A European Corporate Governance Model: Integrating Corporate Purpose Into Practice for a Better Society

List of authors of the underlying paper: Bruno Deffains, Xavier Dieux, Laurence Dors, Rodolphe Durand, Martin Fischer, Daniel Hurstel, Jukka Mähönen, Colin Mayer, Renate Meyer, Anne-Christin Mittwoch, Guido Palazzo, Markus Scholz, Beate Sjåfjell, Jaap W. Winter, Rupert Younger

At a time of profound mutation, between a current system centered on companies’ profits and a competitive emerging system where companies are requested to play a major role to face the challenges of society (climate change, inequalities, energy transition, etc.), it is essential to have a clear understanding of the principles and practices that will enable corporations to navigate these challenges. The European Corporate Governance Model proposed in our paper entitled “A European Corporate Governance Model: Integrating Corporate Purpose Into Practice for a Better Society” (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4632353) provides a comprehensive framework that empowers corporations to establish a long-term vision rooted in their corporate purpose and adopt a coherent societal position considering social preferences and legal institutions. The model recognizes the interconnection between corporations and society, acknowledging their mutual dependency and the distinct roles they play.

We propose a coherent set of principles and processes grounded in the fundamental characteristics of corporate organizations, such as the delegation of authority, acceptance of risks, value creation, and value sharing. By adopting this approach, each corporation can establish its unique organizational compass, strategy, and structure. These principles are underpinned by the notion of corporate responsibility towards society and aligned with the prevailing company laws applied throughout Europe.

Superimposing new ESG-related constraints onto a shareholder primacy model is not a viable solution. While it may create an illusion of progress, it ultimately fails to yield results because it overlooks the fact that a company’s primary goal is to fulfil its own specific purpose while ensuring a return on investment. Imposing overly stringent constraints on firms devitalizes corporate purpose and discourages risk-taking and innovation. Moreover, the misuse of ESG by certain corporations that have “greenwashed” has contributed to the resistance against new regulations (in the US, which may also be spreading to Europe). In addition, the accumulation of multiple constraints favors the promotion of a superficial culture of merely checking boxes, with no actual benefits.

A superior approach lies in reinstating accountability and responsibility at the corporate governance level, not defensively, but with a drive for every firm to make sustainable contributions. This can be achieved by emphasizing the key assets of corporations, i.e. the efficiency of their decision-making process and their effectiveness at undertaking innovative activities incorporating a degree of risk.

A modernized governance system ought to empower corporations to gain a thorough understanding of the interests of all parties involved. It should foster an open and mature dialogue between senior executive management, the corporate board, shareholders, and relevant parties including employees, workers, and representatives for affected local communities. Additionally, it must consider the competitive constraints that businesses face in the markets, particularly at the international level, ensuring that corporate strategies are robust and responsive to global market dynamics. Furthermore, the governance system should enable a sound and informed decision-making process guided by the corporation’s purpose, integrating the best interests of society into its decisions.

In order to do so, our proposal details what corporate purpose is, what shareholders’ ownership rights imply, how board should govern and arbitrate in a complex environment, why delegation matters, why to include passive stakeholders in the economic equation, how to measure better performance to be more inclusive and share more fairly the generated economic value in liaison with what governments require and impose on economic actors.

First of all, one should concentrate on the definition of the purpose. Two elements should be highlighted: (i) involving shareholders and employees in its elaboration offers an opportunity to foster consensus and (ii) to be efficient a purpose needs to incorporate a vision but also to be related to the business of the corporation; purposes are often too general or even messianic and then useless. A purpose should improve the working condition of any employee and will act as a compass to the board in particular when it is confronted to conflicting objectives. Regular appraisals of the coherence between the purpose and the decisions and acts of the corporation are indispensable.

Shareholders own voting and financial rights. In exercising their voting rights shareholders should also take into account the purpose that they have approved. If they were only guided by their own interest, the purpose will become useless if not counterproductive. Accordingly, all decisions submitted to them (including the appraisal of the achievements of the board members) should also include a description of their coherence and alignment with the purpose.

Boards will more and more become the central element of an efficient corporate governance. If it is true that the management makes the difference in terms of corporate success, the board is the place where the difficult exercise of arbitrating between conflicting interests (multiplying in times of rapid evolution of technology, corporate responsibility and geopolitics instability) will happen. This will lead boards to receive information which goes further than enabling it to approve management decisions, to conduct their own research and to have excess to aggregate expertise (whether from its own members – possibly with adequate training or from third parties). Diversity of experience and expertise will facilitate this.

The modalities of participation of employees to an efficient corporate governance need to take into account major changes such as the developing request for training, the expectations of employees to have a meaningful professional life, the severe shortening of the terms of employment agreements, as well as the subcontracting of tasks to third party employees. Defining them at levels of specific businesses is a fruitful road to explore.

Knowledge by boards of stakeholders interests including also those of passive shareholders and how they are impacted by the corporation’s decision will be key to enable them to take efficient and well-thought decisions , which becomes a central challenge. Various means to organize this are also discussed in the paper. Those interests will be treated differently depending on the purpose of the corporation.

Integrating the corporation in a broader structure which includes them together with associations, cooperatives or foundations is a tool offering innovative solutions.