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General introduction

Perspectives for Sustainable Corporate Governance

Catherine Malecki

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Review of questions

Perspectives for Sustainable Corporate Governance

Catherine Malecki

The notion of sustainable development has emerged as the result of a realisation among philosophers of nature and earth summit delegates of the need to protect the planet at global level. Social ecology, which links ecology and society as a whole with “grow or die” challenges, can be contrasted with liberal ecology. The notion of the right to a healthy environment and environmental human rights (such as the universal right to clean drinking water) have forced companies to be stakeholders in sustainable development and, more specifically, in CSR. Non-financial reporting by companies plays an important role. The quality and accessibility of the information provided are key requirements for good corporate governance. Since 2001, the EU has been stressing the importance of such reporting, which must be readily accessible to all stakeholders and tie in with developments in corporate governance.

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Developments in non-financial reporting

Perspectives for Sustainable Corporate Governance

Catherine Malecki

Non-financial reporting has undergone changes since the introduction in France of the NRE (new economic regulations) Law of 10 May 2001. Initially, such information had to be provided by listed companies in their annual reports, but this requirement was subsequently extended to unlisted companies under the Grenelle 2 Law of 12 July 2010 and its implementing decree. This type of reporting covers social, environmental and societal issues. Societal commitments (such as the fight to promote diversity) can bring with them reputational risks; stakeholders will be waiting for information on such issues. Non-financial reporting must fulfil the objective of being transparent, an objective that has since become a requirement thanks to the influence of the European Commission. Sustainable compliance has been enshrined in French law (Article R. 225-105-1-II of the French Commercial Code). Air, water, soil and waste management issues are all key elements of environmental reporting, while children’s rights, human rights and the role of multinational companies are important factors in social reporting. The notion of a “carbon audit” has also been enshrined in law.

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Non-financial information requirements

Perspectives for Sustainable Corporate Governance

Catherine Malecki

Non-financial reporting will need to be made clearer using commitment and management standards (GRI – Global Reporting Initiative). Reports must be drawn up in line with national or international standards (SA8000 certification) to ensure that the information reported is comparable. The French financial markets regulator (Autorité des Marchés Financiers or AMF) has already published three reports on the non-financial information provided by listed companies. Such information must be checked and certified by an independent third-party body (ITB). This body plays an extremely important role, for example, in flagging up breaches of the “report or explain” rule and issuing reasoned “opinions” on the truthfulness of the information provided. The standardisation of non-financial reporting is one of the challenges facing sustainable corporate governance. Of the items listed in the Grenelle 2 Law, which are different for listed and unlisted companies, the criterion of the “nature of a company’s business activities or structure” will be decisive, particularly when it comes to implementing real sustainable compliance.

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A sustainable accounting system

Perspectives for Sustainable Corporate Governance

Catherine Malecki

CSR will call for the implementation of sustainable accounting; it will be vital to quantify, assess and account for natural capital. The tricky part will be assessing notions as varied as water usage, environmental risks and societal commitments. For example, ISO standard 14001 recommends that companies adopt an environmental management system. This will be the role of what is known as “green accounting”. International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) and international initiatives such as the International Integrated Reporting Committee (IIRC) are all playing an important role. The International Federation of Accountants (IFAC) is also involved in incorporating environmental, social and governance (ESG) criteria into accounting practices. The following notions will be key: environmental liability, provisions for site remediation and dismantling costs, carbon audits and tax positions.

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Review of questions

Perspectives for Sustainable Corporate Governance

Catherine Malecki

Corporate governance has reached an important juncture in its development. After nearly a century of theoretical work in the United States and its subsequent transplantation in Europe, it has now collided with CSR to create a “new school” form of corporate governance. Stakeholder theory has been incorporated into this new type of corporate governance, with objectives focusing on transparency and disclosure and thinking around how to create an effective board of directors. In its resolution of 16 June 2010 on the Europe 2020 strategy, the EU highlighted the “inextricable link between corporate responsibility and corporate governance”. This link paves the way to a behavioural corporate governance that is based on information, the prevention of conflicts of interest, the importance of the work done by boards of directors and pay transparency. Listed companies’ corporate governance codes will have to factor in CSR requirements that will in turn involve weighing up and prioritising stakeholders’ differing interests. This raises a totally new question: can CSR open up a third way between shareholder primacy and stakeholder theory? This book seeks to provide an answer to this question.

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Behaviours

Perspectives for Sustainable Corporate Governance

Catherine Malecki

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Corporate administration and management

Perspectives for Sustainable Corporate Governance

Catherine Malecki

Boards of directors will play a key role and are central to CSR strategy in that they define a company’s strategic approach. The composition of a board (in terms of its diversity, equality and balance) is a vital consideration that is enshrined in the European Parliament Directive of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups, which stresses the need for a statement on a “company's diversity policy”. Hopes are pinned on a “lead CSR director” and the more widespread use of CSR committees. Training of board members will be essential, as will managing various CSR-related risks. The notions of competence, loyalty and even courage, particularly when it comes to combating “groupthink”, will be needed. CSR helps to encourage socially responsible behaviour among board members. The AMF’s Reference Framework is very helpful on this matter in that it allows financial and non-financial accounting risks, as well as the procedures relating to these risks, to be taken into account. The issue of board members’ liability and the procedures for holding them liable will be vital.

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What guides or labels for socially responsible behaviour?

Perspectives for Sustainable Corporate Governance

Catherine Malecki

CSR forms part of the more general behavioural trend in corporate governance. Corporate governance codes (such as the AFEP/MEDEF and Middlenext codes) serve as guides to behaviour in the wake of the Green Paper on “The EU corporate governance framework” (5 April 2011), which refers to the notion of “social risks”, something that in itself is a step forward. The concept of “sustainable compliance” must be developed if we are to make CSR more effective. The German Sustainability Code and Global Sullivan Principles are both enlightening examples in this regard. Ethical charters and codes of ethics are also helping to develop ethical behaviour. In France, National Contact Points (NCPs) have proved effective. SA8000, an international social standard, and the International Standard on Assurance Engagements (ISAE) are also useful. The creation of a “European social label”, something that has been strongly advocated by the European Parliament, would help to boost the visibility of CSR both within and outside the EU.

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Dialogue with stakeholders

Perspectives for Sustainable Corporate Governance

Catherine Malecki

The role of stakeholders was enshrined in the French law of 27 March 2017 on parent and contracting companies’ duty of care and is a clear incentive to establish a participatory and collective form of corporate governance. However, stakeholder theory, which has proved hugely successful in management science (stakeholder management), requires a more legal definition of the term “stakeholder” if we are to be able to prioritise their interests. This definition must be functional and refer in broad terms to a person or organisation that has a legitimate interest in a project or entity. By “mapping” stakeholders, we will be able to assess the conditions in which they could contribute to making sustainable corporate governance more effective. An operational (“involve, protect”) criterion will be needed to weigh up and prioritise the interests of different stakeholders and will have to take account of the vulnerability and “well-being” of certain people (particularly employees).