Crises can generate pressure for change – and there are crises aplenty in contemporary governance and corporate accountability. After decades of neoliberal orthodoxy, the US sub-prime crisis, the European banking crises and corporate malfeasance[1] have shaken the ideologies of shareholder value and efficient self-regulating markets and increased support for the re-regulation of markets. Markets require information to discipline firms, and the lack of information on companies’ social and environmental impacts has prevented market mechanisms from pushing against the externalization of costs after impacts created by the externalization became a concern to society.[2]
In response, the EU has passed Directive 2014/95/EU[3] concerning the disclosure of non-financial information by large companies and groups. Accounting is often considered boring and colorless, but the passage of Directive 2014/95/EU has been called “a historic date in the transition to business sustainability for all.”[4] This legislation will require approximately 6000 companies in Europe to report on their social and environmental impacts. Prior to this legislation, non-financial reporting (NFR) has been voluntary in almost all EU member states and countries across the world: whereas companies must report their revenues, profits and losses, they have been able to choose whether or not to report on their social and environmental impacts. This will now change: as a result of this new legislation, transparency will no longer be optional.
From 2017 onwards, European companies will be required to report on their CSR activities and their social, human rights, environmental, anti-corruption and bribery impacts – to track their performance on social and sustainability metrics, not just financial ones. By increasing the quantity and quality of non-financial reporting and by requiring companies to identify their due diligence procedures[5] for identifying, preventing and mitigating the risks their operations and supply chains pose for third parties, and empowering civil society organizations and investors to take appropriate measures to reduce these risks, the Directive represents a “paradigm shift”[6] in reporting that will increase the pressure on businesses to clean up their operations.
The EU NFR Directive also represents a cautious move towards integrated reporting which can regulate impacts / externalities, and re-shape corporate governance rules towards long-termism. Of course “reporting is only the tip of the iceberg. Everything of substance is happening underneath the surface – inside the organization, in terms of governance, management oversight, monitoring, culture, performance and incentives, etc.”[7] While it is no magic bullet, according to many observers the EU NFR Directive will help companies to manage their impacts. It represents a meaningful step toward functioning markets and greater corporate accountability.
Yet the Commission’s original proposal was significantly weakened during the course of the negotiations. The most notable change concerns the scope of the requirements. The initial proposal would have applied to all European companies with over 500 employees and a certain annual turnover or balance sheet total, approximately 18 000 firms across Europe – a significant increase in comparison with the approximately 2500 companies reporting today. The final compromise will apply only to public interest entities with more than 500 employees, approximately 6000 companies or 1/3 as many as the Commission’s original proposal. My research during the past year has focused on identify the interests and roles of different actors in the negotiations. Here are some of my findings.
At the EU-level, leading members of the European Commission[8] and the European Parliament[9] and a loose “transparency coalition”[10] of civil society organizations,[11] sustainable investors,[12] trade unions[13] and responsible business organizations[14] supported the Directive, and they had a discernable impact on the final text. In the Council, France and Germany’s positions were diametrically opposed. Germany took a hardline position of rejecting the entire proposal. France was the strongest supporter and attempted to strengthen the Commission’s initial proposal. The UK was very influential in the negotiations and proposed many amendments. Business associations were a source of strong opposition, except those from France, Denmark, and the UK, which provided support. Why did countries and interest groups take such different positions?
I argue that domestic regulation is a key source of support and a more important determinant than the economy-wide institutional framework or attitudes about “explicit CSR”[15] or sustainability performance. Each of the three EU countries which already mandate NFR for private-sector firms – France, Denmark and the UK – supported the Directive, whereas almost all countries without NFR mandates opposed the mandate or provided at best lukewarm support. But Belgium and the Netherlands – two countries without domestic NFR legislation – also provided support. Left-wing cabinet ministers in these countries supported the NFR Directive in the face of business opposition. This suggests that political ideology and partisanship does matter,[16] and that domestic NFR regulations are a sufficient but not a necessary condition for support. But why has German business been “virulently” opposed to the Directive and “paranoid” about regulation[17]? Why was Germany more opposed to the Directive than twenty-four other EU member states without domestic NFR regulations?
I find that Germany’s Mittelstand or medium-sized enterprise[18] sector provides a plausible explanation for Germany’s strong opposition. Even controlling for the size of countries’ economies, Germany’s medium-sized enterprise sector is significantly larger than any other EU member state in my analysis. In comparison with large companies, few medium-sized enterprises prepare non-financial reports, so a non-financial reporting mandate could impose significant administrative burdens on this sector. Although the scope of the Commission’s initial proposal did not cover medium-sized enterprises, businesspeople are concerned that the scope of the Directive will be extended and that public interest entities will require their medium-sized suppliers to prepare non-financial reports.
At the EU-level and in most European countries, business associations have been outspoken opponents of the EU NFR Directive. In 2012, an American conservative think tank urged business to “unite against compulsory CSR standards that would undermine the core mission of business.”[19] I believe that they would be pleased with the responses of European business organizations to the Commission’s NFR proposal. While business associations are sometimes decried as ‘dinosaurs’ because of their lowest-common-denominator positions, the success of these organizations in watering down the NFR Directive suggests that they are alive and in comparatively good health. But not all business associations fought against mandated transparency.
French, Danish and British business associations actually supported the Directive. Their support suggests an important role for politics: although business initially resists domestic regulation, once they are in place business will support governments’ attempts to further upward regulatory harmonization at the transnational level. In addition to engendering the support of business, mandatory non-financial reporting regulations drive up CSR reporting rates and deepen markets for socially responsible investment.[20] To sum up this point, the positions of business are to some extent politically constructed. Even in a dynamic realm of new governance such as sustainability reporting, it is hard to overestimate the importance of domestic hard law regulation for upward regulatory harmonization.
Meanwhile, the battles over the transposition of the NFR Directive into national law are just getting started. There is much at stake in them. Civil society activists, socially responsible investment organizations and left governments are pushing for an expansive interpretation of corporate obligations. Business associations and conservative political parties support a minimalist transposition of the Directive and strive to defend managerial autonomy against costly new regulations, legal liabilities and social obligations. If they are successful, the EU NFR Directive may end up as “a paper tiger.”[21]
Will business associations across Europe become more accepting and supportive of non-financial disclosure regulations now that this Directive has been passed? Will the Directive lead an increasing number of companies to adopt strengthened disclosure practices, or will the flexibility and loopholes in the legislation lead to a continuation of business as usual? Will the Directive lead the hundreds of trillions of dollars in the global capital stock to be invested in a more sustainable way? Will mandatory NFR “cannibalize the business case that currently legitimates its [CSR’s] adoption”[22]? With the passage of the EU NFR Directive, we have reached “the end of the beginning,”[23] but it remains to be seen what impact it will have on business and society across Europe and beyond.
ENDNOTES
[1] For example the Rana Plaza factory collapse that killed 1,100 Bangladeshi workers producing Western name-brand apparel, and the Deepwater Horizon oil spill oil spill that dumped 750 million liters of oil into the Gulf of Mexico.
[2] I am grateful to Filip Gregor for this insight.
[3] http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32014L0095
[4] Richard Howitt, “The EU law on non-financial reporting – how we got there” The Guardian, April 16. Available from http://www.theguardian.com/sustainable-business/eu-non-financial-reporting-how-richard-howitt
[5] See John Ruggie, “Protect, Respect and Remedy: A Framework for Business and Human Rights: Report of the Special Representative of the United Nations Secretary-General on the issue of human rights and transnational corporations and other business enterprises” Innovations: Technology, Governance, Globalization, 2008, vol. 3, issue 2, pages 189-212. Available from http://www.mitpressjournals.org/doi/pdf/10.1162/itgg.2008.3.2.189
[6] According to Birgit Spießhofer and Robert G. Eccles, the EU NFR Directive represents a “paradigm shift from [financial] value assessment and generation to accountability and private enforcement by financial and non-financial stakeholders.” See Birgit Spießhofer and Robert G. Eccles, “Information und Transformation – CSR-Berichterstattung in Europa und den USA,” in: Forum Wirtschaftsethik, Jahresschrift des DNWE 2014, p. 27.
[7] Susanne Stormer, Novo Nordisk, personal communication, July 31, 2015.
[8] Especially Internal Market Commissioner Michel Barnier.
[9] Especially Richard Howitt but also Raffaele Baldassarre.
[10] David Monciardini, Quello che conta – A Socio-Legal Analysis of Accounting for Sustainable Companies. Department of Sociology of Law, Lund University, 2013.
[11] Most notably, the European Coalition of Corporate Justice, www.corporatejustice.org/ and its members from all over Europe.
[12] Aviva Investors www.avivainvestors.com/ and Eurosif http://www.eurosif.org/
[13] European Trade Union Confederation; see https://www.etuc.org/
[14] CSR Europe; see www.csreurope.org/
[15] Dirk Matten and Jeremy Moon, “’Implicit’ and ‘Explicit’ CSR: A Conceptual Framework for A Comparative Understanding of Corporate Social Responsibility,” Academy of Management Review 2008, Vol. 33, No. 2, 404–424. Available from http://amr.aom.org/content/33/2/404.abstract
[16] In other words, conservative or market-liberal governments are less supportive of non-financial reporting requirements than left-of center or social democratic governments.
[17] Daniel Kinderman, “Corporate Social Responsibility in the EU, 1993–2013: Institutional Ambiguity, Economic Crises, Business Legitimacy and Bureaucratic Politics” Journal of Common Market Studies Volume 51 Number 4, 2013, pp. 701–720. Available from http://onlinelibrary.wiley.com/doi/10.1111/jcms.12021/abstract
[18] Defined by the EU as firms with 50-249 persons employed.
[19] James M. Roberts and Andrew W. Markley (2012). Why the U.S. Should Oppose International Corporate Social Responsibility (CSR) Mandates. Backgrounder Paper No. 2685. Washington, DC: the Heritage Foundation, May 4, 2012, p. 18. Available from http://www.heritage.org/research/reports/2012/05/why-the-us-should-oppose-international-corporate-social-responsibility-csr-mandates
[20] Johan Graafland and Hugo Smid also find that mandatory non-financial disclosure also fosters corporate social performance. See their forthcoming article, “Competition and Institutional Drivers of Corporate Social Performance” De Economist, available from http://link.springer.com/article/10.1007%2Fs10645-015-9255-y
[21] Birgit Spießhofer “Die neue europäische Richtline über die Offenlegung nichtfinanzieller Informationen – Paradigmenwechsel oder Papiertiger?” Neue Zeitschrift für Gesellschaftsrecht Vol. 17, No. 33, p. 1281-1320. Available from https://beck-online.beck.de/default.aspx?vpath=bibdata%2fzeits%2fNZG%2f2014%2fcont%2fNZG.2014.1281.1.htm
[22] Gregory Jackson, “A Socio-Political Perspective on Corporate Social Responsibility: Understanding Regulatory Substitution and the Persistence of Irresponsibility” In: Reto Hilty and Frauke Henning-Bodewig, eds., Corporate Social Responsibility: Verbindliche Standards des Wettbewerbsrechts? Berlin, Springer, 2014, p. 31.
[23] Remarks by John Ruggie, Special Representative of the UN Secretary-General for Business and Human Rights, available from www.ohchr.org/Documents/Issues/TransCorporations/HRC%202011_Remarks_Final_JR.pdf p. 7.
The preceding post comes from Daniel Kinderman, Assistant Professor of Political Science and International Relations at the University of Delaware. It is based on his ongoing research. A short paper summarizing these findings can be found here. A more comprehensive and systematic analysis is in preparation; please contact the author if you are interested.