10/04/2017

Are You Playing Hide-and-Seek in Your Business?

Legislative initiatives promoting responsible business practices have taken big leaps forward lately. To date, corporate responsibility practices have been softly guided by self-regulation by international organisations, industry associations and corporations themselves. Things are starting to get more serious in the form of mandatory legislation.

Transparency Is the Key

The common feature of the current legislative initiatives is transparency. Pressure to be more open has been coming from corporations’ interest groups, the authorities as well as investors. This combined front has added urgency to many legislative projects, particularly on the EU level, and it would be wise to not drag out a game of hide-and-seek, but to proactively get out in front of the upcoming changes.

There are several mandatory legislative projects currently pending in the EU that are aimed to increase transparency and public trust in responsible business practices:

  1. Increased tax reporting both between national authorities and publicly
    The parent companies of major corporations have to report the taxes they pay in different countries to the tax authorities of their home states, who then share that information with other national tax authorities. The report must include profits, taxes paid, number of employees and certain balance sheet items. This obligation has already been enacted into law.

    There is also a pending proposal for a directive that would obligate major corporations to release a public, country-specific tax report. This public report would likely be less extensive than the report that has to be provided to the tax authorities. The earliest that the obligation to release a public report could enter into force would be 2019.

  2. Mandatory reporting of non-financial information
    A more classical corporate responsibility project concerns the publication of non-financial information, which along with tax reporting, is already in force. This obligation requires corporations to shine a light on how they handle environmental matters, social issues, employees, human rights and on their anti-corruption and bribery efforts. The companieswithin the scope of this obligation have to publish their first report for the 2017 financial period, so now would be a good time to make sure that you’re ready.

  3. Remuneration to be put on the agenda of general meetings
    The latest EU news came just a few days ago with the approval of a directive concerning shareholder rights. The keystones of this new legislation concerning publicly listed companies are management remuneration, identification of shareholders and related-party transactions.

    With respect to remuneration, shareholders will be given the right to vote on management remuneration schemes and, correspondingly, management will have to provide a remuneration report for approval by the general meeting. The directive encourages companies to account for environmental and social matters and good management practices in remuneration schemes in addition to just traditional financial performance. This directive has to be transposed into national legislation by the end of 2019.

  4. Mandatory due diligence reviews for importers and conflict minerals
    Another new legislative project involves the regulation of conflict minerals, which is something the EU has been discussing for several years now. In March, the European Parliament approved a regulation that obligates importers of conflict minerals (tin, tantalum, tungsten and gold) to ensure that their entire procurement chain acts responsibly. This seeks to prevent armed groups from funding themselves by selling minerals from conflict zones. The regulation is currently awaiting the approval of the Council. The new regulation is set to enter into force at the beginning of 2021.

As I mentioned at the start, the pressure for more transparent and responsible business practices is strong from a number of directions, and the EU has answered this pressure with legislative initiatives. New legislation will, naturally, also introduce new sanctions intended to enforce compliance. However, the sanctions relating to the reforms that are already in force are quite moderate. In the end, it is more important that companies listen carefully to the wishes and thoughts of their own stakeholders with respect to corporate behaviour than that they just seek to avoid formal sanctions. At its best, legislation provides a unified framework for how to inform stakeholders about these matters, and it is worth preparing for the upcoming requirements.

This post was inspired by a presentation given by Rosanna Tufo from CSR Europe in Helsinki in March 2017.