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Researchers warn about EU Sustainable Corporate Governance

Joachim Kattrup

torsdag 29. april 2021 kl. 14:18

The European Commission’s proposal for new rules for Sustainable Corporate Governance is now also receiving harsh criticism from both European and American researchers. On the other hand, there is surprising support from prominent business leaders such as former Unilever CEO Paul Polman and PwC’s global chairman Bob Moritz, who in a joint statement expressed support for the Commission’s proposal. The dispute is about a controversial report from E&Y in Italy. This concludes that investors are thinking short-term and therefore stand in the way of real sustainable management decisions. 

As Financial Weekly has previously described in the articles (in Danish)Scatching criticism of the EU’s Sustainable Corporate Governance” and “EU Sustainable Finance threatens the Danish management model“, law professor Jesper Lau Hansen from the University of Copenhagen and Professor Steen Thomsen from CBS’ Centre for Corporate Governance have raised a harsh criticism of the European Commission’s proposal for a new common European set of rules for Sustainable Corporate Governance.

The Commission’s proposal includes a proposal to dilute the shareholders’ decision-making rights and give more power to so-called “Stakeholder Committees”, which are to be composed of many different stakeholders outside the circle of shareholders. In addition, the proposal provides an opportunity to sue top executives who do not follow the stakeholder committee’s sustainable recommendations.

Criticism of the proposals has intensified, after 40 researchers and professors from Europe and the US in a “Call for Reflection on Sustainable Corporate Governance” urge the EU to stop and think before moving forward with negotiations on the subsequent wording of legislation and parliamentary work.

The criticism from the researchers, where among others professor of Corporate Governance, Steen Thomsen, is the initiator, appeals to reflection, as “Our recommendation for further reflection is not because we believe that the challenges facing society are not urgent,” the researchers write. “In contrast, it is due to their urgency that we must ensure that any solutions are guided by the very best evidence,” it says.

The researchers refer to a criticized report from Ernst & Young, which the European Commission has used as a basis for the proposals to integrate sustainability into governance rules. According to the researchers, the commission’s work is based on undocumented conclusions from the report that investors are merely greedy short-term shareholders.

“Contrary to intent, the proposal does not promote long-term investor interests, and the preparation is based on a heavily criticized Italian Ernst & Young (EY) report, the conclusions of which no one can recognize,” Financial Weekly wrote in December following criticism from Jesper Lau Hansen and Steen Thomsen.

Jesper Lau Hansen stated here that “this is some of the worst work I have ever seen. The Commission takes an Italian EY report at face value. But it is full of preconceived notions. It has been massively criticized by all experts in the field, and it has even been rejected by EY in Sweden.”

It is the same criticism that is now receiving support from researchers from both Europe and the United States. It is extremely rare for American researchers to interfere in internal European governance rules, making the criticism unusually remarkable.

 

The EU receives support from global top leaders

Last month, the EU received a statement of support for its proposals from a number of prominent global business leaders. They want sustainability to be more integrated into reforms of governance rules. Signatories include Paul Polman, Co-Founder & Chair of IMAGINE (formerly CEO of Unilever), Kerrie Waring, CEO of the International Corporate Governance Network, and Bob Moritz, Global Chairman of PwC.

In the statement, the business leaders write, among other things, that “We express our support for the current European Commission examination and consultation on proposals for sustainable corporate governance, focusing on Board oversight, mandatory due diligence and aligning Board and executive remuneration to sustainability objectives. We agree that this initiative is essential to implement the EU’s Green Deal and its Sustainable Finance action plan. ”

Contrary to the researchers, however, there is strong support from significant global top executives for reforms of current governance rules. One of the supporters of the EU is also Richard Howitt, former Executive Director of the International Integrated Reporting Council.  In an article on the Board Agenda, he addresses very directly the criticism of the EY report’s conclusions about short-term investors, which he believes is justified.

“It strikes me as odd that critics seem more concerned with the methodology through which” short-termism “is defined in the study, rather than its devastating consequences for our world and the action needed to change this,” Richard Howitt writes.

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