Integrating Sustainability in EU Corporate Governance Codes

Abstract

In the light of the strong commitment by the EU in undertaking a sustainable path toward the goals set by the Paris Agreement and the UN 2030 Agenda, and the prospected EU initiatives concerning the establishment of a sustainable corporate governance, it is more pressing than ever evaluating how companies can truly integrate a long-term sustainable approach in their strategies and operations, and therefore whether corporate governance codes could provide a useful tool toward such objectives. Many authors investigated the effective implementation of corporate governance codes, but a few considered the role of the codes in promoting environmental and social responsibility. The aim of the chapter is to comparatively evaluate the most recent attempts to integrate sustainability considerations in corporate governance codes of listed companies within the EU Member States, in order to understand if such progress is on the way and which best practices could be taken into consideration and disseminated by the EU authorities in the years to come. Although this chapter is the result of joint work, Paragraphs from 7.2 to 7.5.8 should be attributed to Shanshan Zhu.

1 Introduction

The transition to a more responsible economic system—that considers the impact of business activities in terms of environmental and social effects—has become an urgent and unavoidable demand. In such a context, corporate governance of listed companies and financial institutions—considered in the past as one of the determinants of the global financial crisis¹—is a key factor that can contribute to the promotion of sustainable strategies and decision-making processes, as essential for “aligning businesses more closely with long-term perspectives”.² The recent COVID-19 outbreak confirmed the importance of ensuring that non-financial risks—especially those associated with loss of biodiversity and wildlife habitat—are duly taken into account in order to reduce the risks of future pandemics which would threaten human health and economic development.³

Notably, EU policymakers essentially left the regulation of corporate governance practices of non-financial companies to self-regulatory and soft law mechanisms. In particular, Directive 2006/46/EC now requires that all listed companies refer to a national corporate governance code in their corporate governance statement, explaining the reason for any departure from it.

However, corporate governance initiatives have been under way since the EU Commission launched a public consultation on possible legislative and soft law measures to support a sustainable corporate governance in 2020,⁴ and a Directive on Corporate Sustainability Due Diligence is soon to be adopted. In such a context, it is important to question the role that soft law and self-regulatory tools, such as corporate governance codes, can play as a possible response to the need to integrate sustainability “(…) into the corporate governance framework, as many companies still focus too much on short-term financial performance compared to their long-term development and sustainability aspects”.⁵ In this regard, we agree with other authors that have correctly argued that “Corporate Governance Codes are meant to create specific rules and are constantly open to flexibility, innovation and modernization” and identified in soft law a complementary tool to overcome the inevitable lack of preciseness and flexibility of regulatory measures.⁶

Many authors investigated the effective implementation of corporate governance codes,⁷ but a few considered the role of the codes in promoting environmental and social responsibility.⁸ Even though many corporate governance codes already require that boards address stakeholders’ (employees, creditors, customers, suppliers, and local communities) interests,⁹ existing studies denounce that the meaning and real implications of such indication diverge, the recommendations are quite generic and vague,¹⁰ and the interests of stakeholders are nonetheless subordinate to the shareholder primacy principle.¹¹ In the light of the strong commitment by the EU in undertaking a sustainability path toward the goals set by the Paris Agreement and the UN 2030 Agenda, it is more pressing than ever evaluating how companies can truly integrate a long-term sustainable approach in their strategies and operations, and therefore whether corporate governance codes could provide a useful guidance toward such objectives.

The aim of the chapter is to comparatively evaluate the most recent attempts to integrate sustainability considerations in corporate governance codes of listed companies within the EU Member States, in order to understand if such progress is on the way and which best practices could be taken into consideration and disseminated by the EU authorities in the years to come.

The chapter starts by briefly analyzing the EU approach to the promotion of corporate governance practices, with a particular focus on the diffusion of corporate governance codes.¹² Then, it focuses on the recent EU actions addressing sustainable development, from the launch of the EU Sustainable Development Strategy in 200¹³ to the announcement of the European Green Deal strategy in December 2019 and the latest regulatory proposals in 2020. It follows a description of the methodology adopted in the comparative analysis, conducted on corporate governance codes currently in force in the EU Member States, also considering the G20/OECD Principles of Corporate Governance (2023) (OECD Code) and UK Corporate Governance Code (2018) as undeniably the most influential codes around the globe. Finally, the paper describes the results of such research and concludes.

2 Corporate Governance Codes: The EU Approach

The first modern corporate governance code was adopted in the UK in 1992 as a series of best governance practices—known as the Cadbury Code—by the Cadbury Committee on Corporate Governance Issues, which defined corporate governance as “the system by which companies are directed and controlled”.¹⁴ The aim of the Code was to raise standards of corporate governance in order to increase the level of confidence in financial reporting and auditing, by clearly defining the rights and responsibilities of shareholders, directors, and auditors. In particular, the Code was developed in reaction to the series of business scandals that hit the UK, including the Guinness share-trading fraud, the collapse of the Bank of Credit, and Commerce International and Maxwell’s pension fund affair.¹⁵

The issuance of the Code was associated with the birth of the corporate governance movement in Europe,¹⁶ as it paved the way for the adoption of corporate governance codes throughout Europe.¹⁷ As so, for many years, the improvement of corporate governance standards was left by EU policymakers to soft law mechanisms, with an exception for the financial sector where—following the 2007 financial crisis—stricter governance requirements were provided for banks and other financial institutions.¹⁸ However, a relevant step toward a model including hard law elements was registered with the introduction of Directive 2006/46/EC that requires listed companies to include a corporate governance statement in their annual reports, containing a reference to the national corporate governance code to which each company adheres and, in the event of non-application of any of the provisions enclosed in such code, an explanation for such choice.¹⁹

As to other interventions on corporate governance practices, the main intentions by the EU legislator were set in three Green Papers published in 2003, 2010, and 2011, which described the evolution of the Commission’s thinking with regard to future regulatory initiatives concerning corporate governance. The EU policies on corporate governance following such documents, and disclosed in the Corporate Governance Action Plan of 2012,²⁰ focused on the enhancement of specific issues, such as corporate transparency, protection of shareholder rights, board effectiveness, and the promotion of shareholder long-term engagement and stewardship.²¹

The improvement of corporate governance code reporting—based on companies’ general tendency to provide insufficient explanation for company choice to depart from national corporate governance provisions—was among the initiatives included in the Corporate Governance Action Plan and was finally addressed by the EU Commission in its recommendations on the quality of corporate governance reporting issued in 2014.²²

However, the explicit link between corporate governance and sustainable development was not mentioned by EU policymakers until 2018, in the context of the implementation of the Commission Action Plan on financing sustainable growth, as better described in the next section.²³

3 EU Approach to Sustainable Development and the Need for a Sustainable Corporate Governance

Since the launch of the EU Sustainable Development Strategy in 2001,²⁴ the EU Commission has made a clear commitment to contribute to the promotion of sustainable development. The introduction of the Europe 2020 Strategy in 2010,²⁵ the signing of the Paris Agreement,²⁶ the adherence to the UN Sustainable Development Goals in 2016,²⁷ as well as the announcement of the European Green Deal strategy in December 2019²⁸ clearly confirmed the EU’s intention to lead the global evolution toward a new economic model.

In particular, the first EU legislative interventions addressing the promotion of corporate sustainability developed along two main intertwined dimensions: sustainable finance and corporate non-financial disclosure.

As to non-financial disclosure, Directive 2014/95/EU on disclosure of non-financial and diversity information (Non-Financial Reporting Directive)²⁹—entered into effect in January 2018—requires that certain large companies³⁰ disclose information about their due diligence processes and policies in relation to environmental, social and employee matters, respect of human rights, anti-corruption and bribery issues, and diversity on company boards (in terms of age, gender, educational, and professional background). Notwithstanding the potentially strong impact performed by the introduction of such directive on corporate practice, many concerns were raised in relation to its implementation,³¹ and empirical research found that non-financial statements are generally affected by lack of quantitative disclosure, lack of clarity concerning the selection and measurability of non-financial targets, but also that they are over-generic, they do not appropriately address climate-related risks nor provide sufficient descriptions of due diligence processes, especially related to human rights and social matters.³² The consequences of such failure could be particularly harmful, especially considered that the quality of sustainability disclosure is a key aspect to prevent market actors from relying exclusively on financial metrics which may encourage a focus on short-term measures of performance.³³ Moreover, the lack of reliable corporate non-financial disclosure is undoubtedly one of the main challenges faced by financial market participants and financial advisers in performing their new disclosure duties in relation to ESG factors in the context of EU sustainable finance regulation.³⁴ In considerations of such limitations, the revision of the Non-Financial Reporting Directive is one of the first key actions included in the initial roadmap of the policies and measures needed to achieve the European Green Deal,³⁵ and a public consultation on its review was launched on February 20, 2020.³⁶ Interestingly, the majority of respondents expressed support for a great number of proposals that would greatly impact the existing directive.³⁷ In particular, support was shown in relation to the adoption of a common reporting standard in order to avoid issues concerning comparability, reliability, and relevance; the development of simplified standards for SMEs; the imposition of stronger audit requirements; the digitalization of non-financial information which should be available through a single access point and machine-readable; the requirement on companies to disclose their materiality assessment process; the expansion of the scope of the Non-Financial Reporting Directive to other categories of companies; and the alignment of environmental disclosure with the EU Taxonomy structure. The finalization of delegated acts to the EU regulation providing a common EU Taxonomy for sustainable financial products³⁸ and EU climate benchmarks³⁹ will undeniably help to prevent greenwashing practices among companies, but also to increase transparency and comparability of disclosed information. In November 2022, the Corporate Sustainability Reporting Directive (CSRD) was adopted by the EU Parliament (Parliament) and approved by the European Council (EC), and in January 5, 2023, it entered into force.⁴⁰

As to the second dimension—sustainable finance—the EU Commission has continued intervening in the regulation of the financial sector, as it became clear that a real change would be possible only by reorienting private capital to more sustainable investments. In fact, it was estimated that more capital flows should be oriented toward sustainable investments to close the €180-billion gap of additional investments needed to meet the targets of the Paris Agreement. In the meantime, great financial risks might occur for business activities in case of inaction, as it was estimated that delays in tackling the climate issue could cost companies nearly $1.2 trillion over the next 15 years for a universe of 30,000 listed companies.⁴¹

As a consequence, at the end of 2016, the EU Commission appointed a High-Level Expert Group (HLEG) on sustainable finance to advise it on developing a comprehensive EU strategy on sustainable finance and development. The HLEG final report,⁴² issued in January 2018, stressed the importance of promoting sustainable finance through a systemic review of the financial framework and proposed eight recommendations, as well as many crosscutting recommendations and actions, addressed to specific financial sectors. In relation to corporate governance, the HLEG Report recommended, inter alia, the strengthening of director duties related to sustainability and invited the Commission to explore ways to enhance director duties and incorporate sustainability in corporate practice, by taking into account the interests of all stakeholders, employees included, and the likely consequences of any decision in the long term on the community and environment. The report suggested that directors should be adequately trained in order to exercise reasonable care, skill, and due diligence in relation to the company’s affairs, so as to consider the direct and indirect impact of the company’s business model, production, and sales processes on stakeholders and the environment. The HLEG also recommended that sustainability-related competencies should be considered during board nomination processes, the company management should develop a climate strategy aligned with climate goals, and remuneration should be aligned with long-term and sustainability goals. Such suggestions, addressed to the financial sector, could and should reasonably apply as best practices to non-financial companies as the main drivers of economic change.

In March 2018, on the basis of the final report published by the HLEG, the EU Commission developed a framework, the “Action plan on Financing Sustainable Growth” (Action Plan),⁴³ which established a strategy to support the re-orientation of private capital flows toward sustainable investments, so enhancing the connection between the financial industry and sustainable development. The EU strategy specifically develops around 10 key actions to be fully implemented by the end of 2019,⁴⁴ the last of which concerns the promotion of sustainable corporate governance and reducing short-termism in capital markets.

As to such action, the Commission argues that corporate governance “can significantly contribute to a more sustainable economy, allowing companies to take the strategic steps necessary to develop new technologies, to strengthen business models and, to improve performance”, but also “improve their risk management practices and competitiveness”.⁴⁵ Indeed, a corporate governance framework excessively focused on short-term performance could lead managers to take risks that are unsustainable in the long term, also in economic terms. Moreover, the EU Commission committed itself to carry out analytical and consultative work with relevant stakeholders to assess: (i) the possible need to require corporate boards to develop and disclose a sustainability strategy, including appropriate due diligence throughout the supply chain, and measurable sustainability targets; and (ii) the possible need to clarify the rules according to which directors are expected to act in the company’s long-term interest. As to the former, in February 2020, the Commission published a study on due diligence,⁴⁶ which indicated the need for policy intervention for the identification and mitigation of adverse social and environmental impact in a company’s own operations and supply chain.

As to the latter, the publication, in July 2020, of the “Study on directors’ duties and sustainable corporate governance”—prepared by EY for the EU Commission DG Justice and Consumer⁴⁷—represented an important step toward the establishment of a sustainable corporate governance, even though it raised much criticism by scholars and other stakeholders. Based on the assumption that “there is a trend for publicly listed companies within the EU to focus on short-term benefits of shareholders”,⁴⁸ the report identifies seven main problem drivers contributing to such ‘short-termism’ in corporate governance⁴⁹ and also analyzes the impacts of possible EU level solutions, from the publication of guidance documents or recommendations to the adoption of hard/legislative measures (including, for example, the requirement that directors should integrate ESG issues while performing their mandate, that corporate boards consider sustainability criteria in the board nomination process, and that Member States introduce mechanisms to incentivize longer shareholding periods). Building on the report, the EU Commission has recently launched a public consultation on possible legislative and soft law measures to support a sustainable corporate governance.⁵⁰ However, the EY report, the inception impact assessment, and consultation questionnaire all have been subject to strong criticism by respondents, as accused of not being adequately evidence-based, moving from biased assumptions, and being poorly structured (especially in relation to the structure of the questions of the public questionnaire), but also inadequate to respond to the real problems at stake (which could not be simply considered to be the strong short-term market pressure and the lack of a stakeholder approach).⁵¹ Moreover, it should be noted that the existence of non-regulatory incentives—such as the evaluation by rating agencies, score providers, and institutional investors of sustainability aspects such as the adherence to international standards (e.g., the UN Guiding Principles on Business and Human Rights and the ILO Declaration on Fundamental Principles and Rights at Work) and the general tendency by institutional investors to adopt a long-term view on investment activities⁵²—should be considered when evaluating the best tools for supporting a more responsible decision-making by corporations.

In the light of the strong criticism moved to a possible hard/regulatory approaches to support the establishment of a sustainable corporate governance, we find it useful performing an analysis of existing practices concerning the integration of CSR, sustainability, environmental and social issues among corporate governance codes adopted by the EU Member States, so as to investigate a possible role of such self-regulatory and soft law measures in enhancing more responsible corporate behaviors.

On February 23, 2022, the EU Commission presented a proposal for a Directive on Corporate Sustainability Due Diligence (CSDDD)⁵³ that will require companies to identify and where necessary, prevent, end, or mitigate adverse impacts of their activities on human rights and on the environment. National administrative authorities appointed by Member States will be responsible for supervising these new rules and may impose fines in case of non-compliance. Interestingly, the Directive introduces directors’ duties to set up and oversee the implementation of due diligence and to integrate it into the corporate strategy.⁵⁴ In addition, when fulfilling their duty to act in the best interest of the company, directors must take into account the human rights, climate change, and environmental consequences of their decisions.⁵⁵ Where companies’ directors enjoy variable remuneration, they will be incentivized to contribute to combating climate change by reference to the corporate plan.⁵⁶

Notwithstanding the initiatives undertaken by the EU legislator, the integration of corporate sustainability is still at its infancy, and the effects of such policy interventions have to be seen and evaluated carefully. However, the restructuring of corporate governance practices is by no means an obliged step to the achievement of international sustainability targets.

As already mentioned, many authors investigated the effective implementation of corporate governance codes,⁵⁷ but a few considered the role of the codes in promoting environmental and social responsibility.⁵⁸ Even though many corporate governance codes already include CSR recommendations, by requiring, for instance, that the board addresses stakeholders’ (employees, creditors, customers, suppliers, and local communities) interests,⁵⁹ scholars denounce that the meaning and real implications of such indication diverge, the recommendations are quite generic and vague,⁶⁰ and the interests of stakeholders are nonetheless subordinate to the shareholder primacy principle.⁶¹ As such, the integration of CSR in corporate governance codes seems superficial and usually done by using boilerplate language.

4 Methodology

The present study is based on the analysis of the content of corporate governance codes in force in all EU 27 Member States⁶² as of November 2023, with specific reference to the approaches followed in integrating Corporate Social Responsibility and/or sustainability issues among the recommendations included therein. In addition to the examination of EU corporate governance codes, the study also includes a comparison to the OECD Code and the UK Code as reference frameworks.

The study builds on a previous work conducted in 2013 on the integration of Corporate Social Responsibility in corporate governance codes in the EU.⁶³ Undoubtedly, the present study partially provides some updates on the state of the codes. At the same time, it differs in the scope of the analysis, as it is limited to the 27 EU corporate governance codes instead of all European codes and includes the analysis of some additional factors, such as the presence in the codes of provisions concerning gender diversity, non-financial disclosure, compensation linked to non-financial/sustainability criteria, and the institution of specific CSR committees.

The findings of this study have to be seen in the light of some limitations. First of all, it should be specified that the broad scope of the research made it necessary for the study to be based on the English convenience translations of the codes provided by the issuers,⁶⁴ and therefore, it could present biases to the extent that such translations show some inconsistencies with the official codes issued in the original language. Further limitations of the study could also originate from the different historical, cultural, and institutional contexts, in which each code is implemented, that have not been the object of this study but could have influenced in multiple ways the consideration of sustainability-related issues in corporate governance recommendations. It is also important to specify that the study does not assess the level of implementation/efficiency of corporate governance rules nor the integration of sustainability concerns in national legislation.

Finally, it should be noted that, in some cases, more than one code of corporate governance was published in some Member State, but that only the main code into effect has been considered for the current analysis. In this regard, Table 7.1 provides the list of codes analyzed for each EU country.⁶⁵

Table 7.1 National codes of corporate governance (EU countries)

5 Findings

The final results of the study are summarized in Table 7.2 and described in the next 7 sections, as briefly specified below:

Table 7.2 The integration of sustainability factors in corporate governance codes in the EU

• (a) The Purpose of Corporate Governance and of Codes: This part includes many indicators, such as the explicit mentioning of sustainability/CSR considerations in the description of the main purpose of the code, but also the approach adopted in defining the function and objective of corporate governance.

• (b) CSR/Sustainability: This section analyzes how corporate governance codes address sustainability, either by mentioning concepts such as ‘sustainable success’, ‘Corporate Social Responsibility’, ‘sustainable value creation’, ‘sustainable long-term value’, ‘sustainable development’, or by dedicating an entire chapter/principle prescribing the duties of the company toward its stakeholders.

• (c) Stakeholders: This part addresses the presence of recommendations/principles concerning the consideration and treatment of stakeholders’ interests, as well as the provision of a definition of the concept of ‘stakeholder’.

• (d) Employees: The paragraph focuses on the inclusion in the codes of specific provisions fostering employee engagement and participation.

• (e) Gender Diversity: The section describes how codes consider gender diversity, distinguishing among corporate governance codes that only recommend that board should be elected promoting gender diversity and codes that even set a minimum percentage for the representation of the female gender.

• (f) Sustainability/CSR Committee: This part concerns the presence of provisions recommending the establishment of specific sustainability/CSR committee with the task of performing CSR functions.

• (g) Compensation and Sustainability: The section analyzes the presence of provisions recommending the integration of non-financial and sustainability-related factors in compensation policies.

5.1 The Purpose of Corporate Governance and of Codes

The 2004 version of the OECD Code defines ‘corporate governance’ as “a set of relationships between a company’s management, its board, its shareholders and other stakeholders”.⁶⁶ To this definition, the 2015 version adds also that “the purpose of corporate governance is to help building an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and more inclusive societies”.⁶⁷ Supporting sustainable growth is therefore among the ultimate objectives included in the latest OECD Code, alongside the support of economic efficiency and financial stability through the improvement of the legal, regulatory, and institutional framework for corporate governance.⁶⁸ The 2023 version of the OECD Code underlines that the corporate governance framework should sustain the sustainability and resilience of corporations, which in turn may contribute to the sustainability and resilience of the broader economy.⁶⁹

The current version of the UK Corporate Governance Code mentions the original definition of corporate governance provided in 1992 by the Cadbury Committee as “the system by which companies are directed and controlled” but, at the same time, specifies that the long-term success of any business depends on its relationships with its stakeholders, and states that good corporate governance should ensure a company’s long-term sustainable success, generating value for shareholders and contributing to wider society.⁷⁰

The latest version of both codes seems, therefore, to have started including some specific references to the need for companies to perform their activities with a long-term perspective, taking into account the interests of other stakeholders and the society in general, so moving away from a shareholder-centric vision based on the need to define corporate bodies functions for agency costs reduction.

As to the EU 27 analyzed codes, we found that 16 countries out of 27 define the purpose and function of corporate governance (Austria, Greece, Denmark, Lithuania, Portugal, Luxembourg, The Netherlands, Bulgaria, Germany, Sweden, Latvia, Malta, Poland, Romania, Slovenia, and Spain). In particular, we identified three approaches to the definition of corporate governance function.

The first approach, followed by the Romanian Code, focuses on corporate value creation, market competitiveness, and transparency, with no mention of stakeholders’ interests, nor to corporate responsibility toward the society.

A second approach—adopted by the Lithuanian code—defines corporate governance as a framework of the company’s management and control involving a set of relationships between bodies of corporate management and supervision, the company’s shareholders and stakeholders. It should be noted that the codes that follow this approach clearly adhere to the 2004 definition provided by the OECD Code stating that “corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders”.⁷¹

The third approach, which aligns with the current integrated definition of corporate governance by the OECD Principle⁷² and the UK Code⁷³—and adopted by codes from Austria, Bulgaria, Denmark, Germany, Greece, Latvia, Luxembourg, Malta, the Netherlands, Poland, Portugal, Slovenia, Spain, and Sweden—mentions the contribution of corporate governance to sustainable development/growth and pays attention to corporate responsibility toward society. In particular, Bulgarian Code states that “modern corporate governance practices contribute to global sustainable development and growth of national economies” and that “good corporate governance requires corporate boards to be accountable, loyal, responsible, transparent and independent in order to act in the best interest of the company and society”.⁷⁴ According to the Danish code, “The aim of corporate governance is to advance a responsible corporate management culture that creates value”.⁷⁵ The German Code specifies that “with their actions, the company and its governing bodies must be aware of the enterprise’s role in the community and its responsibility vis-à-vis society” as “social and environmental factors influence the performance of the company, and its activities have an impact on people and the environment”.⁷⁶ The Luxembourg Code highlights concepts such as ‘integrity’, ‘responsibility’, and “respect for the interests of shareholders and any other stakeholders”.⁷⁷ The Dutch Code defines governance as a concept related to “management and control, about responsibility and influence, and about supervision and accountability”, based on the underlying notion that “a company is a long-term alliance between the various stakeholders of the company”, of which interests should be taken into account with “a view to ensuring the continuity of the company and its affiliated enterprise, as the company seeks to create long-term value”.⁷⁸ Swedish Code defines ‘good governance’ as a tool to ensure that “companies are run sustainably, responsibly and as efficiently as possible on behalf of their shareholders”, and adds that “the confidence of legislators and the public that companies act sustainably and responsibly is crucial if companies are to have the freedom to realize their strategies to create value”.⁷⁹ Similarly, Portuguese Code suggests that corporate governance should strengthen the trust of investors, employees, and the general public in the quality and transparency of management and supervision, as well as in the sustained development of the companies.⁸⁰

As to the purpose of the code, 20 out of 27 codes (Austria, Belgium, Bulgaria, Czech Republic, Croatia, Denmark, Estonia, Finland, Germany, Greece, Hungary, Latvia, Luxembourg, Malta, the Netherlands, Portugal, Sweden, Romania, Slovakia, Slovenia, and Spain) specify what objectives the code was arranged for and its function in relation to the targeted companies. Of these, only 8 (Austria, Belgium, Croatia, Denmark, Luxembourg, the Netherlands, Portugal, and Spain) mention CSR/sustainability factors, such as the consideration of stakeholders’ interests,⁸¹ sustainability and associated opportunities and risks related to the environment, social issues,⁸² and non-financial reporting.⁸³

Specifically, the Austrian, Belgian, Portuguese, Spanish, and Luxembourg codes highlight that one of the main drivers leading to the last revision of the code was the inclusion of a long-term and sustainable approach to value creation. The Luxembourg Code, in particular, begins with the announcement of the commitment taken by the Luxembourg Stock Exchange—when it asked for the revision of the code at the beginning of 2017—to promote “investment in the transition toward a more sustainable economy”, by integrating CSR principles in the code.⁸⁴

Even though some codes include CSR/sustainability issues and/or stakeholder interests in their introductory statements, the majority of the analyzed codes still do not consider corporate responsibility toward the society and the environment as a key aspect of corporate governance function. On the contrary, the analysis suggests that stakeholders’ interests—if considered at all—are usually taken into consideration only if not hindering investors’ interests.

5.2 CSR/Sustainability

The current version of the OECD Code explicitly addresses sustainability issues in a dedicated Chapter 6, entitled ‘Sustainability and Resilience’, recommending companies to manage the potential risks and opportunities associated with transition paths, as well as to disclose comparable and reliable material sustainability-related information. It also clarifies that “combination of sound governance and clear disclosures will promote fair markets and the efficient allocation of capital, while supporting companies’ long-term growth and resilience”.⁸⁵ In particular, the OECD Code includes some provisions about sustainability-related disclosure,⁸⁶ the dialogue on sustainability matters between the company, the shareholders, and the stakeholders,⁸⁷ the consideration of sustainability risks in board decision-making⁸⁸ and the rights and interest of the stakeholders in creating sustainable and resilient companies.⁸⁹

The 2018 updated version of the UK Code clearly identifies the promotion of the ‘long-term sustainable success’ of the company as a core duty of the board. The UK Code, however, does not include a definition of ‘sustainable success’, a concept that is also mentioned in relation to director re-election⁹⁰ and remuneration policies and practices,⁹¹ nor does specifically address stakeholder, environmental, and social matters. Therefore, its contribution to the integration of sustainability consideration in corporate governance seems rather modest.

As to the EU, we found that 21 out of 27 corporate governance codes (from Austria, Belgium, Bulgaria, Czech Republic, Croatia, Denmark, France, Germany, Greece, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, and Sweden) address Corporate Social Responsibility, sustainable value creation or dedicate an entire chapter/principle of the code prescribing the duties of the company toward its stakeholders. In particular, we identified four main approaches:

5.2.1 Sustainable Success

The Italian code mentions—in line with the UK Code—the need for the board of directors to manage the company pursuing its ‘sustainable success’, which is defined as “the objective that guides the actions of the board of directors and that consists of creating long-term value for the benefit of the shareholders, taking into account the interests of other stakeholders relevant to the company”.⁹² Such criteria should also guide the definition of the compensation policy⁹³ and the activities performed by the internal control system.⁹⁴

5.2.2 Sustainable Development/Value Creation/Sustainable Long-Term Value

Codes from Austria, Belgium, Czech Republic, France, Latvia, the Netherlands, Poland, Portugal, Slovenia, and Sweden recommend that companies should be managed in order to ensure a sustainable development/value creation/sustainable long-term value, intended as the maximization of shareholders’ wealth with the permanent consideration of stakeholders’ interests.⁹⁵ Even though not expressly mentioning sustainability, the French Code recommends the consideration of social and environmental aspects among the criteria to be followed by directors in the performance of their duties, as well as among the conditions to be integrated into directors’ training and compensation.⁹⁶

Interestingly, the Dutch Code specifies that the management board should develop a long-term oriented strategy that takes into consideration, inter alia, the interests of the stakeholders but also “the impact of the company and its affiliated enterprise in the field of sustainability, including the effects on people and the environment”.⁹⁷ However, the Dutch Code also explains that depending on market dynamics, it may be necessary to make short-term adjustments to the strategy.

5.2.3 Corporate Social Responsibility (CSR)

Codes from Bulgaria, Denmark, Germany, Luxembourg, Malta, Slovenia, and Spain include recommendations related to the adoption of CSR initiatives. The Bulgarian Code mentions the requirement for corporate management to inform stakeholders of CSR and environmental policies adopted.⁹⁸ The Maltese Code, similarly, recommends that “the Board should endeavour to embrace Environmental, Social and Governance (ESG) standards and Corporate Social Responsibility (CSR) principles in the entity’s strategy, leading to an enhanced focus on sustainable finance activities and projects, and long-term value creation for all stakeholders”,⁹⁹ where CSR is defined as “the commitment by entities to behave ethically and to contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society in general”.¹⁰⁰ In such a context, listed companies are encouraged to: (i) “have a ESG strategy in place and should adequately report on ESG initiatives”, (ii) “act as responsible corporate citizens in the local community, working closely with suppliers, customers, employees, and public authorities”, (iii) “seek to adhere to principles of sustainable finance and CSR”, (iv) “take up initiatives aimed at augmenting investment in human capital, health and safety issues, and managing change, while adopting environmentally responsible practices related mainly to the management of natural resources used in the production process”, (v) “participate in and contribute to ESG initiatives and events; ii. issue public reports on their ESG commitments and performance; and iii. communicate the impact of their business, especially on sustainability issues”, (vi) “identify, understand, manage, and report on environmental impacts, risks, and opportunities.”, (vii) “play a crucial role in ensuring a fair and transparent market, providing its participants with adequate, reliable, and consistent information on risks related to ESG factors that may have an impact on the financial system, and the measures adopted to mitigate such risks”, (viii) “provide consumers of financial services with sustainable finance products and services which genuinely meet their sustainability preferences”, and (ix) “keep abreast with initiatives being taken in the local and international scenario in relation to the themes of ESG and sustainable finance”.¹⁰¹

The German Code recommends that both the management board and the supervisory board should take into account the impact of corporate activities on people and the environment in the management in the performance of their activities.¹⁰²

Codes from Luxembourg, Denmark, Greece, Slovenia, and Spain even recommend the definition of a corporate social responsibility/environmental and social sustainability policy in order to integrate CSR aspects into corporate strategy that should be adequately published and on which a periodic report should be issued by the company.¹⁰³ The Spanish Code describes in detail the minimum content of the environmental and social sustainability policy that should include at least: “(a) the principles, commitments, objectives, and strategy regarding shareholders, employees, clients, suppliers, social welfare issues, the environment, diversity, fiscal responsibility, respect for human rights, and the prevention of corruption and other illegal conducts; (b) the methods or systems for monitoring compliance with policies, associated risks and their management; (c) the mechanisms for supervising non-financial risk, including that related to ethical aspects and business conduct; (d) channels for stakeholder communication, participation, and dialogue; and (e) responsible communication practices that prevent the manipulation of information and protect the company’s honor and integrity”.¹⁰⁴ As to reporting, the Luxembourg Code recommends that the company publishes CSR performance indicators applicable to its business activities and provides a list of possible relevant indicators to be measured (workforce, staff training, safety, absenteeism, gender balance, subcontracting and relations with suppliers, energy consumption, water consumption, waste treatment, CO2 emissions, adaptation to the consequences of climate change, measures taken to preserve or develop biodiversity).¹⁰⁵

5.2.4 Stakeholders

Codes from Bulgaria, Croatia, Lithuania, Slovakia, and Slovenia also include an entire chapter prescribing the duties of the company toward its stakeholders (see the section below).

5.3 Stakeholders

Employees and other stakeholders are recognized by the OECD Code as important contributors to the long-term success and performance of the company.¹⁰⁶ The stakeholders are defined as non-shareholder stakeholders, including, “among others, the workforce, creditors, customers, suppliers and affected communities”.¹⁰⁷ In the revision process performed from the 2004 version to the current version of the code, the chapter originally dedicated to stakeholders has been transposed in Chapter 6,¹⁰⁸ the one related to Sustainability and Resilience, in order to incorporate also the due diligence on environmental and social issues.¹⁰⁹

The 2023 version acknowledges the role of the workforce in effective corporate governance and includes heightened expectations for consultation of workers on major decisions of the company. In line with the 2015 version, the OECD Code requires that companies recognize the rights of stakeholders established by law (e.g., labor, business, commercial, environmental, and insolvency laws) or through mutual agreements (i.e. the recently updated 2023 OECD Guidelines for Multinational Enterprises for due diligence procedure), as well as to allow stakeholders to freely communicate and obtain redress for the violation of their rights and for any unethical and illegal practices by corporate officers to the board or to the competent public authorities.¹¹⁰ Moreover, the activation of mechanisms for stakeholder—especially employee—participation is encouraged, provided that sufficient and reliable information is accessible on a timely and regular basis.¹¹¹ The code provides also some examples of mechanisms for employee participation, such as the employee representation on boards and governance processes allowing employees to share their view on the most relevant decisions.¹¹² Finally, Chapter 5 on the responsibilities of the board requires that the board takes into account stakeholder interest in its decisions.¹¹³

Innovating the previous version, the current OECD promotes a dialogue between a company, its shareholders, and stakeholders to exchange views on sustainability matters and encourages also for these purposes a consistent, comparable and reliable sustainability-related disclosure.¹¹⁴

The UK Code does not broadly address stakeholder interests, nor provide a definition of ‘stakeholder’. The Code mentions such concept only in Principle D—requiring the board to ensure stakeholder engagement and participation—and Provision 5—requiring that the board discloses in the annual report how stakeholders’ interests have been considered in board decision-making and that employees are involved through one or a combination of three methods (the appointment of a director from the workforce, the creation of a formal workforce advisory panel, and the designation of a non-executive officer).

In relation to the EU, our study found that 22 (Belgium, Bulgaria, Croatia, Czech Republic, Denmark, France, Germany, Greece, Hungary, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden) out of 27 corporate governance codes mention stakeholders, out of which 12 (Bulgaria, Croatia, Czech Republic, Greece, Lithuania, Luxembourg, Malta, Netherlands, Slovakia, Slovenia, and Spain) also include a more or less detailed definition of what a ‘stakeholder’ is. Conversely, codes from Austria, the Republic of Cyprus, Estonia, Finland, Ireland, Latvia, and Poland do not include any reference to the concept of ‘stakeholder’.

Most of the definitions provided (Greece, Lithuania, Luxembourg, Malta, Netherlands, and Slovakia) recall the OECD Code definition of stakeholders, just mentioning the list of interest groups that could fall into the definition (employees, clients, investors, suppliers, local community, and regulators). Interestingly, the Spanish Code mentions, in addition to traditional stakeholder categories, also the concept of ‘impact’ of company “activities on the broader community and the natural environment”.¹¹⁵

The definitions included in the Bulgaria and Dutch codes do not only include a list of interested parties and groups but also generally refer to the concept of reciprocal, direct and indirect, ‘influence’ between the company and such groups.¹¹⁶ The same concept also recurs in the Czech Code that defines stakeholders as “those whose interests are going to be influenced by the company”. Similarly, the Croatian Code refers to the concept of “direct and indirect risks in relation to the company and with regard to the company”.¹¹⁷

Conversely, the Slovenian approach to the concept of ‘stakeholders’ (defined as “individuals and groups of stakeholders whose actions are, directly or indirectly, essential to the achievement of objectives and the long-term development and sustainability of the company”)¹¹⁸ reveals a company-centric approach, as it seems only to consider the influence of ‘interest groups’ on the success of the company, and not the negative/positive impact the corporate activities could produce on them.

Codes from Bulgaria, Croatia, Lithuania, Slovakia, and Slovenia include an entire chapter prescribing the duties of the company toward its stakeholders. Such inclusion is sometimes clearly justified by specifying that stakeholders take over certain direct or indirect risks in relation to the company and with regard to the company,¹¹⁹ or that they contribute to the building of competitive and profitable companies¹²⁰ as “vehicle of potential gains and risks undertaken by the company”.¹²¹ On the long term, the success of the corporation is, therefore, considered strictly aligned with stakeholders’ interests.¹²²

In particular, the company is required to: (1) identify the stakeholders who are in the position to influence and impact on company’s sustainable development,¹²³ (2) comply with existing laws protecting stakeholders’ rights,¹²⁴ (3) ensure transparency and access to information through constant dialogue and non-financial disclosure,¹²⁵ (4) ensure that stakeholders can freely communicate their concerns about illegal or unethical practices to the board,¹²⁶ (5) promote stakeholder participation in corporate decisions (such as employee participation in certain key decisions and/or in company’s share capital, creditor involvement in governance in the context of the company’s insolvency, etc.),¹²⁷ and (6) report on its relationships with stakeholders.¹²⁸

In addition to legal obligations, some codes also recommend, in line with the OECD Code, that companies comply with the UN Guiding Principles on Business and Human Rights or the OECD Guidelines for Multinational Enterprises.¹²⁹ However, such reference is not frequently made, and even where it is recommended that stakeholders’ interests should be taken into consideration by the company, we noticed that, generally, shareholder value maximization is still strongly prioritized over stakeholder interests. The Slovenian Code, for instance, states that “the management and supervisory boards are obliged to act exclusively in the best interest of the company irrespective of the will or wishes of individual shareholders and other stakeholders” and that “the boards act exclusively at their own discretion in the interest of the company and do not communicate with individual shareholders and other stakeholders about their decisions”.¹³⁰ Similarly, the Greek Code requires that “The Board of Directors shall identify the stakeholders that are important to the company, depending on its characteristics and strategy, and to understand their collective interests and how they interact with its strategy”.¹³¹

In general, stakeholders’ interests seem to be taken into consideration, not as a core value based on ethical and social/environmental concerns and distinct from the company’s interests, but as a sort of risk factor that should be taken into account in order not to endanger shareholder value on the long term.

5.4 Employees

As mentioned above, the OECD Code includes many provisions addressing stakeholder interests. As to employees, the enforcement of mechanisms allowing employee participation should be ensured by the access to information and training for employee representatives.¹³² As to individual employees, the Code does not include particular provisions, except for the need to ensure a free communication of unethical/illicit conduct by corporate officers.¹³³

Similarly, the UK Code recommends the strengthening of employee engagement, requiring, as already mentioned, the adoption of one or a combination of three specific methods (a director appointed from the workforce; a formal workforce advisory panel; a designated non-executive director).¹³⁴ Moreover, the Code recommends—similarly to the OECD Code—that some procedures should be established, allowing employees to raise concerns to the board anonymously.

As to the EU, the role of employee engagement is mentioned in a more or less detailed way in corporate governance codes depending on the institutional framework of each Member State, especially in relation to the obligation for companies of a certain size to ensure employee representation in the board.¹³⁵ Except for codes from Croatia and Ireland,¹³⁶ all other corporate governance codes from countries which recognized some kind of employee representation at the board level mention employees’ right/interests among their principles/recommendations. In addition, some countries with no legislation or other arrangements providing for board-level representation¹³⁷ mention employees’ rights or interests in their codes of corporate governance. Conversely, corporate governance codes from Belgium, Bulgaria, Cyprus, Estonia, Italy, and Romania—countries which do not provide employee board representation—do not make specific recommendations in relation to employee rights/interests.

In addition to representation in the board, some codes require that appropriate training,¹³⁸ consultation, communication and reporting tools,¹³⁹ information,¹⁴⁰ and remuneration¹⁴¹ are ensured by the company.

As also provided by Directive 2014/95/EU on disclosure of non-financial and diversity information, some corporate governance codes¹⁴² require that companies annually publish a non-financial/sustainability report, including also relevant information on employees.

5.5 Gender Diversity

The OECD Code refers to gender diversity in Chapter 5, in relation to the board assessment of diversity requirements. In particular, the code invites countries to include mechanisms (such as board quotas, disclosure requirements, and voluntary targets) to enhance gender diversity on boards and in senior management.¹⁴³

Principle J under the UK Code recommends that board election practices should promote gender diversity, alongside diversity of ethnic background, cognitive and personal strengths.¹⁴⁴ The annual reports should include a section concerning how the policy on diversity and inclusion has been implemented by the nomination policy.¹⁴⁵

As to the EU, after being blocked in the Council for a decade, in November 2022, the European Parliament gave its final approval to a Directive on improving the gender balance on corporate boards¹⁴⁶ which sets a minimum of 40% for non-executive members or 33% for both non-executive and executive board members.¹⁴⁷ According to the new rules, Member States will also be required to set up a penalty system for companies that fail to meet the new standards by 2026. The necessity for an EU intervention to foster gender equality in corporate boards is indeed strong, especially considered that, according to a report published in 2019 by the EU Commission, over the period 2016–2018, women’s average pay is about 16% lower than that of men and only 6.3% of CEO positions in major publicly listed companies in the EU were held by women.¹⁴⁸

Our analysis found that 20 out of 27 of the EU corporate governance codes (codes from Austria, Belgium, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Italy, Latvia, Luxembourg, Netherlands, Poland, Portugal, Romania, Slovenia, Spain, Sweden) recommend that board composition should appropriately represent both genders.

However, only the Austrian, Dutch, German, Italian, Poland, and Spanish codes specify a mandatory minimum percentage for the representation of the female gender in the board. The Italian Code requires that at least 1/3 of board members¹⁴⁹ consist of representatives from the least represented gender.¹⁵⁰ The Austrian Code requires that the supervisory board should be made up of at least 30% women and 30% men, provided the supervisory board consists of at least six members, and the employee representatives should comprise at least 20% female and male employees each.¹⁵¹ In the Dutch Code and Polish Code, a reference is made to the legal requirement of at least 30% of male/female diversity in the management board and the supervisory board.¹⁵² Similarly, the German Code¹⁵³ requires that the composition of the supervisory board should comply with the legal gender quota requirement. Finally, the Spanish Code recommends that female directors represent at least 40% of the total number of members from 2022.¹⁵⁴

5.6 Sustainability/CSR Committee

The OECD Code does not address the establishment of a CSR/sustainability committee but suggests introducing an ethics committee to which unethical/illicit conduct should be reported.¹⁵⁵ The UK Code, as well, does not address the issue among its provisions.

Among the analyzed codes, only the Luxembourg and Spanish corporate governance codes suggest that companies could assign Corporate Social Responsibility functions to a pre-existing committee (such as the audit or nomination committee) or to an ad hoc corporate governance and social responsibility committee. The Spanish Code recommends that such committee should, inter alia,

“ (…)

b) Monitor the implementation of the general policy regarding the disclosure of economic-financial, non-financial and corporate information, as well as communication with shareholders and investors, proxy advisors and other stakeholders. Similarly, the way in which the entity communicates and relates with small and medium-sized shareholders should be monitored.

c) Periodically evaluate the effectiveness of the company’s corporate governance system and environmental and social policy, to confirm that it is fulfilling its mission to promote the corporate interest and catering, as appropriate, to the legitimate interests of remaining stakeholders.

d) Ensure the company’s environmental and social practices are in accordance with the established strategy and policy.

e) Monitor and evaluate the company’s interaction with its stakeholder groups.”¹⁵⁶

Even though it does not suggest the creation of a specific committee, the German code recommends that the supervisory board’s skill and expertise should also include specific sustainability-related competences.¹⁵⁷ Similarly, the Greek Code required that the selection criteria for board composition ensure that “(…) the Board of Directors, collectively, can understand and manage issues related to the environment, social responsibility and governance (ESG19), within the framework of its strategy”.¹⁵⁸

Outside Europe, such practice is mandated in India, where Section 135 of the Companies Act (2013) requires companies meeting specified criteria¹⁵⁹ to establish a Corporate Social Responsibility committee consisting of at least three directors, out of which at least one director shall be an independent director. In particular, such CSR committee shall formulate and recommend to the board a CSR policy, ensuring that the company spend at least 2% of the average net profit in activities provided for in Schedule VII (such as eradicating hunger, poverty, promoting health care, education, gender equality, and protecting the environment), activities that partially overlap with the SDGs.¹⁶⁰ According to a recent study, in 2019, 76% of the top 100 companies by market capitalization fully spent 2% more on CSR activities,¹⁶¹ which represent a striking 100% increase over the last five years.

Far from introducing a similar requirement, we recommend that the express attribution of CSR-related activities to a specific—pre-existing of new—committee should be included in corporate governance codes and should become a common practice among EU companies, as this would ensure that sustainability issues are duly taken into consideration at the board level, especially in view of the newly introduced and upcoming legislation on non-financial reporting and sustainable finance (see Sect. 7.3).

5.7 Compensation and Sustainability

The OECD Code includes some provisions concerning the alignment of compensation with long-term interests, sustainability, and resilience, including the use of sustainability indicators on which compensation policy should be based.¹⁶²

The UK Code recommends that remuneration policies and practices should be designed to support the sustainable success of the company,¹⁶³ and that workforce engagement has taken place in order to describe how executive compensation aligns with wider company remuneration policy.¹⁶⁴ However, there is no reference to non-financial factors to be considered in the design of compensation policies.

As to the EU, the Shareholder Rights Directive II states that directors’ variable remuneration should be based on both financial and non-financial performance, where applicable.¹⁶⁵ However, there is no requirement in relation to what portion of variable remuneration should be linked to as to non-financial performance. As such, the introduction of a mandatory share of remuneration linked to non-financial performance is one of the main issues on which the EU commission required feedback in its consultation document on the renewed sustainable finance strategy.¹⁶⁶ Indeed, studies found a connection between sustainability-linked management board compensation and firm ESG performance,¹⁶⁷ but also a possible positive impact between the adoption of sustainability incentives in executive remuneration and firm performance.¹⁶⁸

Our analysis on EU codes found that only 13 out of 27 corporate governance codes (Austria, Belgium, Czech Republic, Republic of Cyprus, France, Germany, Greece, Italy, Luxembourg, the Netherlands, Portugal, Slovenia, Spain) include a reference to non-financial criteria or to sustainable value creation in the determination of compensation policy.

The Luxembourg Code, for example, recommends that “the company shall define, precisely and explicitly, the quantitative and qualitative criteria linked to the CSR aspects when determining the variable part of the remuneration of members of the Executive Management”.¹⁶⁹ Similarly, the French Code requires that directors’ compensation should incorporate “one or more criteria related to social and environmental responsibility, of which at least one criterion related to the climate objectives of the company”.¹⁷⁰ The Polish code requires that “incentive schemes should be constructed in a way necessary among others to tie the level of remuneration (…) to the actual long-term standing of the company measured by its financial and non-financial results as well as long-term shareholder value creation, sustainable development and the company’s stability”.¹⁷¹

However, a direct reference to environmental and/or social impact criteria is not common among the other analyzed codes. More frequently, the reference is generically made in relation to non-financial criteria. For instance, Principle 25 of the Spanish corporate governance code requires that “variable payments to executive directors should be linked to predetermined and measurable performance criteria, including criteria of a non-financial nature, which promote the company’s long-term sustainability and success”, and Recommendation 58 specifies that variable remuneration items should promote the “long-term sustainability of the company and include non-financial criteria that are relevant for the company’s long-term value creation”. However, it is also specified that such criteria include, for example, “compliance with its internal rules and procedures and its risk control and management policies”.

Similarly, the Italian corporate governance code requires that the compensation policy should be aligned with the pursuit of the corporate ‘sustainable success’, which, as mentioned before, is defined as the “creation of long-term value for the shareholders, taking into account the interests of the relevant stakeholders”.¹⁷²

In conclusion, the specific reference to environmental and social performance criteria is infrequent among the EU codes, which seems to confirm the lack of clarity concerning the selection and measurability of non-financial targets denounced in relation to the implementation of the Non-Financial Reporting Directive.¹⁷³

5.8 Sustainability Reporting

Chapter VI of the OECD Code—addressing sustainability and resilience—relates to sustainability-related disclosure, encouraging companies to disclose material information about how they assess, identify, and manage material climate change and other sustainability risks and opportunities.¹⁷⁴ It also recommends that the sustainability-related goals are disclosed with consistent, comparable, and accessible metrics and reviewed by an independent and qualified attestation service provider.¹⁷⁵

Conversely, the UK Code does not address non-financial/sustainability reporting, but only mentions the duty of the board to describe in the annual report on the sustainability of the business model, without specifying if the concept of sustainability concerns only economic sustainability in the long term or also the social and environmental impact of the company.¹⁷⁶

In the EU, the reporting requirement contained in Directive 2014/95/EU—that, as already mentioned in § 2, will be soon replaced with the entrance into force of the new EU Corporate Sustainability Reporting Directive (‘CSRD’)¹⁷⁷ in order to facilitate sustainable financing and therefore integrate the current EU reform enacted with the launch of the Action Plan¹⁷⁸—has also been integrated into many corporate governance codes. However, only 20 out of 27 codes (from Austria, Republic of Cyprus, Bulgaria, Czech Republic, Denmark, Estonia, Finland, Germany, Greece, Italy, Latvia, Lithuania, Luxembourg, Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, and Sweden) recommend the reporting of non-financial information or material issues concerning stakeholders. It should be noted that some codes have not been updated recently, which could explain the lack of reference to the Directive and to the disclosure of non-financial information in general.

Some codes even went further than the Directive. The Luxembourg Code, for instance, requires that the company should define a Corporate Social Responsibility policy and that CSR aspects are integrated into its strategy.¹⁷⁹ Moreover, the code invites companies to align with the 17 Sustainable Development Goals in their reporting activities.¹⁸⁰ The Swedish Code requires that companies make available on their websites the ten most recent years’ sustainability reports, along with auditor’s written statement concerning its assurance activities related to the sustainability report.¹⁸¹ The Slovak Code, in addition to environmental and social information, recommends the disclosure of information on political donations.¹⁸² The Dutch Code requires that the management board should align its strategy to a view on long-term value creation, taking into consideration—in addition to matters included in the Directive—also “the chain within which the enterprise operates”.¹⁸³ The sustainability of the supply chain represents, by no means, one of the most critical issues in relation to corporate sustainability, even though the Non-Financial Reporting Directive does not address it directly.¹⁸⁴

As mentioned above, sustainability reporting has been recently addressed by the EU legislator, and a new directive will soon enter into force, requiring more precise, measurable, and standardized information, as well as verification standards. Nonetheless, the express mention of such a requirement in the context of corporate governance codes would ensure the strengthening of the perceived relevance of the same.

5.9 Ethics

The OECD Code includes many provisions addressing ethics. In particular, Chapter V states that “the board should apply high ethical standards” as these “are in the long term interests of the company as a means to make it credible and trustworthy”.¹⁸⁵ As a consequence, the same chapter suggests that existence of a company code of ethics—usually based on professional standards and sometimes broader codes of behavior—could help to ensure that any unethical/illicit behavior is duly reported without fear of negative consequences.¹⁸⁶ Moreover, the OECD Code encourages the establishment of ethics programs,¹⁸⁷ an audit or ethics committee to which report any concerns about unethical or illegal behavior,¹⁸⁸ and the disclosure of policies and performance concerning business ethics.¹⁸⁹

The UK Code mentioned ethics only in passing in relation to the responsibilities of the audit committee that should develop and implement policy on the engagement of the external auditor in supplying non-audit services taking into account the relevant law and ethical guidance.¹⁹⁰

As to the EU, 15 out of 27 analyzed codes (Belgium, Bulgaria, Czech Republic, Denmark, France, Germany, Hungary, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Slovakia, Slovenia, and Spain) include some reference to the notion of ethics.

In particular, 8 codes recommend that a code of conduct/ethics¹⁹¹ should be adopted by the managing board/board of directors, and that the compliance to such code by employees and directors should be monitored (by the supervisory board or the internal audit function) and ensured.¹⁹²

The French and Luxembourg codes provide professional, ethical rules for directors, mainly focused on the compliance with conduct duties related to their mandates, such as the respect of confidentiality, attendance and reporting obligations, and the avoidance of any direct or indirect conflict of interest with the company.¹⁹³

However, from the overall analysis of the EU codes, the concept of ethics seems not to be directly connected to the above-mentioned concepts of ‘sustainable value creation’, ‘sustainable success’, ‘CSR’, etc., that have been only recently introduced in the context of the corporate governance codes.

6 Final Remarks and Future Steps

The analysis shows that even though some EU corporate governance codes have started including specific references to sustainability-related concepts, some gaps, and weaknesses identified for each of the analyzed aspects reveal that further effort is needed for the full integration of environmental and social issues in corporate governance codes. The results of the study, therefore, confirm the generic nature and inadequacy of sustainability and CSR integration in corporate governance codes already denounced by previous literature.¹⁹⁴

However, we could notice that a growing number of codes tend to mention sustainability, CSR, social, and environmental issues, so signaling a growing interest toward the impact of environmental and social factors on business success in the long term. Specifically, some codes, such as the Italian code, mentioned the new concept of ‘sustainable success’, which was introduced—but not defined—by the UK Code. Other codes recommend that companies should be managed in order to ensure a sustainable development/value creation/sustainable long-term value, intended as the maximization of shareholders’ wealth with the permanent consideration of stakeholders’ interests. Other codes include recommendations related to the adoption of CSR initiatives.

As to the purpose and function of corporate governance, we found that 16 companies out of 27 define the purpose and function of corporate governance, adopting three main approaches. In particular, by adhering to most progressive approach, codes from Austria, Bulgaria, Denmark, Germany, Greece, Latvia, Luxembourg, Malta, the Netherlands, Poland, Portugal, Slovenia, Spain, and Sweden mention the contribution of corporate governance to sustainable development/growth and pay attention to corporate responsibility toward society in defining the purpose of corporate governance.

Nevertheless, only a few codes expressly mention CSR/sustainability factors in relation to the main function and objectives of the code. Specifically, the Austrian, Belgian, Portuguese, Spanish, and Luxembourg codes highlight that one of the main drivers leading to the last revision of the code was the inclusion of a long-term and sustainable approach to value creation.

In general, even though some codes include CSR/sustainability issues and/or stakeholder interests in their introductory statements, the majority of the analyzed codes still do not consider corporate responsibility toward the society and the environment as a key aspect of corporate governance function. As to stakeholders, for instance, notwithstanding a high number of corporate governance codes mention the concept of ‘stakeholder’, only a few provide a proper definition and devote specific provisions to the treatment of stakeholders’ interests. While most of the definitions provided recall the OECD Code definition of stakeholders, others refer more generally to the subjects who could impact on/influence or be impacted/influenced by companies activities. However, most of the codes seem to consider stakeholders’ interests only to the extent these could impact on shareholder value in the long term. Such risk-averse approach applied to CSR/sustainability reveals that shareholder primacy rule is far from being overcome, and it is undeniably the same leading the entire sustainable finance reform, as non-financial risks—especially climate-related risks—are considered to be among the most impactful on the future financial performance of listed companies. However, the integration of non-financial risks in the long term is just a small part of what is needed for a truly successful transition to a sustainable economy, as the concept of impact should be considered also in relation to the impact of what is created by the company on the environment and on society.

As to gender diversity, our analysis found that the majority of the EU corporate governance codes recommend that board composition should appropriately represent both genders, but only the Austrian, Dutch, German, Italian, Polish, and Spanish codes specify a mandatory minimum percentage for the representation of the female gender in the board.

With regard to the attribution of CSR function to a specialized committee, only the Luxembourg and Spanish corporate governance codes suggest that companies could assign Corporate Social Responsibility functions to a pre-existing committee or to a newly established committee. In this regard, we recommend that the express attribution of CSR-related activities to a specific—pre-existing of new—committee should be included in corporate governance codes and should become a common practice among EU companies, as this would ensure that sustainability issues are duly taken into consideration at the board level, especially in view of the newly introduced and upcoming legislation on non-financial reporting and sustainable finance.

In relation to compensation, the analysis found that only a 13 out of 27 corporate governance codes include a reference to non-financial criteria or to sustainable value creation in the determination of compensation policy.

As to sustainability reporting, even though the reporting requirements contained Directive 2014/95/EU are effective for more than two years now, only 20 out of 27 codes recommend the reporting of non-financial information or material issues concerning stakeholders, with some codes even going further than the Directive (Luxembourg, Sweden, Netherlands, and Slovak Republic).

As to ethics, 15 out of 27 analyzed codes include some reference to the notion of ethics and 8 of them recommend that a code of conduct/ethics should be adopted by the managing board/board of directors, and that the compliance to such code by employees and directors should be ensured. However, from the overall analysis of the EU codes, the concept of ethics seems not to be directly connected to the above-mentioned concepts of ‘sustainable value creation’, ‘sustainable success’, ‘CSR’, etc.

Among the analyzed EU codes, the most ‘sustainability inclusive’—as performing well in all the identified indicators, sometimes going even beyond the OECD Code—is the Luxembourg Code, which—by the way—is the only one that expressly announces in its introduction the commitment by its issuer (the Luxembourg Stock Exchange) to integrate CSR principles in the revised code for promoting responsible and sustainable investing. The Dutch and the Spanish codes follow, while the codes issued in Cyprus, Estonia, and Ireland¹⁹⁵ seem the weakest in addressing sustainability/CSR/ethical issues. For its part, the UK Code, one of the internationally most influential codes, undeniably addresses sustainability-related issues, but cannot be considered as the most advanced and inclusive case.

Hopefully, the upcoming new EU legislation on mandatory human rights and environmental corporate due diligence, as well as the other initiatives on the establishment of a sustainable corporate governance, will lead to a more homogeneous, complete, and coherent approach to the integration of sustainability concerns in corporate governance practices. In this regard, a further analysis of the level of implementation of the codes and of the practices actually enacted by listed companies in relation to code provisions and recommendations integrating sustainability aspects is necessary in order to better understand the real impact of such measures.