Confederation of Swedish Enterprise responds to consultation on Sustainable corporate governance

The Confederation of Swedish Enterprise considers that the coming initiative ought to separate the proposal on due diligence from the proposal on corporate governance and we urge the Commission not to move forward with the proposal on corporate governance at all. These are different measures aimed at solving different issues. Due diligence is about minimizing the risk of adverse impacts on human rights and environment in supply chains whereas the ideas put forward on sustainable corporate governance aims at resolving alleged short-sightedness in corporate governance. 

Corporate governance

The Confederation of Swedish Enterprise is very critical towards the need for, the aim of and the proposals regarding corporate governance. The initiative is unnecessary, harmful to business and risks be counter-productive to its purpose. Changing the legal system of corporate governance in the Member States from a shareholder-oriented legal framework (i.e. the owners are the ultimate decision makers) to a stakeholder-oriented legal framework (i.e. the stakeholders have legal rights related to the management of the business, to the implementation of business policies and strategies, to the enforcement of directors liability toward the company itself etc.) will lead to unclear management responsibilities with internal conflicts of interests, potentially paralyzed boards and lawsuits, given that not all stakeholders’ interests are fully compatible with each other.

This will dramatically weaken the owners’ rights and incentives, which would have huge negative consequences for business possibilities of attracting risk capital, for the incentives to be entrepreneurial and innovative and it will undermine the incentives for undertaking forward-looking investments and innovations necessary to support sustainable economic growth. It will effectively shift the power from the owners to the agents (management and boards) without the owners being able to hold its agents accountable for their management. Also, the risk of enforcement by other stakeholders against management of different stakeholders´ interests will risk companies to become risk avert and “paralyzed”.

Furthermore, no need for EU legislation on these matters has been proven and consideration for sustainability, long-termism and stakeholders’ interests is already embedded in corporate governance codes and national company law. If we are to have competitive companies in the EU also in the future, companies and its investors need to maintain a clear, simple and effective corporate governance system based on the comply-or-explain mechanism and ultimately controlled by its owners.

We request the Commission to listen to the criticism from all academic expertise and others who have dismissed these proposals and the EY study they are based upon (the EY Study “On directors’ duties and sustainable corporate governance”).

Supply chain due diligence

The European Commission’s initiative for a due diligence duty relating to human rights and environmental impact would change the essentially voluntary system of today to legally binding rules for companies. Given that several countries have or intend to put national legislation in place, this may be a way to avoid having a cost-driving patchwork of national rules, as well as to contributing to a more level playing field. However, binding legal rules carry with them many risks. They may impact negatively on international trade and make companies leave, or refrain from entering, complex markets. Detailed and inflexible rules may lead to compliance costs soaring without tangible impact on sustainability. Companies may be held accountable for third party actions over which it has no control.

Consequently, the proper design of any legal framework for supply chain due diligence is crucial. We believe that the yardstick for any such framework must be that it is an effective way to promote sustainable development and is reasonable for companies to handle. This means, in our view, that a number of conditions need to be fulfilled. These include:

• The framework should be aligned with the relevant UN and OECD guidelines and be harmonized within the EU, i.e. specific national requirements or gold plating should be avoided
• Any social rights or collective rights inferred through this framework should not go further than, duplicate or disrespect what is already provided for in member states’ labour market legislation or collective agreements.
• The legislation must be based on obligation of means (process) and not outcome and it must be possible for a company to assess when they have done enough to avoid liability (safe harbor)
• Only first tier suppliers should be covered, i.e where there is a contractual relationship
• It must not overlap with other existing EU-legislation and all reporting requirements should be aligned with and done under the Non-Financial Reporting Directive