Consultation Proposal for an Initiative on Sustainable Corporate Governance

The Swedish Private Equity & Venture Capital Association (SVCA) is an independent, not-for-profit industry body for firms and individuals active in the Swedish private equity sector, and includes buyouts, venture capital, institutional investors, business angels, and business angel networks, together representing over 85 investors in the Swedish market. The Association, which was founded in 1985, seeks to strengthen the functioning of the private equity market in Sweden and to increase transparency, knowledge and understanding of the private equity market among the general public.

The SVCA members are long-term active owners, who generally invest in unlisted companies in the private markets. However, the well-functioning of public markets is important for the European economy, as a whole, and it is also an important source of risk capital for European growth companies as well as an important tool in the redistribution of capital in the economy, mainly from more mature companies to younger and growing companies increasing business dynamism.

We strongly believe that sustainable long-term active ownership is the best way to increase shareholder value and we share the Commission’s underlying objectives, that fighting climate change and human rights must be priorities for the European Union and its member states. However, we fear that the proposed solutions would do significantly more harm than good for Europe and European economic growth and transition to a more circular economy and that they are thus counterproductive to the Commission’s underlying objectives.

As the format of the consultation document and the non-open wordings, sometimes even downright biased, of several of the questions made it difficult to answer, we have chosen to present our views - limited to corporate governance (directors’ duty of care) - in this letter.

We further consider that that the two sections of the Consultation – corporate governance and due diligence – ought to be split and treated independently from one another as the sections deal with quite different topics and require different framings of the issues at hand, each with far-reaching consequences. The initiative regarding corporate governance is not only lacking in evidence of need but even harmful.

Changing the entire legal system of corporate governance in the Member States from a shareholder-oriented legal framework (i.e. the owners are the ultimate decision makers) to a stakeholder-oriented legal framework (i.e. the stakeholders have legal rights related to the management of the business, for example from the implementation of business policies and strategies to the enforcement of directors liability toward the company itself etc.) will lead to unclear accountability regarding management’s and board’s responsibilities with resulting internal conflicts of interests, paralysed boards and lawsuits. It will weaken ownership rights and owners’ incentives for investing and future-proofing their companies, which will have huge negative consequences for attracting risk capital and for incentives that are necessary in order to drive entrepreneurship and innovation etc. Instead, the suggested measures will rather create risk averse companies with deadlocks between stakeholders.

We find it remarkable that the Commission uses the EY Study “On directors’ duties and sustainable corporate governance” as the sole basis for such a pervasive EU intervention in the corporate governance systems of the Member States. A study that further has been heavily criticized by law professors across Europe and in the US^[1].

There is a huge difference between which interests may be relevant for different companies to take into account as they consider their strategies for growth and whether the EU should make broad brush mandatory requirements on directors’ duties for all companies in the different Member States. We fail to see that there is any substantiative proof of such EU legislation on these matters being generally needed. Due consideration for sustainability, long-termism and stakeholders’ interests is typically already embedded in corporate governance codes and national company law in many countries including in Sweden (e.g. the Swedish Corporate Governance Code states that tasks of the board of directors include inter alia identifying how sustainability issues impact risks and business opportunities for the company). Thus, an EU legislative intervention would violate the subsidiarity principle as well as the EU principle of proportionality since an EU action shall not exceed what is necessary in order to achieve its stated aims.

Companies and their boards need to preserve the flexibility to determine not only the relevance of specific stakeholder groups to their business and how they interact with such different stakeholder groups, but also the potential materiality of different stakeholder groups’ relevance to the company over the longer term. If we are to have competitive companies in the EU also in the future, companies and their investors also need to maintain a clear, simple and effective corporate governance system, with clear division of obligations and accountability, based on the comply or explain mechanism and ultimately determined and controlled by their owners.

It is our firm belief that any EU regulatory initiative dealing with potential short-termism trends that may pose a threat to long-term value creation in companies should and must be handled within the framework of other regulatory initiatives than company law and corporate governance (e.g., through labour law, environmental law etc.).

To conclude, the private sector has a crucial role to play in the field of sustainability, not least as companies are the engines of innovation. A well-functioning market economy with free capital creation and efficient capital re-allocation is vital to generate risk capital to business innovation. However, this discussed initiative on Sustainable Corporate Governance, where the proposed solutions are sought within company law and corporate governance, is deeply worrying. If the proposals were to become a reality, there would be a substantial risk that European companies would have reduced access to risk capital, implying that business sector dynamism and innovation will be hampered, and that the incentives for undertaking forward-looking investments and innovations necessary to support sustainable economic growth will be seriously undermined.

We further refer to and share the views put forward on this consultation by The Confederation of Swedish Enterprise and Invest Europe.

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[1] https://www.law.ox.ac.uk/business-law-blog/blog/2020/12/ec-corporate-governance-initiative-series-comment-european-company, https://corpgov.law.harvard.edu/2020/10/27/short-termism-shareholder-payouts-and-investment-in-the-eu/ and https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance/F583972