Sustainability and the Corporate Governance Code

Sustainability and the Corporate Governance Code

What should the management board and the supervisory board (hereafter: ‘SB’) of the company focus on? The text of the Civil Code (“DCC”) provides in articles 2:129/239 paragraph 5 DCC for the management board and 2:140/250 paragraph 2 DCC a rather minimal guideline: the interest of the company and its affiliated enterprise. Case law has elaborated on this corporate interest: in discharging their duties, the management board and the supervisory board should promote the success of the company by taking into account the interests of all those involved in the company and its business. This clearly shows that the prevailing business model in the Netherlands focuses on the stakeholders of the company. However, how far does this approach extend? Should the management board and the supervisory board also take the climate into account? This is a relevant question for today’s business practice, especially given the threat of the climate crisis. Therefore, in this article, we discuss whether the Corporate Governance Code (hereinafter: ‘Code’) gives a more detailed interpretation of this.

What is the Corporate Governance Code?

First of all, it is important to consider what kind of instrument the Code is. The Code is not binding in the same way as the aforementioned provisions of the Civil Code. It is a soft-law instrument that lays down certain principles and best practice provisions governing the relations between corporate bodies (the management board, the supervisory board and the general meeting of shareholders). The ‘comply or explain’ principle, which is central to the Code, means that companies must apply the principles and provisions or provide a carefully reasoned explanation of why they are not applied. Compliance with the Code must be described in the annual report. Therefore, the does not contain mandatory provisions, but a company must justify any deviations to its shareholders and the general public. Not all companies have to apply or explain the principles and provisions of the Code. The scope of the Code is limited to listed companies with their registered office in the Netherlands.

Long-term value creation

In 2016, the Code was revised to focus on long-term value creation. According to the Van Manen Committee (hereafter referred to as the ‘Committee’), which was responsible for the revision, this is a clarification of the guideline given in the articles mentioned above. According to the Code, the interests of the company and its affiliated companies must be seen in terms of long-term objectives and not in terms of achieving short-term profits. Specifically, Principle 1.1.1 refers to ‘non-financial aspects of business’ such as “the environment, social and personnel matters, respect for human rights and combating corruption and bribery”, which the management board should consider when formulating a strategy for achieving long-term value creation. Principle 1.1.2 explains that the SB should approve this strategy and monitor its compliance.

The environment as a non-financial aspect of business

Except for Principle 1.1.1 mentioned above the Code does not mention the environment. Moreover, the term ‘environment’ itself raises questions about the scope of this term. In the explanatory notes to the Code, the Commission indicates that, in including the non-financial aspects of business, a link was sought with Directive 2014/95/EU on disclosure of non-financial information and diversity. The preamble to this Directive interprets the environment as meaning “actual and foreseeable effects of the company’s activities on the environment and, where applicable, on health and safety, the use of renewable and/or non-renewable energy sources, greenhouse gas emissions, water consumption and air pollution”.  The term ‘environment’ in the Code can therefore also be interpreted against this background.

Corporate social responsibility fundamental to daily business operations

Although the environment is not explicitly mentioned more often in the Code, the Committee believes there is a reason for this. Sustainability is, after all, about the fact that the management board and the supervisory board must take into account the opportunities and risks of the company and the interests of the stakeholders involved in the company in order to strive for long-term value creation. It follows from the explanatory notes that corporate social responsibility in the Code is not seen as “a separate objective to be pursued” but, on the contrary, constitutes “an integral part of the day-to-day running of a company that is committed to long-term value creation”. Moreover, the Committee emphasises that risks arising from non-financial aspects, such as environmental impact, can also have financial consequences. In short: sustainability is not seen in the Code as a separate concept but as part of long-term value creation. It is therefore important for companies (and specifically those to which the Code applies) to focus on sustainability in the day-to-day management, strategy and risk management of the company.

Do you still have questions after reading this article about how the Corporate Governance Code should be interpreted in the context of sustainability? Then please contact Law & More. Our lawyers are specialised in the field of corporate law and corporate governance and will be pleased to help you!