1.12.2020

Sustainable Development through Statutes or Self-Regulation?

Corporate law is normally a very stable field, but change is now in the air. General meetings will be organised in new ways this spring and likely beyond. The new Corporate Governance Code has put remuneration policies on the agenda of general meetings this year and will put remuneration reports on the agenda starting next year. The European Commission has launched a public on sustainable corporate governance. On top of all this, the Finnish Ministry of Justice is currently reviewing the Limited Liability Companies Act in its entirety. It’s enough to make one short of breath.

It is clear that legislation and good governance have to be developed at pace with the rest of the world. The needs of companies and their owners, investors, customers and other stakeholders are changing, and requirements are tightening. This in turn is accelerating the reform cycle for legislation.

However, every detail does not need its own section is the Limited Liability Companies Act. Our corporate legislation has been developed to be flexible and serve many different kinds of companies. The act itself is supplemented by self-regulation, which allows companies to choose their own ways to respond to changes in their environment. Self-regulation has a good track record in Finland. Companies understand that sustainability requires them to do more than just meet the minimum requirements of law.

Does it really make sense to fix something that isn’t broken by making the Limited Liability Companies Act less flexible? It has been proposed that sustainable development should be incorporated into the purpose of companies and the duties of management, i.e. be expressly included in the Limited Liability Companies Act. However, sustainable development is already on the agenda of many boards of directors, with customers, society and other stakeholders are encouraging companies to make sustainable choices. Careful management teams that have their company’s best interest at heart cannot afford to ignore these matters.

Careful thought should be given to whether sustainable development should be folded into corporate legislation or whether it would be better to use special legislation and self-regulation to steer companies towards better choices. The end does not always justify the means.