The EU prepares to get tough over corporate governance

An overview from FTI Consulting Brussels

The session of the European Parliament’s Justice Committee earlier this week left no doubt: The EU is working towards a fundamental change in corporate culture in a number of different ways.

Two initiatives were on the agenda, generating a lively debate from the MEPs who were present. Their respective impacts could have a significant impact on how businesses operate in future.

Firstly, the European Union is expected to shortly roll out new legal obligations which could include civil liability for human rights abuses and environmental harm in supply chains. We highlighted this initiative in detail in our recent snapshot on Human Rights Due Diligence and Sustainable Supply Chains. The debate saw overwhelming support from MEPs who attended the session, calling the initiative an historical moment. The Rapporteur of the upcoming non-legislative report, Lara Wolters from the Socialists & Democrats group in the European Parliament  (S&D, centre left), confirmed that it will  have a broad scope and will propose far-reaching measures such as ensuring access to justice for victims of corporate activities outside the EU,  and making EU companies liable, potentially under criminal law for serious negligence. The Parliament is now expected to publish this draft non-legislative report around the week starting 14^th September. Business is being invited to take part. Once finalised it will go forward as part of the EU’s programme to launch a legislative proposal early in the new year.

Secondly, a further initiative on sustainable corporate governance promises to be similarly impactful. Consultation on a Roadmap, published by the DG for Justice and Consumers, has been open for comment since 30^th July and concludes on 8^th October.

At the session Commissioner for Justice Didier Reynders presented an extensive EU study on corporate governance. It concludes that corporate short-termism, which prioritises shareholder value, has increased in recent decades, hampering progress on climate targets and on delivering the UN’s Sustainable Development Goals. Based on these findings the European Commission initiative has three key objectives:

1. Strengthening the role of directors in pursuing long-term interests of the company
2. Improving accountability of directors for sustainability
3. promoting corporate governance practices leading to sustainability.

In the debate, MEPs discussed the differences between various business models, often comparing the Anglo-Saxon system to the Rhineland or social capitalism model. Strong views were expressed indicating that the potential impact of both initiatives on business could be substantial. Business must take up the invitation from MEPs to engage directly on the issues being raised, to ensure their voices are heard and their opinions are understood and reflected in any future draft legislation. The issues on the table are too important to be ignored.

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries,its affiliates, or its other professionals.