COP27 and Corporate Directors
“COP27 must try something new. Governments agreeing to return home and pass legislation that needs to be negotiated with emitters of huge quantities of greenhouse gases hasn’t worked in the past and won’t work again…. Going forward, corporate directors must be required to protect the environment from severe harm.”
7 November 2022
Robert C. Hinkley
What is the difference between COP27 and corporate directors? The former has the potential to influence reduced emissions of greenhouse gases (GHGs). Directors can stop such emissions; they just need to be required to do so. Instead of thinking of global warming as a business regulation problem, conferees should think of it as a corporate governance problem.
Almost all business regulation prohibits behaviour and imposes fines and penalties for violations. When government finds violations, it must then prosecute the bad behaviour and prevail in court (or force the company to settle). Until then, the business can continue its anti-social behaviour. That’s a problem.
You’d think that our elected leaders would recognize destructive corporate behaviour and automatically take steps to make it stop. However, we now know that doesn’t always happen.
When businesses are well established, it is often difficult to curtail their anti-social behaviour through new legislation. Businesses have supporters too. They also have rights. Sometimes an alternative to the destruction is not readily apparent or the technology isn't yet developed. Politicians become timid. The law doesn’t change. The destruction continues.
Government should never pass laws that create institutions with the potential and right to destroy the environment. Yet, all over the world, that is just what corporate laws do. COP27 should be the conference which corrects this design fault by resolving to specifically deny companies this right.
When companies are making money, the people who manage them (i.e., directors), have little incentive to find ways to eliminate the harm they cause. They have duties under the corporate law to act in their company’s best financial interests. This discourages them from closing a business or spending large amounts of money looking for technological breakthroughs which would make it less destructive. Worse, it justifies their actions when they interfere in the legislative process (lobby) to frustrate new regulation.
The Code for Corporate Citizenship (Code) will change this situation by making it the legal duty of directors to keep their companies from severely harming the environment, human rights, the health and safety of their customers, the dignity of their employees and the well-being of the communities in which they operate. (Conferees may want to reduce the scope of the Code to protecting just the environment.)
The Code goes beyond the recent fashion of encouraging companies to consider more than just the company’s interests (e.g., considering the Environment, Societal impact and Governance (ESG)). The problem with ESG is that it is voluntary and not strong enough to force companies with substantial investments in destructive behaviour to change their ways. In other words, it works fine when reducing or eliminating destructive behaviour costs the company little. It doesn’t work when the cost is steep.
The Code does more that ask directors to consider the environment. It requires them to protect it from severe harm, irrespective of their company’s financial interests.
The underlying idea is to change the corporate system by changing the mission of the corporation and the mindset of the people in them. It achieves this goal by delineating the outer limits of acceptable corporate behaviour (behaviour that doesn’t severely harm the environment or four other elements of the public interest) and providing that companies which are currently exceeding those limits must stop (by imposing on their directors a duty not to cause severe harm). Essentially, it prohibits severely destructive (but legal) corporate conduct by changing the law under which the company operates. This new obligation of directors (to not severely harm) is given priority over the directors’ existing duty to act in their company’s best interests.
COP27 must try something new. Governments agreeing to return home and pass legislation that needs to be negotiated with emitters of huge quantities of greenhouse gases hasn’t worked in the past and won’t work again. Too much danger of industry getting the process bogged down in the details.
One thing everyone at the conference recognizes is that companies emitting huge quantities of greenhouse gases are destroying the environment and need to be stopped. The way to stop this from happening is to make it the job of company directors. For directors to voluntarily consider the environment is not enough. Going forward, corporate directors must be required to protect the environment from severe harm.
The corporate law duty of directors is the same the world over. Amending it to include the Code is a relatively simple matter which shouldn’t be negotiated with emitters. No company (or group of companies) should have the right to cause severe harm.
National delegations should agree in principle to this universal change in the corporate law and begin the process of implementing it immediately. By confronting climate change as a corporate governance matter, COP27 can bring to a halt the continued destruction of the environment from the emission of GHGs.