at EU level.

On the second anniversary of Rana Plaza, the European Parliament (EP) adopted a motion calling for mandatory human rights due diligence for corporations. In April 2015, the EP also voted for a mandatory monitoring system for minerals originating from conflict zones. The bill is now under tripartite negotiations with the Council. Unfortunately, neither EU Member States nor the European Commission seem to follow the EP’s lead in moving past voluntary schemes, towards mandatory human rights due diligence.

The proliferation of national level initiatives signals a broader shift in societal expectations. Customers are placing increasing pressure on companies to take responsibility for their operations. But the progress achieved in this area is too modest. Those affected by the activities of European companies and their supply chain deserve to see concrete plans to address the current gaps in the protection of human rights from business-related abuses.

They need to see the EU engage constructively in the implementation of its international commitments, particularly the UN Guiding Principles on Business and Human Rights. Rules to set up level playing field for human rights due diligence by companies in the European market would be an essential first step towards making responsible business conduct the norm and not the exception.

The next step is for both policy-makers and companies to revisit their strategy and ensure that their decisions balance the interests of investors with those of both local communities and society at large. Maximising short-term returns at the expense of human rights and by aggressive cost-cutting measures is not acceptable. A pro-active engagement to improve supply chain management can pay out in the longer term through brand loyalty and competitive advantages. It will also avoid the reputational damage and supply chain disruptions caused by scandals. It is a lesson learned the hard way by a lengthy list of European companies, including IKEA and Nestlé.

In this context, EU law-makers have the responsibility to foster a systemic change in corporate behaviour and in June, the Foreign Affairs Council will discuss Business and Human Rights and it is hoped that its conclusions will propose concrete actions to address these gaps. At the same time, the European Commission is expected to release a first draft of its new strategy on corporate social responsibility. Robust measures for responsible supply chains should be a central element if we wish to avoid reviewing another list of missed opportunities on Rana Plaza’s next anniversary.

France to vote on groundbreaking law for responsible business conduct

A French law on the obligation of companies to address human rights and other risks is returning to the National Assembly for a second vote on 24 March 2016. The novel law will require large French companies to put in place a due diligence plan (‘un plan de vigilance’) to prevent impacts relating to the environment, human rights and corruption in the entirety of their supply chains. The obligation extends to subsidiaries and sub-contractors both in France and globally.

Slow movement through legislative process. The law was initially approved by the National Assembly before being rejected by the Senate in November 2015. Under French parliamentary procedure, the text will now return to the lower Assembly a second time.

Reactions have been mixed. A group of civil society organisations have spoken out in Le Monde in favour of this ‘historic’ text, which was inspired by the 2013 collapse of the Rana Plaza garment factory in Bangladesh that caused the death of 1,200 workers making clothing for Western markets, especially French brands.

While the bill arguably increases legal clarity by specifying the steps that businesses need to undertake to fulfil their legal requirements, several business lobbies have opposed the bill on the basis that it will dampen the French economy and deter foreign investors.

Limited scope and obligations. The draft law requires large French companies to develop a due diligence plan to address risks relating to violations of human rights and fundamental rights, risks of bodily injury and serious environmental damage, health risks, as well ‘passive’ and ‘active’ corruption. ‘Active’ corruption refers to the offering and paying of the bribe or other benefit, while ‘passive‘ bribery refers to the receiving of the bribe.

The law will apply to French firms with more than 5,000 employees in France or 10,000 worldwide, which is estimated to represent 150-200 companies.

Civil liability for violations.  Where a company fails to adopt and publish a due diligence plan, a judge may apply fines up to 10 million euros and order the publication of the civil sanction. The court will not assess the quality of the due diligence plan or the thoroughness of its implementation.

In the first version of the bill, liability was clearly imposed on French companies not only for failing to have a due diligence plan in place but also for the resulting harm that might be caused. Now it is less clear how courts will approach the question of liability and this will need to be explored in future cases.

Switzerland contemplates similar law. Last year a coalition of civil society partners known as the Responsible Business Initiative launched a campaign to gather the 100,000 signatures required to hold a binding Swiss referendum on the introduction of a law for mandatory human rights due diligence, which is still ongoing. An earlier vote in Swiss Parliament on the same issue narrowly failed.

Debate on corporate responsibility at the EU level. The French rapporteur, Danielle Auroi, has called for similar due diligence requirements to be adopted by the EU. European Parliament has approved an obligatory monitoring and due diligence system for conflict minerals, which is now being negotiated with the Council and Commission.

Revisions to Shareholder Rights Directive

The Shareholder Rights Directive is now in trilogue negotiations between the Commission, Council and Parliament. Here is the text adopted during the plenary vote in July 2015 and the press release.

Interesting aspects for stakeholders that remain in the text:

  • Acknowledgment that shareholders do not own corporations (preamble (para. 2))
  • Requirement that institutional investors adopt an engagement policy that addresses non-financial / ESG risk (comply or explain basis) (art. 3f)
  • Requirement that institutional investors disclose their investment strategy & arrangements with asset managers (art. 3g)
  • Transparency requirements for asset managers & proxy advisers (arts. 3h & 3i)
  • Shareholder say on pay on remuneration policy that must be linked to extra-financial matters & shares should not be the dominant part (min. vote every 3 years on remuneration policy but member state to decide whether binding or advisory; also a right to vote on remuneration reports) (arts. 9a & 9b)
  • Public country-by-country reporting (CBCR) and public disclosure of tax rulings (amendments to Accounting and Transparency Directives)

Other provisions:

  • Increased ability for companies to identify their shareholders & requirements to communicate with them (arts. 3a-c)
  • Increased transparency on related party transactions (art. 9c)

Provisions that were introduced by the Legal Affairs (JURI) Committee but removed in the plenary vote:

  • Incentives for long-term shareholding
  • Employee right to give advisory opinion on remuneration

The major sticking point is CBCR which was introduced at the 11th hour by Parliament but is strongly opposed by several member states.

Our short briefing analyses the version that was earlier approved by JURI but I haven’t yet had time to update it to to reflect the version approved in plenary…it’s somewhere on my to do list. See also this earlier blog post for additional resources.

Reforming Finance: The Case of EU Financial Market Regulation and Landgrabbing

Last week marked the kick-off at the University of Oslo Faculty of Law of the Sustainable Market Actors (SMART) Project, a global research network that will generate research on the promotion of global, sustainable development within a circular, low-emission economy compatible with the planetary boundaries and in line with the international development goals. To oversimplify, the basic concept is that development must take into account the natural limits of our planet’s resources.

The SMART Project builds upon earlier work done by Prof. Beate Sjåfjell and others on responsible company law. One of Prof. Sjåfjell’s most interesting proposals is to reform company law so that boards of directors must consider the limits of the planet’s boundaries when deciding how to allocate firm resources.

During the kick-off event, I presented a joint research project undertaken with Prof. Andrew Johnston, Dr. Jay Cullen and Dr. Ting Xu of the University of Sheffield School of Law.

My talk was on the European Commission’s plan to integrate capital markets across Europe into a Capital Markets Union (CMU). The presentation focused on three aspects of the CMU:

  • the revision of capital calibrations of banks (Capital Requirements Regulation & Directive),
  • a proposal on simple, transparent and standardised (STS) securitisation, and
  • a review of the directive regulating EU (re)insurance (Solvency II).

Our research focused on providing policy recommendations to address the challenge of reforming financial markets to address social and environmental problems. A copy of the slides is available on SlideShare.

Supporting Responsible European Business through Policy Change

I was recently asked about medium-term prospects for supporting responsible and purpose-driven business at the EU level. Below is an edited version of my response:

  • Implementation of the Non-Financial Reporting Directive – The EU Non-Financial Reporting Directive (Directive 2014/95/EU) must come into effect in member states by 2017 (see background here). The Commission will publish a consultation in early 2016 to seek stakeholder input before it issues its guidelines to member states at the end of the year. As of last week, DG FISMA says that it does not know when the consultation will be published but probably in January or February.
  • Clarification or expansion of the fiduciary duties of investors – DG ENVI commissioned a study on the fiduciary duties of institutional investors to consider ESG matters. The study disappointingly does not see a need for legal changes in relation to fiduciary duty, but instead calls for softer action such as guidance from national financial authorities (with support from the Commission) about the interpretation of these duties and their implementation. The study also calls for mandated disclosure by institutional investors on a comply or explain basis of any sustainable / responsible investment policies. At a minimum, the Commission could give stronger guidance to Member States about the content of the fiduciary duty.
  • Strengthening European social enterprise law –  The EU’s expert group on social enterprise, GECES, will issue a report with recommendations in mid-2016. The recently created European Social Enterprise Law Association (ESELA) has released an EU-wide mapping study with recommendations on social enterprise, which may provide some fodder for GECES’ report. (Full disclosure: our law firm Frank Bold is a member of ESELA but we were not involved in writing the report).
  • Adoption of the Diversity Directive – The Directive aiming to increase gender diversity on boards is in deadlock due to the European Council’s rejection in December of a compromise proposal. The Netherlands (which has taken over the presidency) voted against it and it is unlikely to proceed any time soon in its current form.
  • Developing a responsible Capital Markets Union - The current project to develop a Europe-wide Capital Markets Union has a number of implications for facilitating/impeding responsible and purpose-driven business. A number of stakeholders have written excellent position papers, including AvivaE3G, Eurosif, Finance Watch, Share Action, and last but hopefully not least, Frank Bold.

Any comments about my assessment are most welcome by email or Twitter.

Teaching Corporate Governance

This semester I will be teaching a course on corporate governance at the University of Kent’s Brussels School of International Studies as part of their Masters of Law programme.

Overview

Corporate governance, the procedures and processes according to which a business is directed and controlled, has become the subject of increasingly close scrutiny by both companies and regulators. Since the onset of the financial crisis in 2007/8, the debate about how companies should be run has intensified. Although individual malfeasance was clearly a factor in the crisis, there were also contributory structural issues, including a systemic bias towards short-term, speculative trading over long-term investment and misaligned incentives.

The course begins with an overview of corporate governance and its predominant theoretical models: shareholder primacy and stakeholder theory. It then addresses several core questions of corporate governance: the nature and purpose of the corporation; the function of the share; and the role of stakeholders. The course proceeds to examine corporate governance in the context of European integration; the role of corporations in society; and the current debates on the future of corporate governance. The course will focus on both the theoretical and policy implications of corporate governance, including efforts in Europe and elsewhere to reform governance and strengthen oversight in the wake of corporate scandals.

Here is a link to the syllabus: Corporate Governance Syllabus.

Any comments by email or Twitter (@paigemorrowlaw) are most welcome.

The Importance of Defining Corporate Purpose

Blog post at Triple Pundit

The future of sustainable development is being shaped by events such as the U.N. Forum on Business and Human Rights held earlier this month in Geneva, the Climate Change Conference in December, and the adoption of the Sustainable Development Goals in September. Considering that many corporations have greater turnover than the GDP of several countries and that 500 transnational corporations control roughly 80 percent of world trade, it is clear that we need business on board. The way these corporations are governed is essential for either positive or negative change of the system as a whole, depending on the chosen stewardship, which takes us to the central question: What is the purpose of the corporation? 

A corporation may decide to maximize profits and share price ­it is a permitted objective, but not one that is required by law. ​The purpose of a corporation is instead whatever its founders wish it to be, as long as it is legal. Thus, it might be to make innovative products, develop cutting edge technology, build a spaceship or create the next penicillin. The law has left a vacuum allowing companies to decide what their purpose should be. Unfortunately, the current model of corporate governance is based on the popular conception that the sole or primary purpose of the corporation is to maximize its value for shareholders.

The often myopic focus on share price is driven by a business culture that is based on this misunderstanding of the legal obligations of directors and a corporate governance system that empowers short­term oriented shareholders and facilitates the demands of capital markets. This approach has resulted in decision making within companies that focuses on quarterly earnings and creates perverse incentives that encourage problematic practices such as stock buybacks. This way of doing business is also implicated in a range of unintended social, human rights, and environmental consequences. It compels companies to externalize as many costs as they can get away with (e.g. companies’ carbon footprints and supply chains issues). It is also a driving force behind growing inequality (e.g. the pay gap between average workers and bonus­driven top management compensation, the race to the bottom in the cost of labour, and the reallocation of resources to shareholders).

Not surprisingly, the focus on maximizing shareholder value ultimately undermines the viability of companies in the long­term as they are not reinvesting their returns into R&D, human capital, addressing systemic risks and exploiting strategic opportunities. The maximizing shareholder value imperative drives spending of corporate resources and time of top management on strategies such as buying other companies, paying out dividends to shareholders and buying back shares.

Furthermore, according to an a​rticle published in the Harvard Business Review​ by William Lazonick, professor of economics at UMass Lowell, the focus on short­-term returns has resulted in a shift from “value creation” to “value extraction,” contributing to “employment instability and income inequality.”

Corporate governance must evolve into a model that balances the interests of investors, workers, consumers, communities, and the environment, allowing businesses to thrive while contributing to broader sustainability. For this to happen, it is essential that we shift the policy discussion from a single­minded focus on shareholders to a more holistic understanding of their role in the firm.

Corporate Responsibility in the News: UN Forum on Business and Human Rights, E2020 Summit

Update on our workThis week our law firm Frank Bold had the opportunity to participate in two significant conferences on responsible corporate behaviour. The prominence of the speakers and participants highlighted the growing recognition that companies should act proactively to embed sustainability into their operations and manage risk in their operations, especially in high risk regions and industries.

Enterprise 2020 Summit: The Future of Europe

CSR Europe, the European business network for Corporate Social Responsability, organised the E2020 Summit to encourage businesses to contribute to achieving the Europe 2020 goals by delivering high levels of employment, productivity and social cohesion. To that end, they brought together more than 500 participants, including high level business representatives and policymakers from across Europe. During the different sessions, there was always an underlying idea: the need for financially, environmentally and socially sustainable companies. In this sense, the European Commissioner Elżbieta Bieńkowska stated: “we want more European companies to take responsibility, and take care of all shareholders, stakeholders and society”.

A wide range of issues were tackled during this two-day event such as non-financial reporting, management and leadership, business education, sharing economy, youth employment, business and human rights.

Filip Gregor, Head of Responsible Companies at Frank Bold participated in the panel discussion “Building blocks for the Future Europe” along with Member of European Parliament Richard Howitt and the Chairman of China Golden CSR Council, Johnny Kwan. In his intervention, Filip emphasised the need to define the expectations that we as a society have on businesses and added that “it is time to be creative about re-creating the set of metrics we use to measure companies’ success”. His final conclusion revolved around the importance of corporate purpose to set the path towards sustainable management and leadership.

The Summit also saw the launch of the European Pact for Youth, which aims to develop partnerships in support of youth employability and inclusion. The Pact is supporting the creation of 10,000 quality business-education and aiming to create at least 100,000 new good quality apprenticeships, traineeships and entry-level jobs.

UN Forum on Business and Human Rights

Running in parallel with the E2020 Summit, the 4th annual UN Forum on Business and Human Rightstook place in Geneva. The UN Forum is the world’s largest gathering on Business and Human Rights, bringing together more than 4,000 experts to discuss the implementation of the UN Guiding Principles on Business and Human Rights.

Frank Bold co-organised a panel on human rights due diligence in law and practice. The UN Guiding Principles require businesses to conduct proper due diligence to avoid and mitigate human rights impacts. Richard Howitt MEP noted that European Parliament passed a resolution after the Rana Plaza factory collapse in favour of mandatory due diligence but it has not yet been adopted in EU law.

Robert Brooks from the law firm Norton Rose argued that properly conducted due diligence in multinational transactions such as mergers and acquisitions will typically uncover human rights issues at the same time as other problems, e.g. corruption, without any significant additional cost.

Sandra Cossart from Sherpa presented a draft French law that codifies a ‘devoir de vigilence’ or duty of care for businesses. The text proposes that large French enterprises put in place a due diligence plan with respect to the environment, human rights and corruption in the entirety of their supply chains, including in their subsidiaries and sub-contractors in France and globally. Sandra explained that a number of French companies support the law because it clarifies legal and societal expectations of them and ensures that businesses that act responsibly will not be exposed to civil or criminal liability. However the law was rejected by the French Senate only hours after the panel ended and will now return to the Assembly for a second vote.

Many of the sessions at the UN Forum are viewable on UN TV video from the due diligence session will be added in the coming weeks.

B Corp movement prompts debate about future of corporations

Blog post at Triple Pundit:

The B Lab was officially launched in the U.K. this past September, offering a certification scheme for companies to show that they have successfully combined profit with a commitment to making a positive contribution to society. B Lab has existed in the U.S. since 2006 and is now making the leap across the Atlantic to expand into Europe.

Origin of B Corps

The B Corp movement has captured significant attention and certified over 1,300 companies in 41 countries. So, are B Corps the future of responsible business? Yes and no. Other forms of purpose-driven organisations have always existed, whether it be as cooperatives or non-profit/charitable entities. Even a regular ‘C’ corporation can choose to pursue a social mission as part of their business and many do.

Nearly 50 leading legal scholars from universities including Cambridge and Cornell signed a statement last year concluding that: “Contrary to widespread belief, corporate directors generally are not under a legal obligation to maximize profits for their shareholders.” This gives latitude to boards of directors to make decisions that might cause a dip in short-term returns, such as Costco’s commitment to pay a living wage.

Value-add of B Corps

What is special about B Corps is that they build social commitment directly in their governance to support and protect it. Another unique feature is that B Corps have a recognizable brand that allows consumers to make educated decisions about what products to buy and companies to use. Rather than evaluating the merits of each given business, an individual may rely on B Lab to screen companies for certain requirements in terms of working conditions, supply chain management and their relationship with local communities. In this sense it is similar to the Fair Trade label but goes one step further by requiring the company as a whole to meet ethical obligations. The logic is that businesses should not be able to benefit from the label unless they can show that they are run fairly across the organization, not just for one specific product such as tea or coffee.

The focus on purpose could also help social entrepreneurs. Tom Fox, policy lead at UnLtd, which supports social entrepreneurs in the U.K., says:

“[Social entrepreneurs] are showing an increasing appetite to use a conventional business form for their social venture, but formally embedding their social purpose can be regarded as novel and unusual by some stakeholders.”

UnLtd would like to see the launch of B Lab U.K. as a “step forward in the normalization of embedding social purpose into the heart of business.”

Edging into mainstream business

Initially B Corps were mostly small start-ups and it was uncertain whether the movement would have a significant impact on mainstream business. In the past couple of years, however, we have seen increasing interest from established firms that wish to adopt the label to signal both to investors and markets that they do business differently.

Now, stock market listed companies are jumping on board and B Lab has adapted its certification process to take into account the complexities associated with large multinationals. Natura, the Brazilian beauty product company, was the first public company to be certified. Ben and Jerrys became certified and its parent company Unilever (which is publicly listed) has expressed an interest to certify the whole group.

The expansion into bigger companies has brought with it criticism. For example, Etsy maintained B Corp status after its initial public offering, which could help it to protect the company from pressure by capital markets to maximize short-term profits, but recently came under fire from NGOs for using a corporate structure that reduces its tax burden.

What does it mean to be a responsible corporation?

The certification of publicly held companies has taken B Lab into the heart of the debate about what it means to be a responsible corporation:

  • Is it possible to do ‘good’ while providing returns to investors?
  • How much tax should a responsible company pay when it is perfectly legal to “optimise” its tax burden?
  • How much should the CEO earn relative to the lowest paid or average worker?
  • Should companies avoid suppliers or countries with known labour violations or instead push to improve working conditions?
  • How should complaints by workers or local communities be handled?

Many of these questions have been debated for years by the International Labor Organization and human rights advocates in the context of the U.N. Guiding Principles on Business and Human Rights, as well as the emerging discussion on a human rights treaty covering multinational companies. However their focus tends to be on creating rules for companies to obey rather than transforming business from within.

Integrating social purpose into core business

Rather than advocating for external regulations to prevent corporations from misbehaving, the B Corp movement focuses on embedding a social purpose within a company’s DNA. As this movement gathers momentum, it highlights the need for an open debate on the purpose of the corporation, whether it be a certified B Corp or not.