Between a Rock and a Hard Place: Corporate Boards under the Omnibus proposal

Corporate boards are now, more than even, between a rock and a hard place. The metaphorical rock refers to sustainability requirements in legislation, in internationally endorsed social norms, and society’s expectations that business shall be a part of the transition towards a safe and just world. The hard place refers to the increasingly outdated financial markets based, law-and-economics inspired social norm of shareholder primacy. This social norm expects boards to concentrate only on maximising returns to shareholders, and everything else be damned. This is contrary to company law, yet is such a pervasive social norm that it has become a legal myth.

The call for legal reform – and the EU’s unprecedented initiatives

We, who work in this field, have said for years (over a decade now!) that legislative reform for corporate sustainability is needed. With corporate sustainability I mean the contribution of business to sustainability – a safe and just world for all. Corporate decision-makers have increasingly joined the call for legislative intervention, to mitigate the extreme legal uncertainty that they now face – and to create a level playing field for the increasing number of sustainability-oriented businesses.

Following the example of some leading Member States, the European Union (EU) has over the last few years shown an unprecedented willingness to follow up on its own Treaty obligations to do what is necessary to promote sustainability. The EU’s initiatives on Sustainable Finance, Circular Economy, and Sustainable Corporate Governance have led to important changes in the regulatory framework for business. These efforts have not been enough and there are plenty of aspects where further work is needed, but what a great start!

Omnibus on speed – Germany and France violating their Treaty duties

And yet, instead of celebrating these beginnings and finding ways to strengthen the regulatory framework, vested interests and shareholder primacy proponents have lobbied intensely to reverse progress. The issue is no longer just the misinformed and confused Omnibus proposals to ‘simplify’ legislation, notably the Corporate Sustainability Reporting Directive (2022) and its European Sustainability Reporting Standards (2023), and the Corporate Sustainability Due Diligence Directive (2024). These proposals have received well-founded criticism from business, finance, financial supervisors and regulators, civil society organisations, and academics including economists. The European ombudswoman has opened up an inquiry into the preparation of the Omnibus proposals, after several complaints.

Now, riding on a wave of dangerous populism, Germany and France are apparently proposing to ditch the Corporate Sustainability Due Diligence Directive completely. This is not only against common sense, as it increases liability risks for business as well as reinforcing patterns of exploitation of people, destruction of the environment, and undermining of economic and governance bases for well-functioning societies. It is a violation of these two important EU countries’ Treaty duties. Member States have a duty of loyalty, according to Article 4(3) of the Treaty on European Union (TEU). This requires ‘sincere cooperation’ and working to ‘facilitate the achievement’ of the EU’s tasks and ‘refrain from any measure’ which could jeopardise the achievement of the EU’s objectives. These include sustainable development in Europe and in the world (Article 3(3) and 3(5) TEU). Working towards sustainability is not just the only sensible policy choice. It is also a legal duty.

How can boards get out of the rock-and-a-hard-place squeeze?

With this extreme uncertainty created by the Omnibus proposals and other push-back, what can boards do?

A first step is to recognise that the regulatory framework for their duties is evolving rapidly. The second is to follow up on this recognition, and execute the job of the board properly.

Boards can no longer rely on previously established legal starting points, such as those that a parent company is not responsible for harm done by its subsidiaries, and that a lead company can contract its way out of any responsibility for what happens further down in the global value chains. The international trend of lawsuits against companies and their boards for contributing to climate change and human rights violations, amongst other issues, is demonstrating rising liability risks for boards relying on outdated perceptions.

Whatever the outcome of Omnibus proposals and other pushback, the evolution of what I have conceptualised as Corporate Sustainability Law, cannot simply be reversed. The integration in EU corporate sustainability legislation of the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct, and the UN Guiding Principles for Business and Human Rights, has strengthened these internationally endorsed sets of social norms. Even if EU policymakers were to commit the unconscionable act of repealing some of this legislation, it won’t unring the bells that have been rung.

This means, notably, that corporate sustainability due diligence is an evolving horizontal norm; it is what companies increasingly are expected to undertake. Boards that act based on lack of information because due diligence hasn’t been carried out, will find themselves in a very precarious situation if the company or the board members themselves are sued. The mitigation of corporate and financial risks of unsustainability – sustainability risks in EU terminology – requires a well-informed board, which in turn requires corporate sustainability due diligence across the business of the company. The benefits go beyond risk management. Sustainable value creation is gradually replacing shareholder primacy in a number of corporate governance codes, and perceptive board members will see that running a company well is about creating sustainable value.

Creating sustainable value is also good for the shareholders and other investors of the company, and the basis for good returns also in the long term. And if the investors don’t realise that, and exert pressure on the board to continue with unsustainable business-as-usual to maximise returns? Well-informed board members will stand their ground and do their job properly. They risk being held personally liable if they don’t.

By standing their ground, there is a risk that board members may be replaced at the next general meeting of shareholders. They may then also be offered a board position in one of the many companies that realise that sustainable value creation is the way forward. Whatever the case might be, they can look at themselves in the mirror with confidence and calm. And they can meet questions from future employers and business partners, and their own family and friends, and respond: ‘I stood firm, I did my job well, and I did my bit to contribute to a safer and more just world’.    

*****

Did you enjoy this post and would like to hear more? Check out Sustainability Law’s Youtube channel, featuring Beate Sjåfjell’s presentation on this topic.