Europe needs a Copernican revolution in corporate behavior to tackle the climate crisis and social disparities, write Wojciech Baginski and Katie Hill. To do this, the EU should start by clarifying the fundamental principles of company law, they argue.

Wojciech Baginski is co-founder of the Interdependence Coalition, an organization that aims to transform the way we do business in Europe. Katie Hill is CEO of B Lab Europe and co-founder of the Interdependence Coalition.

There are significant issues for the future role of business in Europe at this time. The EU has agreed on ambitious and essential objectives: to achieve climate neutrality in Europe by 2050 and, at the same time, to build an inclusive and fair economy for European citizens.

To achieve this, the role of business, as reflected in existing corporate governance models, needs to be transformed and implemented.

Currently, the dominant regulatory framework allows, but does not encourage, corporate boards to take into account the interests of all those who contribute to and are impacted by the operations of the company. This is the fatal flaw that must be corrected. In some countries, company law and its interpretation can be seen as favoring the now infamous model of “shareholder primacy” – where the interests of shareholders take precedence over the interests of all other stakeholders.

To address this, the European Commission offers a wide range of initiatives enabling companies and investors to act in the best interests of society and the environment. A key aspect of this architecture is the proposal for a directive on corporate due diligence and responsibility (or, in a broader sense, the EU initiative on sustainable corporate governance). The consultation ended a year ago, attracting more than 500,000 responses, numerous debates and several delays.

Twice the draft proposals were flagged red – a rare occurrence – by the Regulatory Scrutiny Board, but no details were made public. We still don’t know what’s holding things back.

Two key elements should be addressed in the proposed directive. The first consists of redefining the overall duty of care of company directors, by requiring them to take into account the interests of all the stakeholders concerned or contributing to the company. The second part is to define the due diligence considerations required as part of supply chain management.

Obviously, these elements are related and serve each other. We consider both to be crucial for a future progressive role of business in our European economy, we have created the Coalition for Interdependence (which has over 100 signatories) to advocate for mandatory, pan-European due diligence of administrators, aligned with EU sustainability regulations. finance. In this way, the use of capital and the behavior of companies are aligned and integrated across Europe.

The duty of care of boards of directors is a fundamental principle of corporate law because it regulates the behavior of managers, who are usually the drivers of culture change in the company. If incentives are misplaced at the top, the whole organization suffers. This revised duty of care will lead to a program in which benefits to our environment and society are planned and encouraged, for example through compensation. It is a North Star in corporate law. Introducing further social and environmental legislation regarding the reporting and use of finance, without bringing about this change in corporate behavior, would increase the risk of greenwashing or piecemeal adoption by Member States, creating divergence and uncertainty.

Without it, there are two options. Either European companies adopt company by company
approach (as B Corps or for-profit corporations do) by revising their corporate documents to include stakeholder governance. OR, EU member states are relying on the courts to interpret the current rules in a way that entails a requirement for boards to take stakeholder interests into account in their decision-making. Both approaches are inefficient and too slow to make meaningful changes at the speed we need.

Concerns over this directive appear to focus on the additional cost of measurement and review and the potential impact on the competitiveness of EU businesses. The B Corp movement has much to contribute to this whole debate. More than 4,600 B Corps worldwide and nearly 800 B Corps in Europe have voluntarily committed in their articles of incorporation to run their businesses with the interests of all their stakeholders in mind: always, not just in specific scenarios . And investors are buying into it.

Most B Corps do not view the actions taken as additional costs but rather as a necessary component of managing risk with integrity. And in terms of competitiveness, B Corp data shows that European B Corps that have been certified for three years and then recertified (as required to maintain B Corp status) have shown average annual revenue growth of more than 30 %.

Key metrics around employee attraction and retention rates, customer loyalty levels, and even access to finance improve with B Corp certification. Even the cost of capital can be favorable as investors see the benefits of companies mitigating a range of risks related to their broader stakeholder governance. We see innovative investment vehicles in which the higher its B Corp impact score, the cheaper the cost of the loan.

And companies are demanding it, in part because they see the pressure from civil society to play a positive and regenerative role. Demand for B Corp certification in Europe has increased by more than 37% over the past two years. More than 150,000 companies use the B impact assessment worldwide, and another 10,000 companies worldwide have voluntarily incorporated a stakeholder governance commitment, either by amending their bylaws or adopting a legal form of for-profit corporation or similar, as applicable.

The conclusion we draw from the examples of the trajectory of the B Corp community is that operating sustainably by taking care of all stakeholders is popular and correlates significantly with their success.

Therefore, we implore the Commission to include a broad definition of directors’ duties in this directive; there is a real window of opportunity for the EU to drive global behavior change by changing business norms and expectations. It is no longer reasonable that those who voluntarily adopt a general duty of care by considering all stakeholders in the operation of their business bear the burden for all other businesses, for which the short-term gain is rewarded.

The stakes are high: the future of our planet and our society. We need a Copernican revolution in corporate behavior to meet these challenges; you have to start by clarifying the fundamentals of company law.