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Boards of Directors in European Companies
Boards of Directors in EuropeanCompanies
European Company Law Series
Volume 10
Series Editors:Steef M. Bartman (Editor-in-chief)
John BirdsAndreas Cahn
Adriaan F.M. DorresteijnMarco LamandiniMichel Menjucq
Christiaan A. SchwarzErik WerlauffJaap Winter
Francisco MarcosRafal Stroinski Christoph van der Elst
The CECL-book series on European company law is closely linked to the bimonthlyjournal European Company Law (‘ECL’), also published by Kluwer Law International.The persons comprising the ECL’s editorial board and the editors of the CECL-bookseries are one and the same. The aims and objectives of CECL can be found at<www.cecl.nl>. The series covers subjects of company law in a broad sense,including insolvency, co-determination and securities law. The editorial board ensuresthat all parts of this series are well written, of sufficient scientific depth and, at the sametime, useful for legal practitioners and academics alike. The board’s credo is thatinternational and comparative law should never degenerate into a theoretical l’art pourl’art-exercise, but must always be subservient to the requirement of practical applica-bility and a further development of the law.
Boards of Directors in EuropeanCompanies
Reshaping and Harmonising Their Organisationand Duties
Edited by
Hanne BirkmoseMette Neville
Karsten Engsig Sørensen
Published by:Kluwer Law InternationalPO Box 3162400 AH Alphen aan den RijnThe NetherlandsWebsite: www.kluwerlaw.com
Sold and distributed in North, Central and South America by:Aspen Publishers, Inc.7201 McKinney CircleFrederick, MD 21704United States of AmericaEmail: [email protected]
Sold and distributed in all other countries by:Turpin Distribution Services LtdStratton Business ParkPegasus Drive, BiggleswadeBedfordshire SG18 8TQUnited KingdomEmail: [email protected]
Printed on acid-free paper.
ISBN 978-90-411-4141-5
© 2013 Kluwer Law International BV, The Netherlands
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, ortransmitted in any form or by any means, electronic, mechanical, photocopying, recording, orotherwise, without written permission from the publisher.
Permission to use this content must be obtained from the copyright owner. Please apply to:Permissions Department, Wolters Kluwer Legal, 76 Ninth Avenue, 7th Floor, New York, NY10011-5201, USA. Email: [email protected]
Printed and Bound by CPI Group (UK) Ltd, Croydon, CR0 4YY.
List of Editors
Hanne Søndergaard Birkmose took her PhD in law at the Aarhus School of Businessin 2003. The PhD thesis was about regulatory competition in European company law.In 2007, she was appointed associate professor at the Department of Law, AarhusUniversity. Her research areas include company law – in particular internationalcompany law and EU company law – and corporate governance, and she has writtenseveral national and international articles in these areas. Recently, she has mainlyworked with shareholder activism and the role of institutional shareholders. HanneSøndergaard Birkmose is a member of the Nordic Company Law Network and theNordic Corporate Governance Network.
Mette Neville is a professor in Company Law at the Aarhus School of Business andSocial Sciences, Aarhus University. Her main research areas are company law andhousing law, and she is the author of numerous books and articles on these subjects.Her special interests are corporate governance and small and medium-sized compa-nies. She is, for example, a member of the Danish Financial Council and Chairman ofthe Disciplinary Committee at OMX Commodities. She participates in many differentnational and international networks within company law and corporate governance,and is one of the founders of the Strategic Partnership between Aarhus University,Nykredit and PwC on Small and Medium-Sized Companies ‘Vidensforum for Små ogMellemstore Virksomheder – www.vidensforum.dk’ Mette Neville has also served onvarious preparatory committees on law, for instance the Danish Committee forFinancial Supervisory Structure under the Danish Ministry of Economic and BusinessAffairs. She has also served as a Danish member of legal scholar networks inconnection with EU studies, such as the European Commission Study on the operationand the impacts of the Statute for a European Company (SE). She is responsible for thestrategic board programme at Aarhus University.
Karsten Engsig Sørensen is a professor and PhD coordinator at the Department ofLaw, Aarhus University. He holds a Danish law degree, a PhD (on EU company law),and a Danish Dr. Jur. (on joint ventures). He also has an LLM from the University ofExeter. His research is mainly focused on EU law and company law, and in these areas,he has published several books and articles in both Danish and English. Additionally,he has been the editor of several books on company law, EU law and WTO lawappearing on, inter alia, Kluwer Law International and Cambridge University Press. Heis a one of the two editors of the SSRN e-journal Nordic and European Company Law,and a member of the Nordic Network for Company Law.
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List of Contributors
Paul Krüger Andersen is a professor of company law at the Department of Law,School of Business and Social Sciences, Aarhus University. He holds a PhD inmarketing law from 1976 and a Dr. Jur. from 1997 (studies in Danish corporate grouplaw). He is the co-founder of the Nordic Network for Company Law. In 1999, heco-founded and has since been the editor of the Nordic Journal of Company Law(Nordisk Tidsskrift for Selskabsret). Since 2000, he has been a member of the board ofthe Danish Association of Corporate Governance (DACP). In 2003, he was a legaladviser for the Latvian Companies Register. In 2004, he was appointed DistinguishedProfessorial Fellow at the British Institute of International and Comparative Law,London, and in 2005 Dr. h.c. at the Turku School of Economics and BusinessAdministration. He is a member of the ECGI (European Corporate GovernanceInstitute, Brussels). Since 2007, he has been Chairman of the European Company LawGroup, which aims to create a European Model Company Act. He is the author andco-author of several textbooks and numerous articles on private law, marketing law,company law and securities law.
Jan Andersson is a professor in private law, in particular business organisations, atStockholm university. Previously, he has been a professor in commercial law atJönköping International Business School (JIBS) in Sweden and before that professor inprivate law at the Faculty of Law, University of Bergen, Norway. He has a Swedish Dr.Jur. from Uppsala university and two LLM (Lund and Umeå). Since the early days of hisresearch career, his main interest has been corporate law and other areas closelyconnected to it such as law & economics and corporate governance. He has a widerange of publications in Swedish and English. He is also a member of the NordicNetwork for Company Law. Linn Anker-Sørensen is a research assistant in the project‘Sustainable Companies’ at the University of Oslo, Faculty of Law. She graduated fromlaw school in 2009. Her master thesis concerning the transposition of the SE inNorwegian Company Law, and questioning whether the European Company Statutecould lead to regulatory competition among Member States is published in theInternational and Comparative Corporate Law Journal. Her special interests arecorporate groups in the EU and how these are to be regulated, and also harmonisationof EU company law.
Dorthe Kristensen Balshøj is a research assistant within Company Law at theDepartment of Law, School of Business and Social Sciences, Aarhus University. In
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October 2013, she will commence as a PhD student within the areas of PublicProcurement Law and Competition Law.
Pierre-Henri Conac is a professor of Commercial and Company Law at the Universityof Luxembourg. His research areas deal principally with securities law, company law,and comparative law in these fields. He has been a member of several working groupsin these areas, including the EU Commission-appointed Reflection Group on theFuture of EU Company Law of 2011 (http://ec.europa.eu/internal_market/company/modern) and the European Model Company Act (http://law.au.dk/emca). He partici-pates regularly in conferences in Europe and internationally. He is the managing editorof the Revue des Sociétés (Dalloz), France’s oldest corporate law review, and is one ofthe editors of the European Company and Financial Law Review (www.degruyter.com/ecfr).
Guido Ferrarini is a professor of Business Law and Capital Markets Law at theUniversity of Genoa, Department of Law, and the Director of the Centre for Law andFinance. He holds a J. D. (University of Genoa, 1972), an LLM (Yale Law School, 1978)and a Dr. Jur. (h.c., Ghent University, 2009). He is a founder, director and fellow of theEuropean Corporate Governance Institute (ECGI), Brussels. He was a member of theBoard of Trustees, International Accounting Standards Committee (IASC) and anindependent director at several Italian blue-chip companies. He was an advisor to theDraghi Commission on Financial Markets Law Reform, to Consob (the Italian SecuritiesCommission) and to the Corporate Governance Committee of the Italian Stock Ex-change. He has held Visiting Professor positions at several universities in Europe(Bonn, Frankfurt, Ghent, Hamburg, LSE, UCL, Tilburg and Duisenberg) and in the US(Columbia, NYU and Stanford), teaching courses on comparative corporate gover-nance and financial regulation. He is the author of many articles in the fields offinancial law, corporate law and business law, and editor of several books, includingthe recent Financial Regulation and Supervision: A Post-crisis Analysis (with E.Wymeersch and K. Hopt).
Carsten Gerner-Beuerle is a senior lecturer at the Law Department of the LondonSchool of Economics and Political Science. He holds degrees in law from HumboldtUniversity Berlin (PhD) and the University of Minnesota (LLM) and in economics fromthe University of London (MSc). He is also admitted to the bar in Germany. His mainresearch interests are in comparative, international, and European company law andsecurities regulation and in law and economics. He also worked as an expert incompany law and financial regulation on a study for the European Commission ondirectors’ duties and a study for the European Parliament on insurance law.
Jesper Lau Hansen worked as a lawyer before joining the University of Copenhagen,where he is a professor of financial markets law. His doctorate thesis in 2001 concernedsecurities regulation and he has primarily worked within this field and company lawwith a particular interest for European and Nordic perspectives. He holds an LLM fromCambridge University and serves on the editorial board of the Journal of Corporate LawStudies, as well as the pan-Nordic Journal of Company Law (Tidsskrift for Selskabsret).He has served on various Danish committees, including the committee that preparedthe current Companies Act of 2009, and European committees, notably the ReflectionGroup on the future of EU company law that advised the European Commission on its2012 Action Plan. He is currently an academic member of the Securities and MarketsStakeholder Group connected to ESMA.
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Masato Hisatake is a professorial fellow at the Department of Business Law at TilburgUniversity in the Netherlands. He is also a visiting professor at Tohoku University inJapan.
Carolin Langes is an academic assistant of Christoph Teichmann at the University ofWürzburg at the chair for civil law, German and European commercial and companylaw. She is currently writing her PhD thesis under his supervision. Her research focuseson German and European Company law, in particular with regard to gender issues inthe area of company law.
Joseph A. McCahery is a professor of International Economic Law at Tilburg Univer-sity School of Law. Before coming to Tilburg, he taught at the University of Amsterdamand Warwick University. He is also a Programme Director of Finance and Law at theDuisenberg School of Finance in Amsterdam. He has been an advisor to severalgovernments, international institutions and corporations. McCahery has worked in thearea of banking, comparative corporate governance, law and finance, and securitiesregulation. He has many publications in top law and finance journals and has writtenor co-edited ten books, including Hedge Fund Activism, Private Equity and Governance(Oxford University Press, forthcoming). He obtained his PhD from Warwick Universityin 1998.
Wolf-Georg Ringe is a professor of International Commercial Law at CopenhagenBusiness School (CBS) and the University of Oxford. He is an affiliate member of theCenter for Corporate Governance at CBS, an associate member of the Oxford-ManInstitute of Quantitative Finance and a Research Fellow of the Institute of European andComparative Law at the University of Oxford. Wolf-Georg Ringe has held numerousvisiting positions at universities worldwide, inter alia a visiting professorship atColumbia Law School, New York. As part of a European-wide consortium, he regularlyadvises the European Parliament on issues of European company law. His currentresearch interests are in the general area of Law and Finance, (Comparative) CorporateGovernance, Financial Regulation and the Conflict of Laws.
Edmund-Philipp Schuster is a lecturer at the Law Department of the London School ofEconomics and Political Science (LSE). Prior to joining LSE, he practised corporate lawwith Baker & McKenzie LLP in London and Vienna and worked for the AustrianTakeover Commission. He holds law degrees from the University of Vienna and theLSE. His primary research areas are corporate law and takeover regulation, includingthe harmonisation of company law at the European level, as well as law and finance.He also worked as a company law expert on an EU project providing pre-accessiontechnical assistance to the Republic of Albania and a study for the European Commis-sion on directors’ duties.
Beate Sjåfjell is a professor and Dr. Juris at the University of Oslo, Faculty of Law. Sheis the head of the research group Companies, Markets, Society and the Environment atthe Faculty of Law in Oslo, and of the international research project SustainableCompanies (2010-2013). She has published extensively on EU company and securitieslaw and the integration of sustainable development. Many of her papers are availableat http://ssrn.com/author=375947. She is a member of the steering group of the NordicCompany Law Network.
Christoph Teichmann is a professor at the University of Würzburg. He teaches civillaw, and German and European commercial and company law. His academic research
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focuses on German and European Company Law, comparative company law, theEuropean freedom of establishment and co-determination issues.
Maria Cristina Ungureanu is a consultant in corporate governance (Milan), researchfellow at the Centre for Law and Finance (Genoa), member of the European CorporateGovernance Institute (Brussels). Prior to this, she worked in corporate and investorconsulting in London and Johannesburg. Her specialties include corporate governance,executive remuneration, shareholder activism, financial services regulation and inves-tor relations. She holds a bachelor degree in Economics, a masters degree in BusinessAdministration and a PhD in Finance from the University of Iasi, Romania. She is theauthor of several papers on executive remuneration, corporate governance andEuropean financial integration and is often invited to international conferences andseminars to present these topics.
Christoph van der Elst is a professor of Business Law and Economics at TilburgUniversity and at Ghent University, and he is an ECGI Research Associate. He holdsboth a master in law and a master in economics and has a PhD in economics (GhentUniversity). He is a member of the Belgian Bar (Cottyn), a member of the disciplinarycourt for the Belgian registered auditors and chairman of the professional examinationcommission of registered auditors. His research interests are corporate governance,(economic analysis of) company law and corporate risk management, and in theseareas he has published in both national and international journals and books.
Erik P.M. Vermeulen is a professor of Business and Financial Law at TilburgUniversity and Tilburg Law and Economics Center (TILEC). He is also a Senior CounselCorporate/Vice President at Group Legal Department of Philips in the Netherlands. Hehas worked on projects related to corporate governance, mergers and acquisitions,corporate venturing and corporate venture capital. Corporate governance and corpo-rate venturing are also recurring themes in his lectures in the International BusinessLaw Program at Tilburg University (of which he is the Director). He has also lecturedthese topics at Ghent University in Belgium, Pontificia Universidad Javeriana andUniversidad Icesi in Colombia, Interdisciplinary Center (IDC) Herzliya in Israel,Kyushu University in Japan, TIASNimbas Business School, Brabant Center for Entre-preneurship and Duisenberg School of Finance in the Netherlands. Professor Ver-meulen has written extensively in the area of corporate and partnership law, corporategovernance, joint ventures, venture capital and innovation. His papers and books havebeen widely published by leading publishers, such as Oxford University Press andKluwer Law International. He has worked on projects for national and internationalorganisations, such as the European Commission, OECD, and the Dutch DevelopmentFinance Institution, concerning financial and venture capital markets, corporate lawand corporate governance.
List of Contributors
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Summary of Contents
List of Editors iii
List of Contributors v
CHAPTER 1IntroductionHanne Birkmose, Mette Neville & Karsten Engsig Sørensen 1
Part I: Duties of Directors 11
CHAPTER 2Mapping Directors’ Duties: Strategies and Trends in the EUCarsten Gerner-Beuerle & Edmund-Philipp Schuster 13
CHAPTER 3Directors’ Conflicts of Interest: A Contribution to European ConvergencePaul Krüger Andersen & Dorthe Kristensen Balshøj 57
CHAPTER 4Directors’ Duties in Groups of Companies: Legalising the Interest of theGroup at the European LevelPierre-Henri Conac 75
CHAPTER 5Duties to Engage ShareholdersHanne S. Birkmose 103
CHAPTER 6The Risk Management Duties of the Board of DirectorsChristoph Van der Elst 129
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CHAPTER 7Directors’ Duties and Corporate Social Responsibility (CSR)Beate Sjåfjell & Linn Anker-Sørensen 153
CHAPTER 8The Many Roles of Boards of SMEsMette Neville 179
Part II: Organisation of the Board of Directors 219
CHAPTER 9Independent Directors: After the CrisisWolf-Georg Ringe 221
CHAPTER 10Active Owners and Accountable DirectorsJesper Lau Hansen 243
CHAPTER 11Nomination of Members for the Board of Directors:A Swedish Version of Wag the Dog?Jan Andersson 263
CHAPTER 12The Europe wide Movement towards a Gender Quota at Board LevelChristoph Teichmann & Carolin Langes 279
CHAPTER 13Understanding the Role of the Board of Directors: What Is the Right Balance be-tween Managerial Oversight and Value Creation?Joseph A. McCahery, Erik P.M. Vermeulen & Masato Hisatake 301
CHAPTER 14Disqualifying Directors in the EUKarsten Engsig Sørensen 327
CHAPTER 15An Overview of the Executive Remuneration Issue across the CrisisGuido Ferrarini & Maria Cristina Ungureanu 349
Bibliography
Summary of Contents
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Table of Contents
List of Editors iii
List of Contributors v
CHAPTER 1IntroductionHanne Birkmose, Mette Neville & Karsten Engsig Sørensen 1
§1.01 A Renewed Focus on Boards of Directors in the EU 1§1.02 Duties of Directors 3§1.03 Organisation of the Board of Directors 7
Part I: Duties of Directors11
CHAPTER 2Mapping Directors’ Duties: Strategies and Trends in the EUCarsten Gerner-Beuerle & Edmund-Philipp Schuster 13
§2.01 Introduction 13§2.02 Duty of Care 14
[A] Regulatory Structure 16[B] Behavioural Expectations 17[C] Business Judgment Rule 20
§2.03 Duty of Loyalty 23[A] Regulatory Structure 24[B] Related Party Transactions 25[C] Corporate Opportunities 28
§2.04 Enforcement 34[A] Derivative Action 36[B] Ease of Enforcement 40
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§2.05 Directors’ Duties in the Vicinity of Insolvency 43[A] Duty to File and Wrongful Trading 47[B] Changes to the Core Duties Owed by Directors 48[C] The ‘Re-capitalise or Liquidate’ Rule 49[D] Additional Elements of a Regulatory Response to
Near-Insolvent Trading 50§2.06 Conclusion 51
CHAPTER 3Directors’ Conflicts of Interest: A Contribution to European ConvergencePaul Krüger Andersen & Dorthe Kristensen Balshøj 57
§3.01 Introduction 57§3.02 EU Company Law 59§3.03 National Models for Regulating Conflicts of Interest 61
[A] The Duty of Loyalty as the Basis 61[B] Legal Paradigms 62[C] Duty to Avoid Conflicts of Interest 62[D] Disclosing Conflicts of Interest and Approval by Disinterested
Directors/Shareholders 63[E] Executive Compensation (Remuneration) 63[F] Competition with the Company 64[G] Appointment and Dismissal of Directors 65[H] Transactions Which Need the Approval of the Shareholders 65[I] Benefits 68[J] Board Composition and the Division of Work 69[K] Consequences 70[L] Takeovers 70
§3.04 Some Core Elements Fostering European Convergence 70
CHAPTER 4Directors’ Duties in Groups of Companies: Legalising the Interest of theGroup at the European LevelPierre-Henri Conac 75
§4.01 Introduction 75[A] The Regulation of Directors’ Duties in Groups at the European
and Member States Level 76[1] The Failure to Address the Issue of Groups in Company
Law at the European Level 76[2] The Regulation of Groups at the Member States Level 78
[B] The Academic and Commission’s Interest for the Regulation ofGroups 80[1] The Academics’ Support for the Regulation of Groups 81
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[2] The EU Commission’s Interest for the Recognition of theInterest of the Group 82
§4.02 The Need to Legalise the Interest of the Group at the European Level 84[A] The Advantages of Recognising the Interest of the Group 84
[1] The Arguments against the Recognition of the Interest ofthe Group 84[a] The Technical Arguments 84[b] The Political Arguments 85
[2] The Arguments in Favour of Recognising the ‘Interest ofthe Group’ 87[a] Advantages from a Cross-Border Perspective 87[b] Advantages from a Member States Perspective 89
[B] A Cautious Approach to Legalising the Interest of the Group 90[1] The Nature of the Legal Instrument 90
[a] A Recommendation 90[b] A Limited Regime Included in a Directive on the SMC 91
[2] The Scope of a Legal Instrument 91[a] At the European Level 92[b] At the Member State Level 93
§4.03 The Distinction between Wholly-Owned and Non-wholly-OwnedSubsidiaries 94[A] Wholly-Owned Subsidiaries 94
[1] Directors’ and Managers’ Liability at the Subsidiary 94[a] A Safe Harbour 94[b] A Simplified Rozenblum Test 95
[2] Directors’ and Managers’ Rights and Duties at the ParentCompany 96[a] When the Risk of Insolvency Is Not Present 96[b] When the Risk of Insolvency Is Present or Realised 97
[B] Non-wholly-Owned Subsidiaries 97[1] The Improvement of the Functioning of the Group 97
[a] The Right to Squeeze-Out Minority Shareholders 98[b] The Right to Give Instructions 98
[2] The Protection of Minority Shareholders 99[a] Sell-Out Rights 99[b] Related-Party Transactions 100
§4.04 Conclusion 101
CHAPTER 5Duties to Engage ShareholdersHanne S. Birkmose 103
§5.01 Introduction 103§5.02 Active Ownership 104§5.03 Engaging Shareholders in Active Ownership 106
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[A] Legal Obligations 107[B] Soft Law Duties 108
§5.04 Information 109[A] What Information Should the Board Disclose? 110
[1] Periodical Information on the Financial Performance of theCompany 110
[2] Continuous Information Relating to CompanyPerformance 111
[3] Information Relating to the General Meeting 112[4] Board Members’ Conflicts of Interest 114[5] Corporate Governance Issues 115[6] Summary 117
[B] How to Disclose Information 117§5.05 The Annual General Meeting and the Exercise of Shareholders’ Rights 118
[A] Agenda 119[B] Facilitating Shareholder Participation in the General Meeting 121[C] Cooperation 123[D] Voting 124
§5.06 Dialogue 126§5.07 Concluding Remarks 127
CHAPTER 6The Risk Management Duties of the Board of DirectorsChristoph Van der Elst 129
§6.01 Fiduciary Duties 130§6.02 Specific Industry, Activity, and Compliance Requirements 131§6.03 New Risk Management Duties 133
[A] European Risk Management 134[B] National Risk Management Provisions 137
[1] Substantive Provisions 138[2] Disclosure Requirements 139[3] Comply or Explain Best Practices 141
[a] Refining and Completing the Legislative Provisions 141[b] Disclosure Best Practices 143
§6.04 European National Case Law 144§6.05 Assessing the European (Member States) Models of Board
Responsibility for Risk Management 147
CHAPTER 7Directors’ Duties and Corporate Social Responsibility (CSR)Beate Sjåfjell & Linn Anker-Sørensen 153
§7.01 A Convergence of Crises: Is CSR an Answer? 153§7.02 Duties of the Board 156
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[A] The Role of the Board 156[B] The Concept of Duty 158[C] Legal Compliance, Business Case and Beyond 159
§7.03 European Developments: From Dichotomy to Convergence? 162[A] A Tentative New Understanding 162[B] A New Room for CSR? 163[C] Integrating CSR in the Duties of the Board 165[D] Reporting and Risk Management as CSR Tools 169[E] An Integrated European CSR Approach? 173
§7.04 A CSR Role for the EU? 174
CHAPTER 8The Many Roles of Boards of SMEsMette Neville 179
§8.01 Introduction 179§8.02 Theories on the Roles of Boards 180§8.03 Towards a Multi-theory Approach to the Roles of Boards 182
[A] The Ownership and Control Structures of SMEs 183[B] The Implications of Ownership and Management Structures for
a Theoretical Approach to the Role of Boards of SMEs 184[1] Agency-Based Roles 184[2] Resource-Based Roles of Boards 190[3] Stakeholder-Based Roles 192
§8.04 The Role of Boards of SMEs in Practice: New Empirical Data 194[A] The Danish Studies 194[B] What Does the Owner-Manager Perceive to Be the Most
Important Role of the Board? (Expectation) 196[C] Does the Board Enhance Good Governance of SMEs? 199
[1] Does a Board Contribute to the Performance of the KeyManagement Tasks of an Undertaking? 200
§8.05 Do Owner-Managers Regard the Board as a Resource? 206§8.06 The Political Implications of the Role of Boards of SMEs 209
[A] The Role of Boards in Company Law 209[1] Involvement in the Strategic Management of the
Business 211[2] Shareholder Power 212[3] The Composition of the Board 213
[B] Corporate Governance Codes 214§8.07 Conclusion 216
Part II: Organisation of the Board of Directors 219
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CHAPTER 9Independent Directors: After the CrisisWolf-Georg Ringe 221
§9.01 Independent Directors and the Financial Crisis 222[A] The Regulatory and Quasi-Regulatory Push 224[B] A Question Mark behind Independence 226
§9.02 Why Do We Have Independent Directors? 227[A] Criteria of Independence 228
§9.03 Challenges to Independence 230[A] Matching Independence to Industry and Ownership Structure 231[B] Empirical Evidence 233[C] Incentive Problems 234[D] Substitutes for Independence 235
§9.04 Towards a Functional Understanding of Board Independence 237[A] Improving Independence 237[B] Combining Independence with Dependence 238
§9.05 Conclusion 241
CHAPTER 10Active Owners and Accountable DirectorsJesper Lau Hansen 243
§10.01 Introduction 243§10.02 The 1992 Cadbury Report and the Hegemony that Ensued 243§10.03 The Emancipation of Management 246§10.04 The Legacy of US/UK Corporate Governance 249§10.05 Challenging the Legacy from a Nordic Perspective 250
[A] The Benefits of Dominant Shareholders 250[B] Hard Ctr. Soft Law 252[C] Board Composition 254
§10.06 A Reappraisal of Old Truths 258§10.07 Conclusion 261
CHAPTER 11Nomination of Members for the Board of Directors: A Swedish Version ofWag the Dog?Jan Andersson 263
§11.01 Introduction 263§11.02 The US Model 264§11.03 The Swedish Model 268
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§11.04 Do We Focus on Model or Facts? 270§11.05 Earlier Research and the Swedish Voice 271§11.06 Substantial Differences? 273§11.07 Conclusion 276
CHAPTER 12The Europe Wide Movement towards a Gender Quota at Board LevelChristoph Teichmann & Carolin Langes 279
§12.01 Introduction 279§12.02 Draft EU Directive 280
[A] Legislative Basis 280[B] Quota 282
§12.03 Legal Situation in Other European States 282[A] One-Tier and Two-Tier Systems 283[B] Legal Comparison 284
[1] Norway 284[a] Board System 284[b] The Statutory Quota Provision 284[c] Sanctions If the Quota Is Not Observed 285
[2] Denmark 286[a] Board System 286[b] Equality on Company Organs 287
[3] Sweden 288[4] France 288[5] Spain 289[6] The Netherlands 290[7] Belgium 290[8] Italy 291[9] Initiatives in Germany 292
[a] Self-Regulation 292[b] Statutory Provision 292
§12.04 Comparison of the Different Quota Provisions 296[A] Companies Affected 296
[1] Major Companies 296[2] Exceptions 297
[B] The Quota to Be Achieved 298[C] Sanctions for Non-compliance 298
§12.05 Summary 300
CHAPTER 13Understanding the Role of the Board of Directors: What Is the Right Balancebetween Managerial Oversight and Value Creation?Joseph A. McCahery, Erik P.M. Vermeulen & Masato Hisatake 301
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§13.01 Introduction 301§13.02 The Role of the Board of Directors in a Three-Dimensional Model of
Corporate Governance 303[A] The Current Corporate Governance Debate 306[B] The Shortcomings of the Corporate Governance Debate 309[C] A Three-Dimensional Model of Corporate Governance 310[D] Understanding the Three-Dimensional Dynamics of the Board
of Directors 312§13.03 The Three-Dimensional Dynamics of the Board of Directors: Empirical
Evidence 316[A] The Data 317[B] Board Dynamics and Composition 318
§13.04 Conclusion 324
CHAPTER 14Disqualifying Directors in the EUKarsten Engsig Sørensen 327
§14.01 Introduction 327§14.02 Harmonising Disqualification in the EU 328
[A] Company Law Harmonisation 328[B] Outside Company Law 330
§14.03 Overview of National Disqualification Rules 332[A] From Criminal Penalty to Civil Sanction 332[B] Conduct Which May Result in Disqualification 333[C] How Disqualification Orders Are Imposed and How Often 334[D] The Aim and Effect of a Disqualification Order 335[E] Between Company Law and Insolvency Law 336[F] Summary 336
§14.04 Imposing Disqualification in Cross-Border Settings 337[A] Which Companies Are Targeted for Disqualification
Proceedings? 337[B] Which Persons Can Be Subject to Disqualification Orders? 340[C] The Status of Disqualification Orders in Cross-Border Situations 340
§14.05 Enforcing Disqualification in the EU 341[A] Which Companies Are Disqualified Persons Not Allowed to
Manage? 341[B] Sanctions for Breach of Disqualification Orders in a Cross-Border
Context 342[C] Ensuring Transparency 344[D] Ways to Improve Cross-Border Enforcement of Disqualification
Orders 345§14.06 Conclusion(s) 346
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CHAPTER 15An Overview of the Executive Remuneration Issue across the CrisisGuido Ferrarini & Maria Cristina Ungureanu 349
§15.01 Introduction 349§15.02 The EU Regulatory Framework 351
[A] Evolution of the EU Regulatory Framework 351[B] Say-On-Pay 354[C] Financial Institutions 356
§15.03 Remuneration Policies 358§15.04 Conclusions 366
Bibliography 367
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CHAPTER 7
Directors’ Duties and Corporate SocialResponsibility (CSR)Beate Sjåfjell & Linn Anker-Sørensen
§7.01 A CONVERGENCE OF CRISES: IS CSR AN ANSWER?
The company is one of the most ingenious inventions of humanity.1 The company is anall-important vehicle for allocating and efficiently employing capital in our societies,providing goods, services, jobs – and revenue. In short, the company is a vehicle foreconomic efficiency. We may ask, though, must economic efficiency equal environ-mental degradation, loss of biodiversity and dangerous climate change? The answer isthat it must not and should not, and in the long run, environmental degradation mayjust as well be economic inefficiency.
Yet we face today a convergence of crises with environmental, social andeconomic consequences. According to even the most conservative estimates of theIntergovernmental Panel on Climate Change (IPCC), business as usual will mostprobably lead to climate change of a magnitude to which we cannot adapt, or to whichwe can only adapt at extremely high costs.2 The loss of biodiversity threatens the
1. Whereas the enforceable contract may be the most innovative contribution of Roman law, seeAlan Watson, The Evolution of Law: The Roman System of Contracts, 2 Law and History Review1 (1984), company law has made a similar contribution to the contemporary economy, seeRaghuram G. Rajan & Luigi Zingales, Saving Capitalism from the Capitalists. Unleashing thePower of Financial Markets to Create Wealth and Spread Opportunity (Crown Business 2003).
2. ‘Unmitigated climate change would, in the long term, be likely to exceed the capacity of natural,managed and human systems to adapt. Reliance on adaptation alone could eventually lead to amagnitude of climate change to which effective adaptation is not possible, or will only beavailable at very high social, environmental and economic costs’, IPCC Core Writing Team,Rajendra K. Pachauri & Andy Reisinger (eds), Climate Change 2007: Synthesis Report. Contribu-tion of Working Groups I, II and III to the Fourth Assessment Report of the Intergovernmental Panelon Climate Change, 65 (IPCC 2008). See the full reports from the Intergovernmental Panel onClimate Change, at <www.ipcc.ch> (last visited 16 May 2013). This is not a new wake-up call
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stability of our ecosystems.3 A variety of factors tell us that the financial crises we haveseen since 2008 are not over, and the impact on the Euro zone through the debt crisishas weakened the legitimacy of business. The resilience of our entire economic systemon which we have based our societies and the welfare of our generation and those tocome is called into question,4 the peaking of fossil energy sources,5 and the harshbrutality of tens of thousands of people dying daily for poverty-related reasons.6 In theaftermath of one financial crisis and in danger of heading into another one, the focus ison stimulating growth and getting back onto a track of business as usual. Althoughthere has been some talk of a ‘Global Green New Deal’, of turning the financial crisisinto an opportunity for necessary change over to a green economy,7 generallyspeaking, looking past the talk and to what is actually done, environmental concernshave had a tendency to be placed on the backburner together with the concern for the
and is perhaps better perceived as a final warning; see already World Commission on Environ-ment and Development, Our Common Future, 343 (Oxford University Press 1987) (the very lastsentence of the report): ‘We are unanimous in our conviction that the security, well-being, andvery survival of the planet depend on such changes, now’.
3. Millennium Ecosystem Assessment, Ecosystems and Human Well-being: Biodiversity Synthesis,(World Resources Institute 2005), <http://www.millenniumassessment.org/en/Synthesis.aspx> (last visited 16 May 2013), 2: ‘Human actions are fundamentally, and to a significantextent irreversibly, changing the diversity of life on Earth, and most of these changes represent aloss of biodiversity. Changes in important components of biological diversity were more rapid inthe past fifty years than at any time in human history. Projections and scenarios indicate thatthese rates will continue, or accelerate, in the future’. See also e.g. The Observer, Fears for cropsas shock figures from America show scale of bee catastrophe, 2 May 2010, <www.guardian.co.uk/environment/2010/may/02/food-fear-mystery-beehives-collapse> (last visited 22 August 2013).
4. See e.g. Carbon Tracker Initiative, Unburnable Carbon 2013: Wasted capital and stranded assets,<http://carbontracker.live.kiln.it/Unburnable-Carbon-2-Web-Version.pd> (last visited 22 Au-gust 2013). See also David Hone, Climate Change and the Carbon Bubble Reality Check, May 2013,The Energy Collective, <http://theenergycollective.com/davidhone/220316/carbon-bubble-reality-check> (last visited 16 May 2013).
5. See e.g. Jeremy Leggett, After the credit crisis – next it will be oil, 8 Jun. 2010, Financial Times<ft.com>: ‘the ITPOES companies fear an irrecoverable fall in global oil supply by 2015 at thelatest and that if oil producers then husband resources, a global energy crisis could abruptlymorph into energy famine for some oil-consuming nations’. See about the UK Industry Task-Forceon Peak Oil and Energy Security (ITPOES), The Oil Crunch – A wake-up call for the UK economy,and their report of 10 Feb. 2010, <http://peakoiltaskforce.net/> (last visited 16 May 2013).
6. ‘[I]t is clear that improvements in the lives of the poor have been unacceptably slow, and somehard-won gains are being eroded by the climate, food and economic crises,’ UN Secretary-GeneralBan Ki-moon says in the foreword to the Millennium Development Goals Report 2010, 23 Jun.2010, <http://www.un.org/millenniumgoals/> (last visited 16 May 2013).
7. See United Nations Environment Programme, Global Green New Deal, Policy Brief, March 2009,stating that ‘The Global Green New Deal (GGND) presented here has three broad objectives. Itshould make a major contribution to reviving the world economy, saving and creating jobs, andprotecting vulnerable groups. It should promote sustainable and inclusive growth and theachievement of the MDGs, especially ending extreme poverty by 2015. Also, it must reducecarbon dependency and ecosystem degradation – there are key risks along a path to sustainableworld economy’, p. 1. See also the press release 22 Oct. 2008, ‘Global Green New Deal’ –Environmentally-Focused Investment Historic Opportunity for 21st Century Prosperity and JobGeneration, UNEP Launches Green Economy Initiative to Get the Global Markets Back to Work:‘Mobilizing and re-focusing the global economy towards investments in clean technologies and‘natural’ infrastructure such as forests and soils is the best bet for real growth, combating climatechange and triggering an employment boom in the 21st century’, available at <www.unep.org>(last visited 16 May 2013).
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underprivileged of this world, when jobs are lost, revenues disappear, stock marketsquiver and the financial basis of developed countries appears to be in danger. Gettingback on track with economic growth and business as usual is a postponement of thenecessary focus on dealing with climate change and other overriding environmentalconcerns – a postponement that may turn out to be highly detrimental to our chancesof achieving a sustainable global society; financially, socially and environmentally.8
While the exact impact of run-away climate change, continued biodiversitydestruction and unchecked social impacts of the current financial challenges we see isunknown,9 we know one thing for certain: Business as usual is not an alternative. Toshift over to a sustainable path, we need companies to contribute. Clearly, ourgovernments, even if they were brave and progressive enough, cannot single-handedlyadopt sustainability.10 The contribution of business is needed. And if business shifts inthe right direction, customers, employees and indeed whole societies may shift withthem.
The pressing question then is whether CSR is an answer. Most discussion of theissue of companies’ responsibility for other issues than that of profit for shareholdershas been discussed under the CSR umbrella. CSR has been a very problematic conceptand the current first author has previously preferred not to use the term at all.11 Someinteresting developments, including the paradigm shift in the EU Commission’sdefinition of CSR, open up for a revisit of the potential of the CSR concept.12
From this rather reticent standpoint and basing our discussion in this chapter onthe EU Commission’s new definition of CSR,13 we put forward that CSR can play an
8. ‘In a world with a growing population, glaring inequality and a precarious environmental base,it is imperative that Governments collaborate to balance the economic, social and environmen-tal strands of sustainable development. GEO-5 highlights not just the perils of delaying action,but the options that exist to transform sustainable development from theory to reality’, UNSecretary-General Ban Ki-moon says in the foreword to the GEO5 Global Environment Outlook,Environment for the future we want, <http://www.unep.org/geo/pdfs/geo5/GEO5_report_full_en.pdf> (last visited 16 May 2013).
9. And there will always be, until we can describe the impact in retrospect, questions as to thevarious prognoses. See e.g. The Economist, A sensitive matter, 30 Mar. 2013, <http://www.economist.com/news/science-and-technology/21574461-climate-may-be-heating-up-less-response-greenhouse-gas-emissions?zid=313&ah=fe2aac0b11adef572d67aed9273b6e55> (last vis-ited 16 May 2013).
10. How governments as legislators can contribute to a greater degree exactly when it comes tobusiness, will be discussed later on in this chapter.
11. Beate Sjåfjell, Towards a Sustainable European Company Law. A Normative Analysis of theObjectives of EU Law, with the Takeover Directive as a Test Case (Kluwer Law International2009); and Beate Sjåfjell, Internalizing Externalities in EU Law: Why Neither CorporateGovernance nor Corporate Social Responsibility Provides the Answers, 40 George WashingtonInternational Law Review 977 (2008).
12. Following then also the lead of Sustainable Companies Project colleague Dr. Tineke Lambooy,see her thesis Corporate social responsibility: legal and semi-legal frameworks supporting CSR:developments 2000-2010 and Case Studies, available at <https://openaccess.leidenuniv.nl/handle/1887/16169> (last visited 16 May 2013).
13. As we will see in s. §7.03[B] below, the new definition put forward by the Commission nowincludes a responsibility of the companies for their ‘impact on society’ and requires anintegration of ‘social, environmental, ethical, human rights and consumer concerns into theirbusiness operations and core strategy’.
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important part in facilitating such a necessary contribution from companies, if thefollowing three conditions are met:
First, the promotion of CSR must encompass both the level of legal complianceand of action beyond compliance.14 The well-known business capture of CSR asvoluntary, as a case of ‘don’t regulate us and we can talk about how we behave’ doesnot suffice. This tends to lead to delimitation against legal obligations and anunwarranted Corporate Governance/CSR dichotomy. The implicit support of share-holder primacy15 entails that sustainable business, in the environmental and socialsense, quickly will hit a ceiling.16 Second, CSR must be true or core CSR, dealing withthe business of the company, how that is conducted and the impacts of that business.17
Third, CSR must entail an integration of environmental and social concerns in thedecision-making of the company in such a way as to lead to an internalisation ofexternalities.18
In section §7.02, we discuss the role of the board in a CSR context, while section§7.03 investigates the recent developments at EU level, where we find that despite aparadigm shift in the definition of CSR, little is done to integrate CSR concerns into theduties of the board. Section §7.04 therefore poses the question what role the EU has inthis context, concluding that the contribution of the EU most likely is a necessaryprerequisite to achieving the shift away from business as usual and onto a sustainablepath.
§7.02 DUTIES OF THE BOARD
[A] The Role of the Board
The board of directors has a core role to play in any serious efforts to integrate issuesof social responsibility (CSR) into the business of the company.19 The board is in anyjurisdiction as a matter of law the highest permanent organ of the company, with the
14. Concerning the limitations of voluntary initiatives in the field of environmental protection, seeNicole Bakker & Benjamin J. Richardson, Breaching the Maginot Line: The Frailty of Environ-mental Law in Europe and North America, University of Oslo Faculty of Law Legal StudiesResearch Paper Series No. 2012-34, <http://ssrn.com/abstract=2171642> (last visited 16 May2013). See also Beate Sjåfjell, Why Law Matters: Corporate Social Irresponsibility and the Futilityof Voluntary Climate Change Mitigation, 8 European Company Law 56 (2011), and e.g. Linda C.Rodriguez & Jane LeMaster, Voluntary Corporate Social Responsibility Disclosure. SEC ‘CSR Sealof Approval’, 46 Business Society 370 (2007).
15. Beate Sjåfjell, n. 14 supra.16. Ibid.17. As opposed to what Sjåfjell have elsewhere denoted Corporate Charity Work, see Beate Sjåfjell,
n. 14 supra.18. Beate Sjåfjell, Internalizing Externalities in EU Law, n. 11 supra.19. When we refer to the ‘board’ in the following, we include the board in the one-tire system and
the supervisory board in the two-tire system. At an EU level, both one- and two-tier boardstructures have been made available in all jurisdictions; see Regulation (EC) No. 2157/2001 onthe Statute for a European Company (SE) (OJ 2001 L 294/1-21). For an overview of severalsystems in Continental Europe before the SE, see Eddy Wymeersch, A Status Report on CorporateGovernance Rules and Practices in Some Continental European States, in Klaus J. Hopt et al.(eds), Comparative Corporate Governance: State of the Art and Emerging Research (Oxford
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responsibilities of policy-making, strategy-setting and supervision. Albeit there arejurisdiction-specific differences, these are broadly speaking matters of nuances. Thecore duty of the board is to protect and promote the interests of the company. This coreduty is expressed differently across the jurisdictions. In an Anglo-American context,20
one will often speak of two basic duties imposed on directors:21 The basic duty of careand the duty of loyalty.22 The duty of care ‘address the managerial agency problem andensure that directors and managers devote sufficient time, care, and diligence tomanage the company, establish information and monitoring systems, supervise busi-ness operations, and possess the necessary skills and experience to discharge theirfunctions effectively’.23 The duty of loyalty has by many been seen as mainly arequirement imposed on directors to subordinate their personal interests to those of thecompany and applies in particular when the director has a material (financial) interestin a transaction at odds with the interests with the company.24 The fiduciary duty ofloyalty is also, and in this context all the more important, a duty for the directors to actin good faith in what they believe to be the best interests of the company.
The issue of the interests of the company is therefore the common denominatorin the discussion of the role of the board across jurisdictions. The concept of theinterests of the company has traditionally been viewed quite differently in the variousjurisdictions, with Continental-European, civil law countries such as Germany andAnglo-American, common law jurisdictions such as the UK generally being perceivedas occupying opposite ends of the spectrum.25 A full analysis of the concept of the
University Press 1998). See further Beate Sjåfjell, Towards a Sustainable Company Law, n. 11supra, at s. 4.2.2.2, where the role of the board in different jurisdictions is discussed.
20. The Anglo-American perspective on the duties of the board are included here specifically as thistends to be the default perspective in corporate governance debates, as is abundantly illustratedin the breathtakingly arrogant and long-since refuted title of the paper by Henry Hansmann &Reinier Kraakman, The End of History of Corporate Law’, Yale Law School Working Paper No.235, <ssrn.com/abstract=204528>, January 2000 (last visited 16 May 2013). The paper putsforward that ‘[W]e are witnessing rapid convergence on the standard shareholder-oriented [US]model as the normative view of corporate structure and governance. [W]e should also expectthis normative convergence to produce substantial convergence in the practices of corporategovernance’, 443.
21. For a broader analysis of the two duties and their legal implications in different Member States,see the contribution by Carsten Gerner-Beuerle & Edmund-Philipp Schuster in this book,Mapping Directors Duties: Strategies and Trends in the EU.
22. The duty of care is today most often recognised in the Member States’ corporate legislationwhere a strict and objective standard of care can be found: e.g. in Germany § 93 para. 1 (1), inFrance Art. L 225-251, in Italy Art. 2392 CC. The duty of loyalty, however, differs in the MemberStates, see Stefan Grundmann, European Company Law – Organization, Finance and CapitalMarkets, 265-270 (2nd ed., Intersentia 2012); and Carsten Gerner-Beuerle & Edmund-PhilippSchuster, Mapping Directors Duties.
23. Carsten Gerner-Beuerle & Edmund-Philipp Schuster, Mapping Directors Duties, 2.24. See Christoph Van der Elst’s chapter in this book, Risk Management Duties of the Board of
Directors, §6.01, referring to Model Business Corporation Act § 8.60 (1).25. See e.g. Gudula Deipenbrock, Sustainable Development, the Interest(s) of the Company and the
Role of the Board from the Perspective of a German Aktiengesellschaft, 8 International andComparative Corporate Law J. 15 (2011), available at <http://ssrn.com/abstract=1712784>(last visited on 16 May 2013); Charlotte Villiers, Directors’ Duties and the Company’s InternalStructures Under the UK Companies Act 2006: Obstacles for Sustainable Development, 8International and Comparative Corporate Law J. 47 (2011), available at <http://ssrn.com/abstract=1712791> (last visited on 16 May 2013); and Beate Sjåfjell, Towards a Sustainable
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interests of the company lies beyond the scope of this chapter.26 Suffice it to say, first,that common to all jurisdictions is that the interests of the company have a coreeconomic element, whether this is denoted the interest of the enterprise or theshareholders’ interest in profit, and second, that there is a certain tendency toconvergence between the traditionally opposing ends of the spectrum.27 Third, weknow that there is certain latitude to promote CSR in all jurisdictions, also the mostshareholder-focused of the Anglo-American ones, through the business case argumentand the business judgment rule giving directors broad discretion in how to promote thecore economic interests of the company.28 The exact boundaries of the interests of thecompany are very rarely defined as a fourth common factor is that boards typically donot use the full scope of their latitude because of the quasi-legal social norm ofshareholder primacy.29
[B] The Concept of Duty
Before we discuss further what this means for the overarching question of this chapter,namely what are and what should be the board’s duties in relation to CSR, aclarification of the concept of duty may be useful.30 Duty may be understood in at leastthree different ways. The first and presumably strongest and that which is often thefocus in the retrospective case law-oriented legal doctrine is the legal duty that is
Development: Internalising Externalities in Norwegian Company Law, 8 International andComparative Corporate Law J. 103 (2011), available at <http://ssrn.com/abstract=1712796>(last visited on 16 May 2013).
26. This is the topic of one of the comparative chapters in the forthcoming edited volume, BeateSjåfjell & Benjamin Richardson (eds), Company Law and Sustainability (Cambridge UniversityPress 2014).
27. See e.g. Dániel G. Szabó & Karsten Engsig Sørensen, Integrating Corporate Social Responsibilityin Corporate Governance Codes in the EU, 19 Feb. 2013, Nordic & European Company LawWorking Paper No. 10-28, <http://ssrn.com/abstract=2081611> (last visited on 16 May 2013).The 2006 reform of UK company law may also be an example of this convergence. The UKCompanies Act 2006, s. 172-173, sets out that the directors are, in good faith and exercisingindependent judgment, to promote the ‘success of the company’ for the benefit of theshareholders as a whole, and in doing so have, with regard (amongst other matters) to long-termconsequences, the interests of the employees and ‘the need to foster the company’s businessrelationships with suppliers, customers and others’ and ‘the impact of the company’s operationson the community and the environment’. However, as we see here, the shareholders’ interest isstill the ultimate guideline.
28. In a shareholder primacy orientation, the business judgement rule allows but does not mandatethat the director takes action which will benefit the company’s stakeholders as long as these are‘reasonably incidental’ to the company’s business, or if this is a specific object of the company.The margin of discretion is based upon ‘a presumption that in making a business decision thedirectors of a corporation acted on an informed basis, in good faith and in the honest belief thatthe action taken was in the best interests of the company’. For further discussions on the‘business judgement rule’, see e.g. Carsten Gerner-Beuerle & Edmund-Philipp Schuster, Map-ping Directors Duties, § 2.02 [C]. See also Bayless Manning, The Business Judgement Rule andthe Director’s Duty of Attention: Time for Reality, 39 The Business Lawyer 1477 (1984). AMember State example is the UK Companies Act, s. 172 (see n. 27 supra).
29. Beate Sjåfjell, Regulating Companies as if the World Matters, 47 Wake Forest Law Review 113(2012), available at <http://ssrn.com/abstract=1964213> (last visited on 16 May 2013).
30. As we will see especially in the discussion of developments at the EU level in §7.03 infra.
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enforceable in a court of law. It appears untenable, however, to draw the conclusionthat a legal obligation can only be found to exist where, and to the extent that, it isenforceable in a court of law. There are an abundance of reasons for cases not beingbrought before a court of law and even when they are, there may be general rules orcase-specific issues regarding procedure or competence that may prevent the courtfrom enforcing a duty that rests on a party. However, a lack of case law does not in itselfconstitute a non-legality of a duty. The second understanding of duty is therefore thelegal duty that, for various reasons, may not be enforceable in a court of law. The thirdunderstanding is the ethical duty that comes within the framework of the law, coveringboth the situation where ethical arguments may act as support for an uncertain orfragile legal basis for stipulating a legal obligation, and the situation where ethicalarguments provide a basis for deciding between legally acceptable alternatives. Allthree levels of the concept of duty are relevant in the further discussion in this chapter– and beyond – of the CSR duties of the board.
[C] Legal Compliance, Business Case and Beyond
Taking the board’s core legal duty of promoting the economic interest of the company31
as a basis, we can set out the CSR duties of the board in the following manner, movingfrom clear legal duty to the dynamic area of legal-cum-ethical obligations: First, thereis the clear-cut duty of legal compliance with the abundance of what may be denotedas CSR promoting regulation, which we have variations of across the jurisdictions.32
Second, the business case for CSR33 entails that the board has a legal duty to go beyondlegal compliance in all cases where integrating CSR will be most profitable for thecompany. Third, starting out from the business case argument, we will find ourselvesmoving on a spectrum from clear legal duty to go beyond legal compliance because thatis obviously profitable for the company to the difficult cases where ethics may conflictwith profit. A key issue here will be the time frame of the board’s perspective: thelonger the perspective in which profit is sought, the more the potential conflict betweenCSR and profit is reduced.34
Legal compliance in terms of complying with the law protecting social andenvironmental interests is clearly and unequivocally a duty of the board. This mayseem obvious. However, by moving directly on to discussing CSR as beyond legal
31. Which may be understood as the interests of the shareholders or as the economic interest of theenterprise from which the shareholders’ interest in profit is derived.
32. In the area of labour rights, social rights, human rights and environmental protection.33. See e.g., Archie B. Carroll & Kareem M. Shabana, The Business Case for Corporate Social
Responsibility: A Review of Concepts, Research and Practice, 12 International J. of ManagementReviews 85 (2010). See also Jonathan Porritt, Capitalism as if the World Matters (Earthscan2007).
34. The issue of long term perspective is a difficult and unresolved one (e.g.: how long a perspective?Who decides the length of the perspective in each case?). This discussion lies beyond the scopeof this chapter. See e.g.: It’s Time: The Temporal Dimensions of Responsible Investing:Summary of the proceedings An international symposium: June 20-21, 2013, University ofBritish Columbia, available at http://www.law.ubc.ca/files/pdf/enlaw/symposium2013.pdf (last visited at 16 Aug. 2013).
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compliance ignores the fact that legal compliance is not a matter of course, and that itinvolves issues that require further discussion. Focusing on legal compliance as a coreCSR duty may raise awareness to the lack of compliance.35 Further, true legalcompliance entails complying with the spirit of the law and not just the letter. Cuttingcorners, boiler-plate compliance and assessing the financial risk of non-compliancebeing detected is not true compliance. Conversely, a board may and should insist to itsshareholders that true compliance is indeed a legal duty, albeit that this may not alwaysbe what gives the highest quarterly bottom-line results. To ensure true compliance, aproper due diligence in social and environmental matters is required so as to integratethese issues into the core risk management of the company.36
A grey area exists between legal compliance and beyond in the case where thecompany can avoid strict CSR regulation by relocating its business to countries wherethe regulation is more lenient or where enforcement is lax or non-existent. In the lattercase of lax enforcement, the legal compliance duty clearly entails as indicated abovethat the company must continue complying. Where the legal rules themselves are morelenient, the more difficult question arises whether the company should follow the lawof the home state or that of the host state. As a starting point, the company will satisfythe legal compliance requirement where host state regulations are met. However, withthe ethical aspect of CSR in mind, the argument could be made that an internationalminimum level of CSR standards could be identified, beneath which it would becontrary to the legal duty of the company to go. That commonly accepted ethical
35. See Nicole Bakker & Benjamin J. Richardson, n. 14 supra. See also for example the CommissionStaff Working Paper on the Implementation and Enforcement of Community EnvironmentalLaw: Even though we see an increasing amount of EU incentives on regulating CSR matters asenvironment and human rights, the implementation and enforcement of these laws is lagging.According to a 2004 survey of the European Commission, just under one-third of all complaintsand cases alleging noncompliance with EU law that were investigated by the Commissionconcerned noncompliance with environmental laws. In 2005, the environment sector accountedfor about one-fourth of the total number of open cases concerning non-compliance withCommunity law under investigation by the Commission references. Indeed, there is a greaterlack of implementation and enforcement of EU environmental requirements than of any otherarea of EU regulation, see Commission Staff Working Paper, Sixth and Seventh Annual Surveyon the Implementation and Enforcement of Community Environmental Law, (August 2005 andSeptember 2006). Available at <http://ec.europa.eu/environment/law/pdf/6th en.pdf> and<http://ec.europa.eu/environment/legal/law/pdf/7th_en.pdf> (last visited on 16 May 2013).
36. The Ruggie principles’ focus on due diligence here is a significant move in the right directionwith a potential knock-on effect also on other CSR issues than core human rights. See e.g.,Special Representative of the United Nations Secretary – General for business & human rights,Applications of the U.N. ‘Protect, Respect and Remedy’ Framework, <http://www.business-humanrights.org/media/documents/applications-of-framework-jun-2011.pdf> (last visited 16May 2013). See also Surya Deva, Guiding Principles on Business and Human Rights: Implicationsfor Companies, 9 European Company Law 101 (2012). See e.g. Tineke Lambooy, Mary A. Varner& Aikaterini Argyrou, The Corporate Responsibility to Remedy (3rd Pillar Ruggie Framework) –Analysis of the Corporate Responses in Three Major Oil Spill Cases: Shell – Nigeria, BP – US (theGulf), Chevron – Ecuador, University of Oslo Faculty of Law Research Paper No. 2011-26,<http://ssrn.com/abstract=1953190> (last visited 16 May 2013). See also Robert C. Blitt,Beyond Ruggies’s Guiding Principles on Business and Human Rights: Charting an EmbraciveApproach to Corporate Human Rights Compliance, The Selected Works of Robert C. Blitt (2012),available at <http://ssrn.com/abstract=1907778> (last visited 16 May 2013).
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standards in society are a relevant factor in the setting of legal duties in company lawis accepted, for example in the Nordic system.37 That there is an international societalstandard of ethics relevant to companies is arguably supported by the steadily strongerposition of notably the OECD guidelines for multinational enterprises, the GuidingPrinciples on Business and Human Rights (the ‘Ruggie Framework’), ISO 26000, theGlobal Reporting Initiative and the Global Compact.38
Taking a reasonable long-term perspective,39 the business case argument sup-ports choosing the most ethical alternative of equally profitable business choices alsowhere this entails going beyond CSR specific legal compliance. It may instead be seenas legal compliance with the core company law duty of promoting the economicinterest of the company. A combined legal and ethical argument makes the case forchoosing the most ethical option of two business opportunities also where this isassumed not to be supported by the business case – for example where the boardassumes that the general public will never know that it refused to take the unethicalprofitable option and thereby not affecting the reputation of the company.
To what extent the board must, can and should go beyond strict legal compliancealso without support of the business case varies across jurisdictions and across time,and is a complex legal question with ethical implications, where the answer rarely ornever can be found expressly regulated in legislation, nor in case law. The latterbecause the strong, mainly social, norm of shareholder primacy regularly prevents theboard from using the room that it arguably has.40 Shareholder primacy’s short-termand narrow effect prevents full realisation of companies’ potential to be part of thesolution even to the extent that companies do not see the business case and thepotential that lies in being market leaders in social and environmental terms. Thedifficult question of how far beyond legal compliance and beyond the business casecompanies have an ethical duty to society to move, does therefore typically not arise.
The current state of affairs is clearly insufficient. Companies are not to anadequate extent using the room they have today to integrate CSR into their corebusiness, and are not realising the business potential of contributing to sustainabledevelopment. Regulatory intervention to spark a business move away from ‘businessas usual’ and onto a more sustainable path is required. We may be seeing the first
37. See B. Sjåfjell, Sustainable Companies: Possibilities and Barriers in Norwegian Company Law,(16 aug. 2013). University of Oslo Faculty of Law Research Paper No. 2013-20, <http://ssrn.com/abstract=2311433> (last visited 17 Aug. 2013).
38. For further information see the following websites <www.oecd.org/daf/inv/mne/oecdguidelinesformultinationalenterprises.htm>, <www.unglobalcompact.org/Issues/human_rights/The_UN_SRSG_and_the_UN_Global_Compact.html>, <http://www.iso.org/iso/catalogue_detail?csnumber=42546, www.globalreporting.org/> and <www.unglobalcompact.org/>(all last visited on 16 May 2013).
39. And what that entails is a larger discussion beyond the scope of this chapter, see n. 34 supra.40. ‘Shareholder primacy originates not in company law, but rather in the norms and practices
surrounding the rise of the hostile takeover movement in Britain and the US in the 1970s and1980s. It is […] essentially a cultural rather than a legal point of reference.’ Simon Deakin, TheComing Transformation of Shareholder Value, 13 Corporate Governance: An InternationalReview 11 (2005). See further Beate Sjåfjell, n. 29 supra, with tentative conclusions from theSustainable Companies Project.
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tendencies of recognition of the necessity of a new and more holistic perspective in thehitherto neglected area of company law in this statement by the Commission:
Through CSR, enterprises can significantly contribute to the European Union’streaty objectives of sustainable development and a highly competitive socialmarket economy.41
The current first author has in her earlier work concluded that the core role of EUcompany and financial market law is to promote economic development notably byacting as a vehicle for market integration, through facilitating and enabling cross-border business and investments, and to protect the interests of the involved parties(both to promote business and facilitate integration and as an objective in its ownright). Importantly in our context, she also concluded that the contributory role of thissector of EU law is to facilitate and further the coherence between notably environ-mental and social/labour law and the core economic role of company and financialmarket law, and thereby contribute to sustainable development.42
The board is undoubtedly the key to unlocking companies’ potential to contrib-ute to sustainable development through integrating CSR into the core business of thecompanies. The pressing question is how to turn this key. We will investigate in thenext section to what extent the Commission’s statement is followed up on in the recentdevelopments at the EU level.
§7.03 EUROPEAN DEVELOPMENTS: FROM DICHOTOMY TOCONVERGENCE?
[A] A Tentative New Understanding
The financial and economic crises over the last years have led to a renewed focus oncorporate governance and a tentative understanding of unchecked short-termism as aproblem. Whereas CSR and mainstream corporate governance were earlier twodifferent debates, both concerning companies but otherwise hardly connected, wehave seen over the recent years’ convergence tendencies. This section discusses thisdevelopment and the significance for CSR issues as an integral part of the duties of theboard that section §7.02 argued above is necessary.
A tentative new understanding of CSR has become more visible after the financialcrises in parallel with a questioning of formerly established truths and law andeconomics-based postulates. For example, the before trusted Efficient Capital MarketHypothesis (EMH) that is based on the assumption that the financial market is basedupon topical information, including the information given by the companies concern-ing CSR matters, has failed: there has been no proper and unequivocal warning of theconvergence of crises described at the beginning of this chapter, not even of thefinancial crisis. The relevance and normative validity of the EMH has therefore recentlybeen questioned at EU level, especially in the light of governance, the role of
41. COM (2011) 681 final, s. 1.2.42. Beate Sjåfjell, Towards a Sustainable European Company Law, n. 11 supra, ss 11.1 and 11.2.
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shareholder and remuneration of management.43 This led the Commission-appointedReflection Group on the Future of EU Company Law to point out the problemsassociated with the failure of EMH to achieve its purpose:
Two of the most powerful market devices to ensure efficient management, i.e.,leverage and stock-based compensation, can themselves allow, or lead to, dis-torted and conflicted management decisions and to undue emphasis on theshort-term and excessive risk-taking.44
In the following, we take a closer look at some of the new developments at EU level andinvestigate tendencies we see in a short-termism versus long-term perspectives at EUlevel, and how risk management should be addressed and solved in a CSR perspective.
[B] A New Room for CSR?
An important starting point is the paradigm shift in the EU definition of CSR from 2001to 2011. In 2001, we saw a regulatory capture, as the Commission more or lessverbatimly repeated Business Europe’s definition of what companies do on a voluntarybasis. CSR was then defined as:
a concept whereby companies integrate social and environmental concerns in theirbusiness operations and in their interaction with their stakeholders on a voluntarybasis.45
Ten years later, in 2011, the Commission did not merely attempt to adjust incremen-tally the former definition, but instead explicitly set aside the 2001 definition andlaunched a new concept of CSR. Starting out with the 2001 definition, the Commissionin its Communication for a ‘renewed EU strategy 2011–2014 for CSR’, says that it putsforward a new definition of CSR as ‘the responsibility of enterprises for their impacts onsociety’.46 We see in this OECD-inspired definition that CSR is now defined clearly asincluding both legal compliance and beyond.47 The most obvious distinction betweenthe former and latter CSR definition is that the former speaks about a voluntaryconcept, while the latter speaks of a responsibility. In this sense, the Commission’snew CSR definition is progressive – it sees CSR as an integrated part of businessresponsibility towards society and not something that companies can elect to consider
43. Report of the Eddy Wymeersch et al., Reflection Group on the Future of EU Company Law,s. 3.1.1. The Report is available at <http://ec.europa.eu/internal_market/company/docs/modern/reflectiongroup_report_en.pdf> (last visited on 16 May 2013).
44. Ibid., s. 3.1.1.45. COM (2001) 366 final. Although the Communication went on to speak of ‘not only fulfilling legal
expectation, but also going beyond compliance and investing “more” into human capital, theenvironment and the relations with stakeholders’ (paras 20-21), the definition of CSR asvoluntary has been dominant.
46. COM (2011) 681 final, s. 3.1.47. Ibid., s. 3.1. See also the 2011 revised OECD Guidelines for Multinational Enterprises: Update
2011, Doc. C (2011).
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when convenient.48 A responsibility in this respect should be seen as an integral part ofa director’s duty in every company.
The new CSR approach requires enterprises to:
have in place a process to integrate social, environmental, ethical, human rightsand consumer concerns into their business operations and core strategy in closecollaboration with their stakeholders, with the aim of maximising the creation ofshared value for their owners/shareholders and for their other stakeholders andsociety at large; [and] identifying, preventing and mitigating their possible adverseimpacts.49
This new CSR approach can potentially be of great importance, as it appears to extendthe philosophy of the Ruggie framework beyond human rights concerns.50 A shift in theEU’s recognition of corporate social responsibility as a societal responsibility and notjust a voluntary concept is also in line with international law. Several internationallyrecognised principles and guidelines refer to a formal approach to CSR.51 The Europeanpolicy to promote CSR should be made fully consistent with this framework.52
After the recognition of CSR as a wider concept, the Commission goes on to speakof the importance of having in place a process:
to integrate social, environmental, ethical, human rights and consumer concernsinto their business operations and core strategy in close collaboration with theirstakeholders, with the aim of:
1. Maximising the creation of shared value for their owners/shareholders and fortheir other stakeholders and society at large;
2. Identifying, preventing and mitigating their possible adverse impacts.53
Also here the Commission now speaks of a responsibility by addressing these processesas something the ‘enterprises should have in place’.54 The Commission is not clear onwhether responsibility implies a legal or moral duty. The Commission acknowledgesCSR as ‘actions by companies over and above their legal obligations towards society
48. See also Daniel Kinderman, Corporate Social Responsibility in the EU, 1993- 2013: InstitutionalAmbiguity, Economic Crises, Business Legitimacy and Bureaucratic Politics, 51 J. of CommonMarket Studies 701 (2013).
49. COM (2011) 681 final, s. 3.1.50. Andrew Johnston, Governing Externalties: The Potential of Reflexive Corporate Social Responsi-
bility’, Center for Business Research, University of Cambridge, Working Paper No. 436, 3,<http://ssrn.com/abstract=2165616> (last visited 16 May 2013).
51. See e.g. OECD Guidelines for Multinational Enterprises: Update 2011, Doc. C (2011), 59, andReport of the Special Representative of the Secretary-General on the issue of human rights andtransnational corporations and other business enterprises, Guiding Principles on Business andHuman Rights: Implementing the United Nations ‘Project, Respect, Remedy’ Framework, UNDoc. A/HRC/17/31, 21 Mar. 2011. The Human Rights Council endorsed the Guiding Principleson 16 Jun. 2011 (Resolution 17/4, UN Doc. A/HRC/RES/17/4). Both reports have explicatedgovernmental expectations on companies to pre-empt or mitigate adverse impact on thesocieties in which they function, see Karin Buhmann, The Danish CSR Reporting Requirement asReflexive Law: Employing CSR as a Modality to Promote Public Policy Objectives through Law, 24European Business Law Review 187, 193 (2013).
52. COM (2011) 681 final, s. 3.2.53. Ibid., s. 3.1.54. Ibid., s. 3.1.
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and the environment’,55 but no legal implications are discussed. The absence ofdiscussions at a legal level could be seen as an expression of CSR being understood asa moral obligation – that CSR is still ‘just’ a part of the companies’ broader societalpurpose.
In any case, the scope of the duty will depend on factors such as the size of theenterprise and the nature of its operations.56 The rationale behind the dividingenterprises based on their size, is due to the administrative burden that could comefrom extensive CSR obligations. Therefore, ‘[f]or small and medium-sized enterprises,especially microenterprises, the CSR process is likely to remain informal and intui-tive’.57 After this statement, it seems difficult to argue that CSR today is a legal duty forsmall and medium-sized enterprises. Even for the larger enterprises the Commissionnarrows the scope of the duty of CSR when it states that ‘enterprises are encouraged toadopt a long-term, strategic approach to CSR (…)’, and even in cases of possibleadverse impact, the enterprises are merely ‘encouraged to carry out risk-based duediligence, including through their supply chains’.58
[C] Integrating CSR in the Duties of the Board
Such a, in principle, progressive and broad CSR definition does present new possibili-ties for the discourse on the duties of the board. Nevertheless, it is undoubtedly adiffuse basis on which to identify and agree on specific duties for specific organs of thecompanies.59
Different approaches as to the extent of CSR legislation can be found acrossMember States, and the Commission highlights that:
[r]espect for applicable legislation, and for collective agreements between socialpartners, is a prerequisite for meeting that [corporate social] responsibility.60
We see that CSR is endorsed also by the Commission as a concept that encompasseslegal compliance and beyond in an interaction between the Member States’ applicablelegislation, collective agreements, European and international rules. Commonly ac-cepted ethical standards of the European and global community may be seen asinforming this new CSR definition.
CSR as a legal concept in company law indicates a broader scope of the interestsof the company as the framework for the duties of the board.61 However, while theCommission’s Communication on CSR presents a paradigm shift, the EU debate on
55. Ibid., s. 1.56. Ibid., s. 3.1.57. Ibid., s. 3.1.58. Ibid., s. 3.1 (emphasis added). Risk management and due diligence are discussed in §7.03[D]
infra.59. And as we will see, the lack of follow up from the Commission has shown that the outcome is
not necessarily progressive.60. COM (2011) 681 final, s. 3.1.61. See our discussion in s. §7.02 supra and also e.g. already Gunther Teubner, Company Interest:
The Public Interest of the Company in itself, in Ralf Rogowski & Ton Wilthagen Reflexive LabourLaw (Kluwer Law and Taxation Publishers 1994). Teubner points out that the company is an
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company law and corporate governance does not even come close to fully reflecting thenew CSR definition. Indeed, the main link between CSR and corporate governance andcompany law lies in the renewed focus in the EU on unrestricted short-termism as aproblem in its Green Paper on Corporate Governance,62 in the Report of the ReflectionGroup on the Future of EU Company Law and on the Action Plan on EuropeanCompany Law and Corporate Governance.63
Challenging short-termism has a link to the core issue of what the interests of thecompany are: economic interest usually understood as shareholder profit only or abroader balancing of interests. This is misleadingly often discussed as a stakeholder v.shareholder debate. As the recent crises have shown, short-termism is also a problemin terms of a more narrow economic interest, whether denoted the core economicinterest of the enterprise or shareholder profit. A long-term perspective is oftennecessary to provide anything but very short-term profit and a broader balancing ofinterests is an integral part of a long-term perspective.64
Nevertheless, even an informed business case-based long-term perspective willat some point identify a potential conflict between the narrow economic interests andthe broader societal concerns. The debate on what the concept of the interests of thecompany should encompass has at an EU level a long history back to the never-adopteddraft Fifth Company Directive, addressing structure and management questions forpublic limited liability companies.65 In the proposal from 1988, the interests of thecompany as a guideline for the board were set out in the following manner:
All the members of the management and supervisory organs shall carry out theirfunctions in the interest of the company, having regard to the interest of theshareholders and employees.66
This 1988 definition of the interests of the company is in a modern CSR context a verytentative attempt at broadening the scope by mentioning the interest of the employeesand through including shareholders as an interest to be considered, discerning the
entity with its own interest intermediating with other interests such as management, sharehold-ers, unions and public interest. Teubner’s approach on the interests of the company – as anintermediating concept – can be viewed in the light of a suggestion of CSR as a comprehensivedefinition – as a communication process between subsystems in the development of transparentnormative framework for business response to uncertainties and risk emanating from social andenvironmental impacts of business, see Olufemi O. Amao, Reflexive Law and the CSR Debate.Reflexive Law: Does it have any relevance to the Corporate Social Responsibility (CSR) debate? 6Cork Online Law Review 55, 59 (2007).
62. COM (2011) 164 final.63. COM (2012) 740 final, ‘Action Plan: European company law and corporate governance – a
modern legal framework for more engaged shareholders and sustainable companies’, availableat <http://ec.europa.eu/internal_market/company/docs/modern/121212_company-law-corporate-governance-action-plan_en.pdf> (last visited on 16 May 2013).
64. As we discussed above concerning the business case argument for CSR duties of the board.65. The proposal for the Fifth Companies Directive seems to be discussed ongoingly after it was
formally withdrawn from the Commission in 2001. The proposal is mentioned in the latest EUdocuments for the future development of EU company law, and the EU Parliament stated that it‘[b]elieves that due consideration should be given to the resumption of work on the FifthCompany Law Directive with regard to the structure and operation of public limited companies’,see EU Parliament resolution 14.06.12, s. 6.
66. Proposal for the Fifth Companies Directive, Art. 10 a (2).
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shareholder interest from the company interest proper. Compared to the UK Compa-nies Act section 172, enacted in 2006, it may seem difficult to understand thecontroversy that this proposal instigated.67 The main difference lies, however, in thesubordination of shareholder interests to the interests of the company, which is thereverse of what we see in the much broader formulated list of interests to be taken intoaccount in the UK Companies Act.68
As a way of combating the unrestricted short-termism and which also may beseen as an attempt to integrate broader concerns, the Reflection Group raised the ideaof enacting a rule on the level of EU secondary legislation allowing Member States topermit companies to include in their articles of association that the board shouldpromote the long-term interests of the company. This would allow the board to give thelong-term interests of the company ‘priority over the interest of individual shareholdersif these two are in conflict and if serving the short term interest of shareholders wouldhave a direct negative impact on the long-term viability of the company’.69
The Reflection Group does not suggest a mandatory rule providing a long-termdevelopment focus, where important CSR requirements could be addressed. TheReflection Group takes the more modest approach by highlighting the importance ofbalance, in that short-term opportunism is also an integral part of doing business andnot by definition a wrong perspective – it is the dominance of the short-termperspective that is the problem. The Report goes on to state that:
(t)he Group acknowledges that listed companies in all EU jurisdictions should beable to make a deliberate choice for a stakeholder-oriented view of their ownpurpose and goals, via amendments to their articles of association (…) can only beadopted in compliance with the required procedures under national company law.
67. See e.g. James D. Cox & Nis J. Clausen, The Monitoring Duties of Directors under the ECDirectives: A View from the United States Experience, 2 Duke J. of Comparative & InternationalLaw 29, 52 (1992). For the newer discussion concerning the UK Companies Act, s. 172, see e.g.L. Linklater, Promoting Success: The Companies Act 2006, 28 Company Lawyer 129, 129 (2007),stating that s. 172 has been one of the most controversial elements of the 2006 Act. See also E.Lynch, Legislative Comment, Section 172: a ground-breaking reform of director’s duties, or theemperor’s new clothes? 33 Company Lawyer 196 (2012), where the author questions whether thenew s. 172 really is a change of substance or just a change in form when she cites that 172 of theCompanies Act 2006 appears ‘to do little more than set out the pre-existing law on the subject’,cf. West Coast Capital (Lios) Ltd v. Debbie Garden Centers Plc [2008] CSOH 72, 21; CobdenInvestment Ltd v. RWM Langport Ltd [2008] EWHC 2810 (Ch). See also e.g. Gudula Deipen-brock, Sustainable Development, the Interest(s) of the Company and the Role of the Board;Charlotte Villiers, Directors’ Duties and the Company’s Internal Structures; and Beate Sjåfjell,Towards a Sustainable Development: Internalising Externalities, n. 25 supra.
68. However, it is just the shareholders that can enforce their interest through the mechanism of astatutory derivative action on behalf of the company, leaving the other stakeholders empty-handed in regard of utilising s. 172. Accordingly, shareholders seem to maintain their positionas a primary interest, where the discretion granted the directors to take account for otherinterests that the shareholders in s. 172 only will be given effect insofar as these other interestswill ‘promote the success of the company for the benefit of shareholders’, see. E. Lynch, supra.67, 201. According to Lynch, the conclusion to be drawn is that ‘the list of factors in s. 172 (1)is mere window dressing, and in fact, directors, shareholders and other stakeholders are in thesame position they were before the 2006 Act, for all practical intents and purposes’, 200.
69. See Report of the Reflection Group n. 43 supra. s. 3.1.1.
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In all EU jurisdictions (…) this approach [should be] available to companies and itsapplication would then require an affirmative vote by the shareholders meeting.70
The suggestion is clearly well-intended. However, suggesting that Member Statesshould be allowed to permit companies to choose a ‘stakeholder-oriented view’ mayperpetuate the Anglo-American shareholder primacy-informed view of companies as apan-European legal norm per today, which it is clearly not.71 The Reflection Group’sproposal may therefore be detrimental to a proper understanding of company law andthe concept of company interest in Nordic and other Continental-European Countries,where a regulatory requirement for a long-term perspective and a more inclusiveconcept of the interests of the company may be said to be already included in companylegislation.72
With the apparently insurmountable differences in approach that this discussionindicates, it may from the Commission’s pragmatic point of view seem a more rationalway forward than to harmonise and promote a concept of CSR to accept andacknowledge the differences in legislation concerning the directors’ duties throughoutEurope and rather concentrate on measures that would support the integration of CSRconcerns into the duties of the board. They may nevertheless be defined as a matter ofcompany law. In the next subsection, we will consider two main trends in thisdirection.
70. Ibid., s. 3.1.1.71. Rather, the dominating norm of shareholder primacy is a quasi-legal social norm, with varying
legal support in the different jurisdictions. See Beate Sjåfjell, Regulation Companies as if theWorld Matters, n. 29 supra; and Beate Sjåfjell, Internalising Externalities in Norwegian CompanyLaw, n. 25 supra. See also Andrew Keay, The Corporate Objective, 20-21 (Edward ElgarPublishing Limited 2011), also referring to William Allen, Our Schizophrenic Conception of theBusiness Corporation, 14 Cardozo Law Review 261, 264-265 (1992). See further analysis for anoverview of the debate: Jonathan Mukwiri, Myth of Shareholder Primacy in English Law, 24European Business Law Review 217 (2013); and Andrew Keay, Moving towards Stakeholderism?Constituency Statutes, Enlightened Shareholder Value, and More: Much Ado About Little? 22European Business Law Review 1 (2011). In the latter paper, the author makes the point that:‘The greater amount of social reporting that occurs and the greater importance of human capitalto companies in Anglo-American jurisdictions have, it has been suggested, moving thesejurisdictions closer to the stakeholder position’, 3.
72. In Norwegian company law, the stakeholder theory was advocated already back in 1988, whereSmith argued that shareholder primacy could not be the only interest of the company, especiallyif we have in mind their position in the resolution of the company, where the creditors interestsare prior to the shareholders, see Lucy Smith, Kampen på aksjemarkedet: en rettslig studie avselskapsovertak og forsvarstiltakk, 59 (Oslo: Universitetsforlaget1988). The same argument hasbeen made in Denmark by Werlauff, see Erik Werlauff, Selskabsmasken: Loyalitetspligt oggeneralklausul i selskabsretten, 70 (Gad 1991). In the Netherlands, the interest of the companyis also included in the role of the board, and then again also presumably a duty of the directors.The Frijns Code stipulates in Principle II. 1, that: ‘The role of the management board is tomanage the company, which means, among other things, that it is responsible for achieving thecompany’s aims, the strategy and associated risk profile, the development of results andcorporate social responsibility issues that are relevant to the enterprise.’ The management boardis accountable for this to the supervisory board and to the general meeting. In discharging itsrole, the management board shall be guided by the interests of the company and its affiliatedenterprise, taking into consideration the interests of the company’s stakeholders. For a furtherdiscussion concerning Dutch corporate law in regard of CSR issues, see Tineke Lambooy,Corporate social responsibility: legal and semi-legal frameworks supporting CSR, n. 12 supra.
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[D] Reporting and Risk Management as CSR Tools
Reporting requirements tend to be the compromise solution when regulating thesubstantive matters poses too great a challenge. While the Commission in April 2013put forward a proposal for so-called non-financial reporting,73 reporting on other issuesthan the financial ones in the narrow sense is not a new requirement. The EUaccounting rules have long contained provisions stipulating that Member States mustrequire their companies to report on notable environmental and labour issues to theextent that they may have an impact on the financial situation of the company.74
On national level, Norway is one of the countries that has taken this a stepfurther, requiring reporting on labour issues, gender equality and broader anti-discrimination work and the environment with the notable difference that the legisla-tive objective of the reporting is to promote labour interests, gender equality, combatdiscrimination on any basis and protect the environment in itself.75 The focus isthereby on the company’s impact on society rather than on society’s impact on thecompany. The belief informed by reflexive law theory76 that such reporting require-ments will lead to a process of integration of the issues in the duties of the board andinternalisation of the externalities in the business of the company, has led to the laudedDanish general CSR reporting requirement.77 Norway has, inspired by the Danish rule,added an additional layer of a broader CSR reporting requirement to its existingprovisions, requiring that large companies report on the work that they do to integrate
73. COM (2013) 207.74. Regulatory measures to promote social and environmental reporting was already addressed in
the Modernisation Directive (2003/51/EC) that prescribes that large companies’ annually reporton non-financial key performance indicators among other environmental and employee mattersrelate to their worldwide business activities. An analysis of the Directive and its implementation,see Tineke Lambooy & Nicole Van Vliet, Transparency on Corporate Social Responsibility inAnnual Reports, 5 European Company Law 127 (2008). Other EU sources where non-financialreporting has already been required see e.g. Art. 46(1)(b) of the Fourth Companies Directive,require that if relevant for the ‘development, performance or position’ of the company,environmental and social matters are to be included. This was proceeded by the CommissionRecommendation 2001/453/EC of 30 May 2001 on the recognition, measurement and disclosureof environmental issues in the annual accounts and annual reports of companies (OJ 2001 L156/33–42); even though the regulation is not satisfying as far as environmental protection isconcerned, it is nevertheless a significant first indication of the consideration of environmentalconcerns in EU company law.
75. Beate Sjåfjell, Internalising Externalities in Norwegian Company Law, n. 25 supra and BeateSjåfjell, Sustainable Companies: Possibilities and Barriers in Norwegian Company Law, n. 37supra. Also Sweden has reporting requirements for non-financial issues, see further e.g. JanAndersson & Frida Segenmark, Mapping Paper on the Company Law Barriers and Possibilities forSustainable Companies, April 2013, University of Oslo Faculty of Law Research Paper No.2013-09, <http://ssrn.com/abstract=2248584>, s. 3.
76. Reflexive law theory can be used as a legal instrument imposing duties or norms (mainly ofprocedural character) upon companies, and then again the directors. See e.g. Olufemi O. Amao,Reflexive Law and the CSR Debate, n. 61 supra.
77. Act No. 1403, 27 Dec. 2008, s. 99a. See e.g. Karin Buhmann, The Danish CSR ReportingRequirement: Migration of CSR-Related International Norms into Companies’ Self-Reglationthrough Company Law?, 8 European Company Law 65 (2011), available at <http://ssrn.com/abstract=1774742> (last visited 16 May 2013). See also Karin Buhmann, The Danish CSRReporting Requirement as Reflexive Law, n. 51 supra.
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human rights and labour rights concerns and other social interests, environmentalconcerns and combating corruption.78 Companies can choose to merely report thatthey have no CSR guidelines, and there is little indication that this new provision willbe enforced any more than the original CSR provisions have been.79
Empirical studies indicate that social and environmental reporting generally areneither reliable nor relevant and indicate that the ‘ugliest’ companies tend to use themost make-up.80 It is not rational for companies to report honestly and fully on theirefforts to become environmentally and socially responsible when their competitors donot, as the companies complying fully with mandatory or voluntary reporting require-ments then may come across as less responsible companies than their green-washingrivals.81 Stringent enforcement of reporting requirements and proper auditing andsanctions in case of non-compliance present themselves as necessary steps to changethis picture.
The EU proposal for non-financial reporting rules does little to allay the criticismthat the existing CSR reporting requirements in general give rise to,82 and it fails to takeup the potential of truly integrated reporting.83 Instead, some hope may be found intentative indications that integrated financial and non-financial reporting seem increas-ingly the norm for large companies.84 Disclosure requirements in a number of EUMember States, faulty as they may be, also go farther than the newest initiative on thismatter from the Commission.85
78. The amendment of the Norwegian Annual Accounts Act was adopted in April 2013 and cameinto force on 1 Jul. 2013.
79. As with the original CSR requirements, there is no proper auditing requirement, merely aconsistency check which is waived where the companies report according to internationalstandards like Global Compact. The non-compliance with the original CSR requirements is notdiscussed in the preparatory works, indicating that proper enforcement cannot be expected withthe new general CSR requirement either.
80. See Sylvie Berthelot, Denis Cormier & Michel Magnan, Environmental Disclosure Research:Review and Synthesis, 22 J. of Accounting Literature 1 (2003), analysing environmentaldisclosures and concerns over their reliability, William S. Laufer, Social Accountability andCorporate Greenwashing, 43 J. of Business Ethics 253, 255-257 (2003); and David Graham &Ngaire Woods, Making Corporate Self-Regulation Effective in Developing Countries, 34 WorldDevelopment 868, 870-871 (2006). See also on non-compliance amongst European companies inthe preamble to COM (2013) 207: Proposal for a Directive of the European Parliament and of theCouncil Amending Council Directives 78/660/EEC and 83/349/EEC as regards disclosure ofnon-financial and diversity information by certain large companies and groups.
81. See also David Graham & Ngaire Wood, Making Corporate Self-Regulation Effective, n. 80 supra,877.
82. See COM (2013) 207. Only on the issue of gender diversity does the EU proposal contain any realsubstance. Gender diversity is discussed in the chapter Gender diversity of boards in this book.
83. See e.g., <https://www.globalreporting.org/information/current-priorities/integrated-reporting/Pages/default.aspx> (last visited 16 May 2013). See also the response note from ProfessorsCharlotte Villiers and Jukka Mähönen on behalf of the Sustainable Companies Project at<http://www.jus.uio.no/ifp/english/research/projects/sustainable-companies/news/> (lastvisited 19 Aug. 2013).
84. See e.g. the KPMG International Corporate Reporting Survey 2011, <http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/corporate-responsibility/Pages/default.aspx> (last visited 27 May 2013).
85. Daniel Kinderman, Corporate Social Responsibility in the EU, 1993 – 2013, n. 48 supra, 13.
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At a general level, a flaw in reporting as a CSR tool is its retrospective nature,which invites companies to select and explain rather than to confront and act. Themore forward-looking tool of risk management therefore may present a more promis-ing avenue.86
The financial crises have increased the general awareness of business risks andunderlined the importance of carefully reviewing and managing risks. While thefinancial difficulties affecting the viability of many large enterprises have differentroots, a common problem was the insufficient monitoring structures and the percep-tion of failed internal controls.87 The viability of companies may be threatened bynumerous external actors or occurrences and by internal operational risks. In our CSRcontext this entails, in the words of the Reflection Group that:
The public awareness and reaction in this respect may be expected to require morefrom management in terms of CSR policies and also will call for a long termperspective of the company.88
Recent developments at EU level could be seen as being in line with the view of theReflection Group. The importance of risk management as a duty of the board ofdirectors has been addressed by the Commission.89 A duty to integrate a broader CSRconcept of risk management in this regard can be an important step in the furtherconvergence of CSR and mainstream corporate governance. All companies face a widevariety of external and internal risks. A framework of internal control and riskmanagement could facilitate the companies’ achievement of their strategic, operations,reporting and compliance objectives.90 An enhanced risk management instrument andthe emphasis of the duty of the directors that this would entail would be crucial toensure a true integration of the companies’ impact on society into the decision-makingin the company. An initiative in this respect was announced to be put forward alreadyin 2013 according to the Commission’s Action Plan:
In order to encourage companies to enhance board diversity and give greaterconsideration to non-financial risks, the Commission will make in 2013 a proposalto strengthen disclosure requirements with regard to their board diversity policyand risk management through amendment of the Accounting Directive.91
86. This being said, risk management is not an entirely new CSR tool in EU. Directive 2006/43/ECArt. 41 requires most ‘public interest entities’ to have audit committees and impose a duty onaudit committees (for alternative bodies) to monitor the effectiveness of companies’ internalcontrol, internal audit (if any), and risk management systems. In the same manner, Directive2006/46/EC Art. 7 requires listed companies to include a corporate governance statement intheir annual report containing ‘a description of the main features of the company’s internalcontrol and risk management systems in relation to the financial reporting process’.
87. Christoph Van der Elst in this book, The Risk Management Duties of the Board of Directors, §6.03.88. Reflection Group, s. 3.1.2., i).89. COM (2012) 740 final, s. 2.1.90. Committee of Sponsoring Organizations of the Treadway Commission, Enterprise Risk Manage-
ment – Integrated Framework, Executive Summary, AICPA Inc, see further about the COSOprinciples in Christoph Van der Elst in this book, The Risk Management Duties of the Board ofDirectors, §6.03.[B][2].
91. COM (2012) 740 final, s. 2.1, referring to the Accounting Directive, Directive 78/660/EEC.
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We certainly then had reason to expect more than the rather toothless proposal onnon-financial reporting put forward in April 2013.92 While the proposal has a mentionof the identification and management of risk, its non-stringent measures and hesitantapproach leaves little room for doubt that CSR reporting will continue to be seen as lessserious, less important and less relevant to the core of the companies’ business thanproper financial reporting.93
To realise the potential of risk management as a CSR tool, we would obviouslyneed more than risk management in the narrow financial sense. We would also needto move beyond risk management in the somewhat broader sense, focusing on theimpact of social and environmental risks on the performance of the company. Rather,we would need to have risk management with full due diligence, such as thatrecommended by the Ruggie principles in the human rights area.94 An integrated duediligence forming a basis for a comprehensive CSR risk management would have tocover the societal impact of the business of the company on social and human rightsissues as well as on environmental and climate issues.
It is unfortunate that the Commission’s approach to CSR risk management is ona more voluntary and non-stringent basis, as one could fear already from the start in theCommission’s emphasis that:
(t)his additional focus on non-financial aspects would encourage companies toadopt a sustainable and long-term strategic approach to their business.95
When the Commission says that non-financial reporting would encourage enterprisesto be more aware of their risk potential, and therefore also their possible impact onsociety, this promotes an understanding of CSR risk management as a voluntary effort.This is not in accordance with the Commission’s earlier Green Paper on CorporateGovernance where the effectiveness of risk management was said to rely upon a cleardecision ‘set from the top’, for example by the board of directors for the wholeorganisation.96 Further, the Commission stated that:
It is generally recognised that the board of directors bears primary responsibilityfor defining the risk profile of a given organisation according to the strategyfollowed and monitoring it adequately to ensure it works effectively.97
92. COM (2013) 207 final. The only concrete policy proposal regarding CSR concerns is anamendment of the 4th Company Directive.
93. As explained in the proposal itself, it insists on taking ‘a flexible and non-intrusive approach.Companies may use existing national or international reporting frameworks and will retain theirmargin of manoeuvre to define the content of their policies, and flexibility to disclose informa-tion in a useful and relevant way. When companies consider that some policy areas are notrelevant for them, they will be allowed to explain why this is the case, rather than being forcedto produce a policy’, COM (2013) 207, s. 1.
94. United Nations Human Rights, Guiding Principles on Business and Human Rights – Implement-ing the United Nations ‘Protect, Respect and Remedy’ Framework, www.ohchr.org/Documents/Publications/GuidingPrinciplesBusinessHR_EN.pdf (last visited 16 May 2013).
95. COM (2012) 740 final, s. 2.1.96. COM (2011) 164 final, s. 1.5.97. Ibid., s. 1.5.
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If we are to see risk management as an effective future CSR tool, we would need awhole new set of clear-cut requirements for such risk management to be supported bystringent reporting requirements.
[E] An Integrated European CSR Approach?
CSR is no longer a fringe concern. We see a tentative convergence at the EU levelbetween the mainstream areas of company law and corporate governance, on the onehand, and the broader societal issues encompassed by the CSR debate, on the otherhand. We also see this at the Member State level in the increased inclusion of CSRissues in the corporate governance codes – the main regulatory tool of the mainstreamcorporate governance movement.98 While much of the inclusion in the codes issuperficial and insufficient, it is an indication of the growing acceptance of theimportance of the impact of business on society.99 The inclusion of CSR issues inmainstream corporate governance codes and in the debate on core company law issuesand notably the paradigm shift in the Commission’s definition of CSR, all contribute toa strengthening of the argument of core CSR issues as generally accepted ethicalstandards of society.100 And as we saw in section §7.02 above, this has relevance for thescope of action for the board of directors and potentially for their legal duty to promotethe interests of the company.
The question remains though, whether the paradigm shift in the EU’s CSRdefinition is sufficient to instigate a shift away from ‘business as usual’ and onto asustainable path. Is Europe, at EU level and at Member State level, moving to resolvethe underlying issue or merely polishing the surface? Considering the focus onreporting, the question may be asked whether the different initiatives are merelyhelping companies to greenwash. Certainly, it is not rational for socially responsiblecompanies to report openly on their efforts as that may in comparison to theirnon-complying competitors seem less responsible. A level playing field for responsiblecompanies is an obvious lacking element of EU law.
We may safely conclude that we do not yet have tools in place to ensure thecontribution of business to the overarching goal of sustainable development.101 RecentCSR developments at EU level do not serve to fully integrate CSR concerns in the dutiesof the board. However, environmental and social concerns are to a greater extent
98. Daniel G. Szabó & Karsten Engsig Sørensen Integrating Corporate Social Responsibility inCorporate Governance Codes in the EU, 19 Feb. 2013, Nordic & European Company LawWorking Paper No. 10-28, <http://ssrn.com/abstract=2081611> (last visited16 May 2013).
99. The Norwegian Corporate Governance Code also includes CSR issues in its risk managementrecommendation; an integrative approach that, however, is not picked up in the detailedexplanation of the risk management recommendation where the focus is on traditionalfinancial risk management, see s. 10. The code is available in the English translation at<http://www.nues.no/en/> (last visited 19 Aug. 2013).
100. With the tentative consensus on what these standards are being formed by the repeatedreference to international conventions and guidelines to human rights, labour rights, genderequality and other social concerns, environmental protection and anti-corruption. A case inpoint is the Commission’s new CSR definition, see §7.03[B] supra.
101. See quote from COM (2011) 681 final, s. 1.2 towards the end of §7.02[C] supra.
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emphasised and the tentative indications of a broader risk management approach aretendencies in the direction of developing standards that down the road could result inclear-cut directors’ duties.
Per today, reporting remains the compromise fix in practice, with no clear duty tocomply with any general CSR standards. The Commission failed to follow up on thepromise encompassed in the integrated reporting debate in spite of the Commissionstatement that it was following this work closely.102
A small segment of companies in Europe have signed up to the various interna-tional CSR initiatives, such as Global Compact.103 The Commission ‘invites’ morebusinesses to sign up to international CSR initiatives, especially in the fields of humanrights, but seems willing to do little substantive.104 The Commission’s new Action Plangives little reason to amend this conclusion, although there are positive indicationssuch as the discussion of risk management in relation to non-financial activities. TheCSR reporting proposal is toothless with a voluntary element that inspires non-compliance and a lack of proper enforcement and auditing. Unless further initiativesare put into place, there is little reason to expect major changes in the risk managementsystems of European companies.
§7.04 A CSR ROLE FOR THE EU?
The paradigm shift of the EU definition of CSR has not been followed up in practice.105
In spite of the good intentions of the Commission, it does not seem to have been ableto follow through on the tentative convergence tendencies between CSR and main-stream corporate governance.106 Considering this failure and the lack of consensus onthe core issue of the interests of the company, this gives rise to question whether the EUcan play any significant role here at all.
As a matter of EU law, the subsidiarity principle requires that we first ask: doesthis matter require EU level rules or can it be dealt with by the Member States
102. COM (2011) 681 final.103. Ibid.104. N. 101 Supra.105. See e.g. Daniel Kinderman, Corporate Social Responsibility in the EU, 1993-2013, n. 48 supra.106. In this context, it is interesting to note also Douglas M. Branson, Proposals for Corporate
Governance Reform: Six Decades of Ineptitude and Counting, May 2013, Wake Forest LawReview, forthcoming, Legal Studies Research Paper Series Working Paper No. 2013-16,<http://ssrn.com/abstract=2260406> (last visited 16 May 2013). The author describes thedifferent approaches to corporate governance, and the many shifts in this respect that hasbecome quite common when we look at the history over the last six decades. In the concludingremarks, the author asks why reform proposal after reform proposal ends up effectively goingnowhere – and he makes a tentative observation, that all, or almost all, of these proposals comefrom the top-down rather than the bottom-up regulatory position. The argument has beenmade that the bottom-up perspective in the context of reflexive law is a way forward. For ananalysis of CSR as a matter of reflexive law, see e. g. Karin Buhmann, The Danish CSR ReportingRequirement as Reflexive Law, n. 51 supra; and Olufemi O. Amao, Reflexive Law and the CSRDebate, n. 61 supra. However, our discussion in §7.03[D] indicates that the current efforts inthis direction are insufficient.
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themselves?107 The answer generally speaking is that Member States probably areunable to deal with the issues unilaterally, although it may be possible that a MemberState could break away from the herd and spark a development in the rest of Europe.108
However, the most likely scenario seems to be that action at EU level is a necessary toolto achieve the desired change towards sustainability. Warranted from a businessperspective or not, companies may shy away from Member States with new CSRrequirements, concerned about administrative or financial burdens of, for example,putting into place broader risk assessment mechanisms and truly integrated reporting.Certainly Member States may fear such an effect, and the barrier to innovativeregulation that the fear of regulatory competition constitutes is best dealt with byadopting common European rules. Integrating the interests of people and planet intothe pursuit for profit, promoting the interest of future generations and setting into placea really long-term perspective is therefore perhaps not only more easily achievable butonly possible on a coordinated European level.
Also as a matter of EU law, the question should be posed whether EU law thenrequires action or whether promoting CSR is an optional matter. In the core CSR issueof environmental protection, Article 11 in the Treaty on the Functioning of theEuropean Union (TFEU) codifies the most operational part of the principle of sustain-able development, namely the environmental integration principle.109 Article 11 TFEUrequires necessary action to be undertaken to integrate environmental protectionrequirements in all policies and activities, with the aim of achieving sustainabledevelopment. Sustainable development is an overarching aim of the EuropeanUnion.110 The current first author has therefore made a case for a duty for the EUinstitutions to integrate environmental protection requirements into the regulation ofcompanies, including the duties of the board, to the extent necessary to achieve theshift away from ‘business as usual’ and onto a sustainable path.111
While we do not have the same explicit integration rule in another core area ofCSR: human rights, much of the same argument can be made here. Securing humanrights is a fundamental part of sustainable development and also in itself an objectiveof the EU. This was the case already before the Lisbon Treaty reform,112 and theposition of human rights has been made even stronger through the Lisbon Treaty.113
107. The subsidiarity principle in Art. 5(3) TEU seeks to ensure a workable division of powersbetween the Union and the Member States.
108. In the same way that Norway has done in the core company law area of the composition of theboard, see e.g. Beate Sjåfjell & Hedvig B. Reiersen, Report from Norway: Gender Equality in theBoard Room, 5 European Company Law 191 (2008).
109. Beate Sjåfjell, Quo Vadis, Europe? The Significance of Sustainable Development as Objective,Principle and Rule of EU Law, in Cecilia Bailliet (ed.), Non State Actors, Soft Law and ProtectiveRegimes (Cambridge University Press 2012).
110. Ibid.111. Sjåfell, n. 109 supra. See also Sjåfjell, Regulating Companies as if the World Matters, n. 29
supra.112. See Sjåfjell, Towards a Sustainable European Company Law, n. 11 supra, at s. 10.8.113. See TEU Art. 2 and TEU Art. 6 (1): ‘the Union recognises the rights, freedoms and principles set
out in the Charter of Fundamental Rights’. For the position of human rights pre-Lisbon, seeBeate Sjåfjell, Towards a Sustainable European Company Law, n. 11 supra, s. 10.8.
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The urgent need to integrate human rights concerns into the decision-making incompanies is reflected internationally in the work done with Guiding Principles forbusiness and human rights under the leadership of Special Representative of the UNHuman Rights Council, John Ruggie.114 Although the Ruggie principles, as they havebecome known, are legally a non-binding regime, they may be in the process oftransforming CSR.115 The Guiding Principles set out a due diligence framework whichrequires a company to assess its activities and relationships in their social, political andeconomic context, act on the findings and report on actions taken.116 To operationalisedue diligence in the field of human rights, the principles promote the concept of humanrights risk:
Due diligence for human rights risk enables a business to both respect humanrights and minimize the threat to company interests from non-financial or socialrisks. In this way, due diligence assessments for human rights risk providebusinesses with the empirical information necessary in attempting to reconcile themarket-driven demands of doing business with the social expectations and legalobligations for respecting human rights.117
From a company law perspective, the CSR issue of human rights is thereby linkeddirectly in the mainstream corporate governance duties of the board of directors interms of risk management.
The case may arguably be made that the EU institutions have a legal duty,strengthened through international obligations and arguments of moral necessity, toidentify the means to integrate the core CSR issues that the Commission itselfpinpointed118 into the regulation of companies to the extent necessary to achieve trulyresponsible business and ensure the contribution of business to sustainable develop-ment. The challenges posed by climate change are a case in point for the broaderperspective in which the social, environmental and economic dimension of sustainabledevelopment are promoted in an integrated approach based on a recognition of theinextricable entity of humanity, our natural environment and our economic system.
The board of directors would have a crucial role in setting the strategies andensuring their implementation in the business of the companies to achieve suchintegration, whether the board is explicitly addressed in such regulation or not.
The remaining question then is what the EU can do to fulfil its role. It lies beyondthe scope of this chapter to give more than a bare indication of the potential in differentareas.119
114. Protect, Respect and Remedy: A framework for Business and Human Rights, UN Doc.A/HRC/8/5 (2008), paras 54 and 55.
115. Mark B. Taylor, Beyond ‘Beyond Compliance’: How Human Rights is Transforming CSR, in AtleMidttun (ed.), CSR and Beyond – A Nordic Perspective (Cappelen Dam Akademisk 2013).
116. Ibid., 9. See also UN Guiding Principle No. 17.117. Taylor, n. 115 supra, 10.118. To ‘to integrate social, environmental, ethical, human rights and consumer concerns into their
business operations and core strategy’, COM (2011) 681 final, s. 3.1.119. A deeper analysis is undertaken in the forthcoming volume, Beate Sjåfjell & Benjamin
Richardson (eds), Company Law and Sustainability (Cambridge University Press 2014).
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First, the core company law issues of the company purpose, the duties of theboard and the interests of the company should be revisited, albeit that the EU has failedto harmonise these earlier and they will be controversial topics to reopen.120 We putforward that discussing the integration of CSR into the decision-making in companieswithout addressing these core company law issues, will continue to be little more thanglossing the surface of an extremely unsustainable path of ‘business as usual’.121
Second, in recognition of the significance of corporate groups, an in-depthanalysis is required of the balance between the acceptance in practice of a concept ofan interest of the corporate group, on the one hand, and the limited liability for theparent company, on the other hand. In the corporate world, establishing subsidiaries orspecial purpose vehicles to undertake great risk ventures is a well-known mechanism,allowing the parent company to receive high dividends if the venture is financiallysuccessful and walk away without obligations if environmental or societal risksmaterialise.122 While the Commission’s Action Plan on Company Law raises the issueof whether a group interest should be recognised and indicates that this shall befollowed up in 2014, the issue of whether such recognition should be coupled with abroader scope for piercing of the corporate veil or other ways of holding the parentcompany liable for environmental or other societal damage by the subsidiaries is noteven touched upon.123
Third, a core element should be a cradle-to-cradle or life cycle analysis intrinsicto a true CSR due diligence. There is ongoing work in the EU on the life cycle approachin terms of environmental impact of products.124 The due diligence mechanism of theRuggie Principles could perhaps serve to inform a broadening and deepening of thisapproach. To follow up on this, fourth, integrated reporting with proper auditing seemsnecessary, which would need to go far beyond the current EU proposal.125
Fifth, the potential reform of takeover rules and other financial market law rulesrequire analysis. The failure of the Takeover Directive in terms also of promoting
120. See supra §7.02.121. See Sjåfjell, Regulating Companies as if the World Matters, n. 29 supra.122. See e.g. Muzaffer Eroglu, Multinational enterprises and tort liabilities: an interdisciplinary and
comparative examination (Edward Elgar, 2008).123. COM (2012) 740 final, Action Plan: European company law and corporate governance, s. 4.6.124. COM (2013) 196 final. Building the Single Market for Green Products: Facilitating better
information on the environmental performance of products and organisations.125. See supra §7.03[B]. It may even seem that the corporate world is taking the lead: ‘companies
not yet reporting on their CR activities are under significant pressure to start. This will beincreasingly critical; not only to stay competitive in a societal context, but also to gain a betterunderstanding of how CR activities impact and benefit the business in areas such as costsavings and new business opportunities’, see Corporate responsibility reporting has become defacto law for business, one of the key findings of the KPMG International Corporate ReportingSurvey 2011, <http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/corporate-responsibility/Pages/default.aspx> (last visited 27 May 2013). Although thisviewed in a positive light may be seen as an indication of the reflexive law theory working inpractice, the fact remains that without regulatory intervention and control, this sector is left tothe initiative of business, which may bring development forward but also leaves the field opento non-audited claims of green and responsible business.
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sustainable development has been substantiated in earlier work.126 The ongoing workto consider potential reform of the Directive has ever so reticently touched upon theseissues,127 but the Commission’s attitude leaves little hope for a necessary paradigmshift in the focus of EU law in this area.128 Although the takeover rules are meant toregulate a relatively rare occurrence for the individual company, they have a generaleffect on companies which in the case of the Takeover Directive may be said to benegative for the board of directors and its ability to fulfil its corporate governancerole.129 Generally, CSR initiatives aimed at regulating companies should be combinedwith an approach that encompasses the level of the financiers.130
Integrating CSR into directors’ duties is arguably a fruitful avenue and in ouropinion also a necessary one for nudging companies away from ‘business as usual’ andtowards a green and sustainable business. EU law has the potential of taking the leadin this work within Europe and globally and thereby turning away from the currenttrend of short-term growth mania and onto a sustainable new path. This wouldindubitably benefit European business and European and global society.
126. See Sjåfjell, Towards a Sustainable European Company Law, n. 11 supra, at Part V, where theTakeover Directive is analysed as a test case for the objectives of EU company and financialmarket law.
127. Mainly in the External Study on the application of the Directive on takeover bids, undertakenby Marccus Partners on behalf of the Commission, <http://ec.europa.eu/internal_market/company/takeoverbids/> (last visited 27 May 2013).
128. Beate Sjåfjell, A Sustainable Takeover Regime? The Potential Reform of the Takeover Directive ina Sustainable Development Perspective, working paper on file with current authors, see abstractat <http://ssrn.com/abstract=2098852> (last visited 27 May 2013).
129. Beate Sjåfjell, The Core of Corporate Governance: Implications of the Takeover Directive forCorporate Governance in Europe, 22 European Business Law Review 641 (2011), available at<http://ssrn.com/abstract=1598298> (last visited 27 May 2013).
130. See e.g. Benjamin Richardson, Socially responsible investment law: regulating the unseenpolluters (Oxford University Press 2008).
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