4. Regulatory environment
While Europe has some bright stars in its start-up scene, the world’s largest technology companies all come from either the US or China. Hence these countries appear to have regulatory environments and financing structures that support small businesses to rapidly become very large businesses. In the US, for example, there has been a surge in popularity of Special Purpose Acquisition Companies (SPACs), which are non-operating, publicly listed companies set up with the specific purpose of acquiring a private company and taking it public without going through the traditional initial offering process. Europe, in contrast, does not currently deploy a similar mechanism for channeling large sums of money to fast-growing businesses.
Additionally, there are differences in corporate governance approaches between Europe and the US. Europe is ahead of the US in terms of diversity quotas, for example. In Silicon Valley, on the other hand, there is a strong trend for founders and venture capitalists to retain control over companies through the use of dual-class shares. This is a controversial practice since it creates shareholders with superior voting rights to other shareholders. Nevertheless, there is an argument that when a founder retains control, a company is more likely to maintain its entrepreneurial spirit and adherence to its initial purpose or vision.
An effective regulatory environment is crucial for ensuring that sustainability is a driver of innovation and competitiveness. While robust sustainability frameworks are needed to underpin good practices that drive long-term value creation, too much red tape can be a burden on businesses, especially on startups. It is important that the EU does not over-regulate ESG to the extent that European companies become less competitive than their peers in the US and China.
5. Board structures
Boards have many pressures on their time and must balance a number of competing priorities. As a result, they can struggle to find sufficient time to reflect on their company’s long-term value creation, its opportunities for innovation and its role in the global value chain. By making greater use of committees, they can, however, dedicate more time to these areas.
Few boards currently have dedicated sustainability committees. Boards can instead draw on the capabilities of their audit committees to provide effective oversight of sustainability-related matters. Audit committees can help to facilitate sustainable corporate governance by assuring the reliability of the information that is used to inform decision-making.
To provide effective oversight, audit committees need to ask direct, targeted questions of management, monitor emerging risks, ensure that ESG expertise is considered in decision-making processes, understand the evolving rules and expectations in relation to sustainability reporting, and establish effective internal controls in line with these rules and expectations. Audit committees must ensure that the right processes and procedures are in place to support the organization’s activities. This requires them to work closely with the internal audit function, which plays an important role in helping to identify ESG risks and auditing the processes involved with ESG reporting.
Europe currently has two types of board systems – one-tier boards and two-tier boards. A question that the EU institutions – as well as national governments – might want to consider is which kind of system enables boards to more effectively reflect on their company’s sustainability strategy. They might also want to see whether the governance models of private equity firms offer some learnings for the boards of public companies. Directors of private equity firms tend to be both “hands-on” and very well informed. For example, they often have daily conversations with management and rarely rely solely on the information presented at board meetings. They also tend to consider a time horizon that extends well beyond quarterly or semi-annual earnings reports.
Shift toward sustainable corporate governance
Today, a major shift is underway within corporate governance. Organizations are increasingly moving away from the principle of shareholder primacy toward the principle of stakeholder capitalism. Unlike shareholder primacy – which advocates that companies should prioritize the interests of shareholders – stakeholder capitalism recognizes that the interests of shareholders are best served when organizations consider the long-term interests of all of their stakeholders.
Sustainable corporate governance underpins this shift away from shareholder primacy toward stakeholder capitalism. It ensures that a company keeps a long-term perspective, and is able to balance short-term priorities with long-term investments.
Additionally, sustainable corporate governance is crucial to providing proper accountability around companies’ strategies for long-term value creation, the goals they set themselves and how they measure their progress against these goals. For this reason, sustainable corporate governance will not only support the EU’s transition toward a sustainable economy, but it will also improve the long-term financial performance, competitiveness, productivity and resilience of EU companies overall.
