It has long since ceased to be an issue that companies have a major social influence and thus also have an important social role to play. The functioning of companies affects not only the interests of direct stakeholders, but also the climate and society.
This also changes the role of the various bodies within a company. Governance is not one of the 3 pillars of ESG legislation for nothing.
Governance deals with the role of the various bodies within the company and their relationship to each other and looks at how the company incorporates rules, principles and responsibilities between different stakeholders into its policy and strategy. A good governance structure helps to harmonize the interests of different stakeholders within the company and makes a company future-proof.
Each body within a company has its own role with associated responsibilities in this context.
Board
In managing the company, the board must take into account the impact of its decisions on sustainability issues, in the short, medium and long term. A concrete example of this is making investment decisions. The board should include ESG aspects in its considerations. ESG aspects should also be taken into account when dealing with labor relations issues. Consider diversity and inclusiveness within the company.
In addition, the CSRD requires (more and more) companies to report on:
(i) the effects of their business operations on the environment and society;
(ii) what impact, risks and opportunities the ESG issues have on the company.
Even for companies that do not (yet) fall within the scope of the CSRD, the CSRD can have consequences, for example, because a company is required by a customer to provide information about the production process and the associated emissions. This forces directors to think critically about the company's strategy and policy and how it should be adjusted to be and remain sustainable as a company.
Failure to take ESG aspects into account can create reputational and operational risks for the company. This can further result in investors, banks, customers or employees choosing parties where ESG does have priority. In addition, non-compliance with legal ESG obligations can lead to civil, administrative and/or criminal liability for companies, with all the associated penalties and fines.
The board will also have to account annually to its shareholders (and the supervisory board). If insufficient attention is paid to ESG, a director can be fired or miss out on a bonus. Conversely, a field of tension can also arise if the board fulfills its responsibilities in the context of ESG, while the shareholders see less benefit in this.
Supervisory Board
The role of the supervisory board is increasingly changing from a reactive stance to a proactive, critical stance. The supervisory board should critically question the management board about the sustainability policy pursued by the company and the associated risks. The supervisory board not only has a role in formulating the policy, but also with regard to its implementation. Against this background, it is increasingly obvious to have one or more supervisory board members with specific expertise on ESG-related issues sit on the supervisory board.
The CSRD also requires sustainability expertise to be part of the supervisory board. The board report should account for the expertise and skills of supervisory board members with respect to the sustainability aspects of the company, or the access the supervisory board has to external advisers with such expertise and skills.
Shareholders
The prevailing view with respect to shareholders (and the general meeting) is that they do not have to focus on the interests of the company (and all stakeholders), but may in principle - unlike the management board and supervisory board - focus on their own interests. However, more and more you see that shareholders also focus on the broader, societal, interest.
Shareholders have no direct obligations under ESG legislation. However, they can influence the company's ESG policy. Among other things, shareholders can appoint and dismiss directors, amend the articles of association, have dividends paid and, to a certain extent, issue instructions. In addition, the management board and supervisory board will have to account annually to its shareholders. If insufficient attention is paid to ESG, a shareholder can use the aforementioned means and, for example, dismiss a director or not pay his bonus.
