A Step But Not A Leap: The Commission’s New Proposal For Non-Fianancial And Diversity Reporting

Sigurt VitolsLast week the Commission released its long-awaited proposal for a Directive regarding disclosure of non-financial and diversity information. The Commission’s explanation of the motivation for this proposal is straightforward: “…only a limited number of EU large companies regularly disclose non-financial information, and the quality of the information disclosed varies largely, making it difficult for investors and stakeholders to understand and compare companies’ position and performance.” Furthermore, many companies are subject to “group think” due to insufficient diversity in their boards, which leads to resistance to innovative ideas and a negative impact on company performance. To remedy this problem the Commission proposes that companies with 500 or more employees be required to report information on their social, environmental and board diversity policies and performance.[1]

The background to this proposal is the increasing demand by a broad range of organizations, individuals and investors for comprehensive, accurate and comparable information on the nonfinancial practices and impact of companies. Our triple crisis – increasing inequality through a simultaneous expansion of precarious work and exploding executive remuneration, a lack of progress on climate change and the massive failure of corporate governance in the crisis – demonstrate that things are seriously wrong with the way our companies are currently operating. Under the motto “understanding what a company does is the first step to improving its practice”, nonfinancial reporting can be seen as addressing a basic need for information by employees, the community, and other stakeholders regarding the company’s impact on them. Two recent reports from the European Parliament on Corporate Social Responsibility acknowledged this widespread need for improving company transparency and demanded that the Commission take legislative action.

At first glance, the Commission’s proposal to deal with this problem – imposing reporting requirements on all companies with over 500 employees – appears to be far-reaching. An estimated 18,000 companies will be covered by the Directive, which is many times more than the approximately 2,500 European companies that currently provide nonfinancial information on a regular basis. This proposal thus goes far beyond the current EU requirement; the so-called Accounts Modernization Directive of 2003 requires certain companies to report “…to the extent necessary for an understanding of the company’s development, performance or position…where appropriate, non-financial key performance indicators relevant to the particular business, including information relating to environmental and employee matters.” In practice this provision has not had much impact in practice, and the initiative for stronger reporting requirements has been taken at the national level by countries such as France, Denmark and Norway.

However, a closer look reveals a number of problems with the proposal which will likely considerably weaken its impact. First, rather than defining one common set of reporting standards, companies are allowed to pick and choose among national and international reporting frameworks. These frameworks are quite different regarding the amount and quality of information required from companies, and also opens up the possibility that new, quite weak, frameworks will be created for companies wishing to provide minimal information. This stands in stark contrast with the requirement for financial reporting by listed companies, where common and detailed International Financial Reporting Standards (IFRS) must be used. Second, the ‘comply or explain’ principle is proposed, i.e. companies are freed from the obligation of providing information if they explain why they are not providing this information. In the case of corporate governance reporting in the EU, which is based on this comply or explain principle, we see that in practice companies frequently provide neither information nor a real explanation for this omission. In short, the Commission’s proposal falls far short of demands by trade unions, NGOs and many experts, as it gives businesses a huge amount of leeway in picking and choosing what they actually report.

In acknowledging the need for nonfinancial reporting in principle but in allowing companies considerable discretion in how and what they report, the Commission is presumably trying to find a solution which could bridge the huge gap in opinion between business associations and civil society. However, even the mild requirements proposed appear to have provoked opposition from the business community; BusinessEurope has already criticized the proposal as creating “…red tape and further disadvantage for a large number of European businesses in international markets.” In order to take a real leap ahead in improving nonfinancial and diversity reporting, in further deliberations by the European institutions, this proposal should be revised to require reporting on the basis of a standard which has real content. The standards developed by the Global Reporting Initiative (GRI), an organization which includes trade unions, NGOs, progressive businesses and experts in its governance structure and deliberations, which are already used widely around the world, would be an obvious candidate. Second, trade unions and other civil society organizations should play a role in verifying the accuracy of information provided by companies. Finally, the ‘comply or explain’ approach should at the very least be seriously restricted and penalties introduced for non-compliance, so that a real obligation for providing information exists. These changes are necessary to create the real leap ahead in nonfinancial and diversity reporting needed to help push our companies to become truly sustainable, in the interests of employees, the environment and society as a whole.

References:

Cremers, J. (2013) Non-financial reporting beyond the strict minimum: is the workforce a well-informed stakeholder? ETUI Working Paper 2013.02, available at: http://www.etui.org/Publications2/Working-Papers/Non-financial-reporting-beyond-the-strict-minimum-is-the-workforce-a-well-informed-stakeholder

Hojnik, J. (2012) “Sustainability reporting and the modernisation of EU accounting rules“, pp. 287-318 in: S. Vitols and J. Heuschmid (eds.), European company law and the Sustainable Company: a stakeholder approach, Brussels: ETUI.

Vitols, S. and N. Kluge (eds.) (2011) The Sustainable Company: A new approach to Corporate Governance, Brussels: ETUI, available at: http://www.etui.org/Publications2/Books/The-Sustainable-Company-a-new-approach-to-corporate-governance



[1] For the proposal and further background information see: http://ec.europa.eu/internal_market/accounting/non-financial_reporting/index_en.htm