Corporate legitimacy shift towards social sustainability

Driven by civil society, consumer advocacy groups, investors, and public backlashes communicated by the press following some catastrophic events occurring in global supply chains (e.g. the Rana Plaza Factory collapse in Bangladesh (2013), the Brazilian dam disaster involving BHP Billiton and Vale (2015), or the Uyghur forced labour incidences involving large multinational textile brands (2019-ongoing)), companies now find themselves under high scrutiny to account for their behaviour, especially in certain sectors. Some recent court cases, such as the Shell case in the Netherlands, even consider a liability on the basis of the violation of international soft law and Dutch law’s ‘unwritten standard of care’. Clearly, corporate legitimacy has shifted towards shared responsibility for impact on social and environmental concerns. This transformation aligns with the stakeholder theory developed by Freeman, which emphasises that corporations must consider the interests of all stakeholders, not just shareholders. This theory advocates for an internalisation of companies’ sustainability duties, pressing them to acknowledge their role as stewards of social well-being and contributors to a harmonious global ecosystem.

Changing legal framework

Within these evolving expectations, companies are also driven by a changing legal framework, progressively increasing accountability for companies’ impacts in global supply chains where they have not conducted their businesses in ‘due diligence’. The EU’s Corporate Sustainability Due Diligence Directive (CSDD Directive) in the process of adoption, aims to foster sustainable and responsible corporate behaviour and to anchor human rights and environmental considerations in companies’ operations and corporate governance. This prospective law closely follows the Corporate Sustainability Reporting Directive which entered into force in January 2023, replacing the non-financial reporting Directive to modernise and strengthen the rules concerning the social and environmental information that companies must report. These two European legislative instruments require businesses to increase the transparency of their supply chains and provide a mapping of the risks and activities conducted to prevent them. To comply with these new standards, companies entering the scope of these instruments are asking external consultants to conduct a gap analysis of their practices to comply with the law. These instruments bind companies to put the Environment, Social and Governance (ESG) criteria and Corporate Social Responsibility (CSR) as a priority in their business strategies.

Whether these pieces of legislation will reach the desired objective to “advance respect for human rights and environmental protection”, as laid down in the explanatory memorandum of the proposed Directive by the European Commission in February 2022, remains to be seen. Reaching this goal comes with many challenges, especially in terms of business implementation of the norms. But for now, the text of the CSDD Directive has yet to be adopted. During this phase of trialogue between the European Parliament, the European Council, and the European Commission, important components such as the scope, sanctions, and extent of obligations of the CSDD Directive will determine the expectations towards businesses in relation to the responsibilities they have for incidents occurring in their supply chains.

Challenges for business practice

The CSDD Directive transforms the simple (and familiar) world of financial figures into a (more) complex world of balancing opposite interests – which was always the centrepiece of CEOs, though in a more abstract way. Now, the question is whether businesses are up to this task. Corporate structures are evolving to embrace the new paradigm, e.g. by hiring experts on business and human rights, adopting or redrafting supplier codes of conduct, integrating them in supplier contracts, etc. However, one may question whether these policies effectively cascade down the supply chain or come hand in hand with a heightened budget on CSR issues, at the cost of short-term profit and competition. One risk to be avoided is strictly following the ‘compliance approach’, where companies make sure that all legal obligations are fulfilled (by ‘ticking the box’), but fail to undergo the systemic change necessary to improve labour conditions and environmental protection in global supply chains. It is thus in the hands of companies to make the best of these legal instruments, so that these do not only become a liability risk – resulting in mass claims eventually leading to insolvency and consequential personal liability for directors – but also a roadmap to guide them through their new business raison d’être.

Challenges for theory

The central theoretical question is how do (and can) corporations contribute to social welfare, prompting the following questions: To what extent can the current system of transnational governance, mainly based on capitalism, liberalism and free trade, address our most pressing issues of conserving social justice and healthy living environments? What incentives and/or regulations are necessary to motivate corporate CEOs to internalise social costs and benefits? What is or should be the purpose of a corporation and its new role to bear in times where overconsumption inevitably leads to exploitation of resources and humans? What are the limits to corporate responsibility? Going beyond the corporate level, what global systems must we develop in order to address the environmental crisis and human rights violations? These complex issues are increasingly being discussed in the academic literature. The recently established Corporate Governance Strategy research group at Leiden University seeks to contribute to this academic debate.

The authors work collaboratively within the Corporate Governance Strategy research group on the topic of corporate governance, notably the shift necessary to face environmental and human rights challenges.