11 Jul 2022

An EU boost to sustainable corporate governance

Donald Kalff

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There are numerous initiatives to steer corporate decision-making towards the EU’s sustainability objectives. The frontrunner seems to be the ESG movement – the setting of environmental, social and governance standards. Unfortunately, more and more inherent flaws of this approach are coming to light.

A far more promising route is the strengthening of corporate governance, and the EU Directive on Corporate Sustainable Due Diligence is an important step in the right direction. It is argued that its introduction will inevitably lead to more hands-on board involvement in corporate strategy in general, as sustainability cannot be separated from innovation, investment and commercial policies.

In turn, this will trigger a reset in the ways the two-tier governance system, in which a supervisory board both advises and oversees a management team, operates in practice. This paper presents an overview of desirable improvements.

It also puts forward that the Commission should accelerate this process by stimulating the use of the continental corporate law systems of the EU Member States. These systems put the company, and not the share- or stakeholders, centre stage and entail individual and joint responsibility of members of the board for the company.

Given the very sizable funds the Commission makes available to companies to facilitate their transition, both financial and governance due diligence are called for.