Response by the Directors’ Institute Finland on the European Commission’s roadmap on sustainable corporate governance

Statement for the European Commission 7th of October 2020

Directors’ Institute Finland (”DIF”) is an independent non-profit association which contributes to the development of the professional capabilities of its members, and thus enhances its position as a leader in the debate on corporate governance. DIF has 750 members with significant experience on board work. DIF is a member of The European Confederation of Directors’ Associations (ecoDa). Our Transparency Register number is 79238116273-93.

With reference to the ongoing consultation on the European Commission’s initiative on Sustainable Corporate Governance (the “initiative”) and the related EY study on directors’ duties (the “EY report”), DIF would like to submit the following statement.

DIF wishes to initially state that it shares the presented focus of the European Commission on emphasizing the importance of sustainability in all actions by all actors, including both companies, governments and private actors. However, DIF does not recognize the premises that the initiative is based on, nor the findings and conclusions of the EY report and does not see that the envisaged result will be achieved by implementing new legislation.

DIF is concerned about the legal excesses suggested in the initiative, which would weaken European companies and the principles of directors’ liability.  The Institute is also concerned by the negative vision the Commission relays on businesses which does not reflect all efforts undertaken by companies to integrate sustainability in their strategies. If the recommendations as suggested by the initiative or the EY report are fully implemented, it will have devastating effects on the efficiency, innovativeness and competitiveness of European companies – and hence on the EU economy at large.

The EY study on directors’ duties and sustainable corporate governance

The objective of the EY study has been to “assess the root causes of “short-termism” in corporate governance” which is a statement having been implied at the outset of the study. The study was composed of a very large number of questions, which limited the group of responders significantly. For those answering the study, the possibility to come with individual input or disagree with the already stated outset of the study, was limited or impossible. The study was responded to by a total of slightly more than 60 respondents, which clearly shows that the whole exercise of the study failed significantly. It therefore does not represent neither the views nor the reality of European business and companies.

Quite opposite, the members of the DIF, representing a large part of the elected directors’ of Finnish listed companies, cannot recognize the result and the statement that companies would strive only for short-termism in their decision-making. In the operations of DIF, sustainability is a mainstream issue. For example, the theme of Q4 2020 is Board and Sustainability, while the theme of Q4 2019 was Boards and Recycling and the theme of Q4 2021 will be Boards and Stakeholders. This elaborates the importance of sustainability issues in today’s directors’ work when a quarter of our current work is annually geared to sustainability issues.

Sustainability and long-term perspective is embedded in the decision-making and long-term strategies of listed companies, without which companies no longer may prosper and prevail on the global market. However, it is clear, that efforts to enhance sustainability can mainly be made by companies with a strong business and cash flow.  Without profits it may be very difficult to act in a sustainable manner and to be a sought-after employer.

The EY report is based on several preconceived ideas, which DIF does not recognize. Moreover, the survey and the interviews do not provide real quantitative, nor qualitative inputs. Almost no reference is made to the responses received and the report does not attempt to describe precisely the reality of boards of directors.

The study is concluded to having found a clear trend of short-termism in the focus of EU companies. The initiative notes that the study has identified “key drivers of this issue, ranging from the narrow interpretation of directors duties and the company’s interest with the tendency to favour the short-term maximisation of financial value, through growing pressure from investors and the lack of a strategic perspective on sustainability all the way to the limited enforcement of the directors’ duty to act in the long-term interest of company”. However, nothing in the study indicates the basis for the alleged finding, nor are the responses accounted for or any background material provided and the study as such lacks the grounds for being set as the foundation for very extensive amendments to corporate law.  The report seems to be a compilation of mostly already existing literature – the choice of which appears surely biased towards the preconceived outcomes. We don’t find it acceptable that in the EY report year 1992 has been selected as the comparison year for dividends and other pay-outs. 1992 was a year of severe world-wide recession and it is very natural and actually a positive development that dividends today are higher than during times of severe recession.

All metrics used and the basis for the drivers that have been presented and based on which recommendations have been made, must be transparently accounted for prior to any legislative measures being planned.

Company purpose and interest

The EY report further does not sufficiently emphasize the importance of fairly compensating shareholders and the fact that companies cannot exist without investors, especially in times of crisis when companies are in acute need of equity funding. It does not take the risks of ownership into account. The report does not provide a detailed analysis of the legal obligations or those set out in the corporate governance codes which apply to the directors as well as all the developments resulting from judicial decisions.

In the end, companies are owned by investors, placing their investments into the company, without which, no sustainable actions can be taken. Investors are to a large extent mindful of sustainable actions and placing more and more actions on ensuring a sustainable investment on their part, often by long-term investments into a company.

Neither does the EY report sufficiently take into account the diversity of systems existing across Europe. Most of EU market is characterized by more concentrated ownership. The report, for example, set out that the national frameworks in the EU member states link the concept of directors’ duties and company’s interest to short-term objectives. However, on the contrary, for example in Finnish law the long-term interest of companies is embedded in the definition of shareholder value and long-term interest calls for taking sustainability and reputation issues into.

The Nordic market has a large proportion of long-term investors, who are likely to favor sustainable choices and the long-term success of companies. A smaller proportion of shares in the listed companies are traded on a daily basis by short-term investors, however, the large majority of investment is long-term based with the significant institutional investors being pension funds, family owned investment institutions or state-owned as well as foundations financing science and culture. These are active investors interested in long-term return and very often requiring sustainable actions from their investment companies. A large share of Finnish listed companies has significant long-term shareholders. And the situation is surely the same in some, if not most Member States. This fact is totally missing from the project.

The Directors’ Institute Finland thereby concludes that the outset based on which the initiative is made needs to be re-evaluated and any legislative actions, which may impact European companies and their competitiveness need to be based on a much more thorough research and facts, and not on preconceived ideas or a narrow use of existing literature or research.

Board composition

The EY report is based on the notion that current board composition would not fully support a shift towards sustainability and recommends considering that sustainability-related expertise is systematically considered in the board nomination process. The Directors’ Institute Finland questions the feasibility of such a recommendation. Sustainability needs to be embedded in board work and a mindset by the Board taken as a whole. Composing a Board that brings value to the company is based on many different considerations, one important being diversity of thought as well as background and personal integrity.

The legislator should not define the competence of directors and setting a formal criterion for several kinds of competencies may reduce the possibility to elect Boards that are of most value to the European companies.

Stakeholder interests

According to the initiative, an EU level initiative could include actions by which company directors must take into account all stakeholders’ interests, which are relevant for the long-term sustainability of the company or which belong to those affected by it as party of their duty of care. DIF strongly brings forth that introducing such a definition of the duty of care of directors would be an impossible task. Stakeholder interests are in most situations quite contradictory to each other and Board decision-making would be seriously paralysed by the proposed recommendations.

For example, in the situation of the company needing to consider the shut-down of a non-profitable activity in one of its sites, the interests of stakeholders are quite diverging. Employees at the site vs. employees at the head-quarter or in another country where the company is operating, debtors, shareholders, environmental views, customers, suppliers and the society as a whole. All have a different interest in the situation. The Board will need to navigate and make a decision in the interest of the company as a whole on long-term, as set out in current law.

According to Finnish law, the Board’s duty is to act in the long-term best interest of the company as a whole, which gives guidance on how to act in the example situation. However, having a specific duty to consider all stakeholders in all situations, will lead to impossible decision-making and companies being faced with lack of ability to act in any situation, severely hampering society as a whole. Only prosperous companies can sufficiently take sustainability into account and companies must be able to take actions to stay viable in order to be successful on long-term.

Boards should not be turned into bargaining bodies where different, often probably mutually conflicting interests are turned against each other, hampering efficient decision-making. However, responsible boards must definitely arbitrate between the interests they take into regard and those they ignore. Boards should take into account the interests of both shareholders and the relevant stakeholders of the company which need to be clearly identified and can be specific to certain sectors and companies.

In conclusion

Due to the different corporate governance structures in the EU member states, binding EU law will not lead to the intended outcome. There is a large variety of governance systems amongst the members states, with vastly diverging ownership structures and investor behaviors. Also the matureness of imbedding sustainability actions and targets in company activities may diverge largely.

Emphasis should be placed on transparency and introducing measures only where based on meaningful background analysis. Legislative measure to the extent suggested may otherwise be seriously detrimental to European companies and create a very unequal playing field compared to companies from other origins operating on the European and global market.

The aim of enhancing sustainability is most valuable, however, to do so through the means of changing the definition of company interest and directors’ duties in the manner suggested, will not lead to the envisaged end result and may lead to companies not being able to implement sustainable solutions that otherwise would have been implemented.


Directors’ Institute of Finland – Hallitusammattilaiset ry

Kirsi Komi
Chair of the Board of Directors

Leena Linnainmaa
General Secretary