At the recently concluded conference: EU Financial Services Regulation: Completing the Internal Market, held at the Institute of Advanced Legal Studies, London, United Kingdom, October 26-27, 2006 and excellently organized by the Academy of European Law and the Centre for C Commercial Law Studies, Queen Mary, University of London), Beate Sjåfjell, of the Faculty of Law, University of Oslo Centre for European Law presented an intriguing paper offering insights on the Takeover Directive. During the course of that presentation, Ms. Sjåfjell raised a point in passing that is worth thinking about. In discussing the issue of stakeholder involvement in economic matters, and especially corporate combinations, she suggested that the EC Treaty might have something to say on the matter: specifically that the focus on “sustainability” in the EC Treaty’s Preamble and objectives, as well as in Article 2 EEC (on the tasks of the Community) may provide a legal basis for increasing stakeholder involvement in merger review procedures.
I believe this point is worth expanding. Article 2 EEC provides that:
The European Commission has considered issues of corporate governance as part of its general efforts to harmonise company law in the EU. That harmonisation process has been both very long and only mildly successful. In 2003, the Commission published an Action Plan—Modernising Company Law and Enhancing Corporate Governance in the European Union COM (2003) 284 final; the published Frequently Asked Questions document may be helpful. While the Action Plan was long on reform, it was careful not to disturb the fundamental principle of corporate governance—shareholder wealth maximization. Indeed, the Action Plan was targeted toward the two traditionally preeminent stakeholders in the corporation—shareholders and creditors. As such, the Action Plan did not deviate much from the usual cluster of proposals for company law reform—strengthening shareholder power through enhanced principles of shareholder democracy, increasing and deepening disclosure requirements, and increasing the number and responsibilities of independent members of corporate boards of directors. But none of this suggests, in any measure, an attempt to upset the “natural order” of corporate law by privileging other actors with authority in the management or operation of corporations.
But consider Art. 2 again. It tasks the EU institutions with the establishment of a common market “and by implementing common policies or activities referred to in Articles 3 and 3a, to promote throughout the Community a harmonious, balanced and sustainable development of economic activities.” The current focus of regulation derived from this charge is focused on environmental issues. The “European Commission, Directorate-General for Enterprise and Industry promotes the integration of sustainable development into enterprise policy and aims to ensure that the definition and implementation of policy instruments for achieving environmental goals foster entrepreneurship and encourages innovation, thus contributing to competitiveness” (European Commission, Enterprise and Industry, “Competitive Aspects of Sustainable Development”). For this reason, perhaps, there has been little attention paid to other aspects of sustainable development that might be read into Art. 2.
Yet consider “sustainable development” from its corporate governance perspectives. It seems to me more than plausible that this language can be used as a basis for the assertion of a governmental power to regulate corporate organization to promote “a harmonious, balanced and sustainable development of economic activities” and that this power may include regulations designed to vest governance power of some sort in all corporate stakeholders—including labor, consumers, and government. It might be argued, for example, that the promotion of a harmonious, balanced and sustainable development of economic activities might necessarily invoke consideration of the general welfare of the communities affected by economic activity. But the general welfare ought not to be determined only by those with a capital investment in the economic entity. Sustainability and balance require input from the other important sectors of economic activity—from the communities in which economic activity is conducted, to the employees, consumers, suppliers and the like.
Now we come close to the understanding of sustainability and stakeholder involvement that has been developing within the U.N.’s human rights institutions in Geneva, which was eventually derailed. See Report Of The United Nations High Commissioner On Human Rights
On The Responsibilities Of Transnational Corporations And Related Business Enterprises With Regard To Human Rights. In particular, European Human rights NGOs have long argued a conflation of business and human rights. Amnesty International (UK) for example has advanced the idea that
Indeed, from a global perspective, this notion is not that far fetched anymore. Consider the increasingly popular idea of corporate sustainability reporting. The Australian Department of the Environment and Heritage describes corporate sustainability reporting as emerging from a recognition among corporate actors of “the value of demonstrating transparency and accountability beyond the traditional domain of financial performance. This trend has come about through increased public expectations for organisations and industries to take responsibility for their non-financial impacts, including impacts on the environment and the community.” Australia, Department of the Environment and Heritage, “Corporate Sustainability—Corporate Sustainability Reporting”. Much of these efforts are still voluntary, but the governance framework is already there. Thus, for example, again in Australia, the Department of the Environment and Heritage “The Department of Environment and Heritage works cooperatively with Australia's financial services sector (investment, insurance and lending institutions) to facilitate integration of sustainability issues into the services, products and operations of the sector.” Australia, Department of the Environment and Heritage, “Financial Services Sector”.
Some of this springs from efforts from out of the civil society sector—for example the Global Reporting Initiative, which seeks to create a global consensus around the idea that “reporting on economic, environmental, and social performance by all organizations becomes as routine and comparable as financial reporting. GRI accomplishes this vision by developing, continually improving, and building capacity around the use of its Sustainability Reporting Framework.” Global Reporting Initiative, “A Common Framework for Sustainability Reporting."
I have just suggested a potentially radical rewriting of the foundations of corporate governance. I have suggested before that this rewriting, at least at the international level, might have been without legal basis, though it might have been able to end run the legal orders of states by resort to private law. Larry Catá Backer, “Multinational Corporations, Transnational Law: The United Nation’s Norms on the Responsibilities of Transnational Corporations as a Harbinger of Corporate Social Responsibility as International Law,” Columbia Human Right. Law Review 37:287 (2006). This foundation, a mainstay of corporate regulation for more than a century, might have seemed well grounded in the legal orders of the West. But I have just suggested that this traditional approach may be easier to destabilize than previously thought plausible. This does not mean that a stakeholder model is necessarily a good foundation for corporate governance or that reconstituting corporations as entities with a more direct public aspect is a good idea, especially in the context of the relationship between economic and political communities. But it does suggest that the legal framework within which these conversations might proceed has already been established in the EU.
I believe this point is worth expanding. Article 2 EEC provides that:
The Community shall have as its task, by establishing a common market and an economic and monetary union and by implementing common policies or activities referred to in Articles 3 and 3a, to promote throughout the Community a harmonious, balanced and sustainable development of economic activities, a high level of employment and of social protection, equality between men and women, sustainable and non-inflationary growth, a high degree of competitiveness and convergence of economic performance, a high level of protection and improvement of the quality of the environment, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States." (Consolidated Version of Treaty Establishing the European Community.Is it possible to derive form this provision a requirement that corporate governance must abandon the shareholder maximization model for a stakeholder model of corporate governance? While the answer is not clear, I might suggest that the language at Art. 2 is broad enough to provide the institutions of the EU with the legal basis to do just that.
The European Commission has considered issues of corporate governance as part of its general efforts to harmonise company law in the EU. That harmonisation process has been both very long and only mildly successful. In 2003, the Commission published an Action Plan—Modernising Company Law and Enhancing Corporate Governance in the European Union COM (2003) 284 final; the published Frequently Asked Questions document may be helpful. While the Action Plan was long on reform, it was careful not to disturb the fundamental principle of corporate governance—shareholder wealth maximization. Indeed, the Action Plan was targeted toward the two traditionally preeminent stakeholders in the corporation—shareholders and creditors. As such, the Action Plan did not deviate much from the usual cluster of proposals for company law reform—strengthening shareholder power through enhanced principles of shareholder democracy, increasing and deepening disclosure requirements, and increasing the number and responsibilities of independent members of corporate boards of directors. But none of this suggests, in any measure, an attempt to upset the “natural order” of corporate law by privileging other actors with authority in the management or operation of corporations.
But consider Art. 2 again. It tasks the EU institutions with the establishment of a common market “and by implementing common policies or activities referred to in Articles 3 and 3a, to promote throughout the Community a harmonious, balanced and sustainable development of economic activities.” The current focus of regulation derived from this charge is focused on environmental issues. The “European Commission, Directorate-General for Enterprise and Industry promotes the integration of sustainable development into enterprise policy and aims to ensure that the definition and implementation of policy instruments for achieving environmental goals foster entrepreneurship and encourages innovation, thus contributing to competitiveness” (European Commission, Enterprise and Industry, “Competitive Aspects of Sustainable Development”). For this reason, perhaps, there has been little attention paid to other aspects of sustainable development that might be read into Art. 2.
Yet consider “sustainable development” from its corporate governance perspectives. It seems to me more than plausible that this language can be used as a basis for the assertion of a governmental power to regulate corporate organization to promote “a harmonious, balanced and sustainable development of economic activities” and that this power may include regulations designed to vest governance power of some sort in all corporate stakeholders—including labor, consumers, and government. It might be argued, for example, that the promotion of a harmonious, balanced and sustainable development of economic activities might necessarily invoke consideration of the general welfare of the communities affected by economic activity. But the general welfare ought not to be determined only by those with a capital investment in the economic entity. Sustainability and balance require input from the other important sectors of economic activity—from the communities in which economic activity is conducted, to the employees, consumers, suppliers and the like.
Now we come close to the understanding of sustainability and stakeholder involvement that has been developing within the U.N.’s human rights institutions in Geneva, which was eventually derailed. See Report Of The United Nations High Commissioner On Human Rights
On The Responsibilities Of Transnational Corporations And Related Business Enterprises With Regard To Human Rights. In particular, European Human rights NGOs have long argued a conflation of business and human rights. Amnesty International (UK) for example has advanced the idea that
Human rights violations destabilise the investment climate. At stake are employee safety, company assets, project viability and corporate reputation. As the influence of global companies grows in the world economy, and as their impact on the societies in which they work deepens, it is becoming evident that their licence to operate and their reputation depend on their acceptability to society at large. (Amnesty International, Economic Globalization and Human Rights, Why Do Human Rights Matter to Business?).It is just a short step from this framing of the issue of corporate governance and the idea that balance, and sustainability require intervention in the regulation of corporate governance models. And it is an even smaller step from that notion—and the idea that sustainability, when coupled with the idea of comitology and consultation that stands at the heart of the EU’s regulatory framework—to the idea that the EU’s governance framework suggests adoption of a stakeholder model of corporate governance. And indeed, read in its entirety, Article 2 seems to suggest a need for stakeholder involvement in all aspects of economic activity. Thus the provision requires the promotion not only of a harmonious, balanced and sustainable development of economic activities, but it also requires promotion of a variety of other goals, including “a high level of employment and of social protection, equality between men and women, sustainable and non-inflationary growth, a high degree of competitiveness and convergence of economic performance, a high level of protection and improvement of the quality of the environment, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States." Applied to the governance of economic enterprises within the EU, this might well seem to tie economic activity to the general welfare. Thus tied, there might well be a legal basis for the reordering of corporate governance to reflect this emphasis. Indeed, it might be possible to argue that corporate governance systems that privilege one of the stakeholders—shareholders—might actually not be permitted under the regime described in Art. 2.
Indeed, from a global perspective, this notion is not that far fetched anymore. Consider the increasingly popular idea of corporate sustainability reporting. The Australian Department of the Environment and Heritage describes corporate sustainability reporting as emerging from a recognition among corporate actors of “the value of demonstrating transparency and accountability beyond the traditional domain of financial performance. This trend has come about through increased public expectations for organisations and industries to take responsibility for their non-financial impacts, including impacts on the environment and the community.” Australia, Department of the Environment and Heritage, “Corporate Sustainability—Corporate Sustainability Reporting”. Much of these efforts are still voluntary, but the governance framework is already there. Thus, for example, again in Australia, the Department of the Environment and Heritage “The Department of Environment and Heritage works cooperatively with Australia's financial services sector (investment, insurance and lending institutions) to facilitate integration of sustainability issues into the services, products and operations of the sector.” Australia, Department of the Environment and Heritage, “Financial Services Sector”.
Some of this springs from efforts from out of the civil society sector—for example the Global Reporting Initiative, which seeks to create a global consensus around the idea that “reporting on economic, environmental, and social performance by all organizations becomes as routine and comparable as financial reporting. GRI accomplishes this vision by developing, continually improving, and building capacity around the use of its Sustainability Reporting Framework.” Global Reporting Initiative, “A Common Framework for Sustainability Reporting."
I have just suggested a potentially radical rewriting of the foundations of corporate governance. I have suggested before that this rewriting, at least at the international level, might have been without legal basis, though it might have been able to end run the legal orders of states by resort to private law. Larry Catá Backer, “Multinational Corporations, Transnational Law: The United Nation’s Norms on the Responsibilities of Transnational Corporations as a Harbinger of Corporate Social Responsibility as International Law,” Columbia Human Right. Law Review 37:287 (2006). This foundation, a mainstay of corporate regulation for more than a century, might have seemed well grounded in the legal orders of the West. But I have just suggested that this traditional approach may be easier to destabilize than previously thought plausible. This does not mean that a stakeholder model is necessarily a good foundation for corporate governance or that reconstituting corporations as entities with a more direct public aspect is a good idea, especially in the context of the relationship between economic and political communities. But it does suggest that the legal framework within which these conversations might proceed has already been established in the EU.
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