The Politics of Corporate Accountability and Upward Regulatory Harmonization: The Case of the EU Non-Financial Disclosure Directive

Friday, 3 July 2015: 4:00 PM-5:30 PM
CLM.2.05 (Clement House)
Daniel Kinderman, University of Delaware, Newark, DE
My paper analyzes the struggles over the EU non-financial disclosure Directive which will require large firms to report on their social, environmental and human rights impacts and the risks their activities pose for third parties. Prior to this legislation, non-financial reporting has been voluntary in the vast majority of EU member states and countries across the world: whereas companies have an obligation to report their revenues, profits and losses, they can choose whether or not to report on their social and environmental impacts. This asymmetry has exacerbated problems with negative externalities which are at the heart of the current governance crisis. The EU’s new measure thus represents a meaningful step towards greater corporate accountability. Its analysis is also of considerable importance for scholars of regulation and governance, as it provides an opportunity to analyze the politics of upward regulatory harmonization and support and opposition of different interest groups for raising regulatory standards in less regulated states. The paper has also benefitted from extensive fieldwork and information leaked to me by Brussels insiders. These data allow me to reconstruct in detail the positions of different countries and interest groups and their effects on the final compromise. 

The paper is motivated by the following puzzle: despite very favorable circumstances, the Directive was weakened significantly. In the heated negotiations, some countries (particularly France) and interest groups supported the Directive while others (particularly Germany) fought hard against it. While the final text of the Directive has a number of innovative and experimentalist elements, its scope was reduced so that it will only apply to 1/3 as a many companies as the Commissions’ original proposal, which had already fallen far short of demands by trade unions, NGOs and many experts. My analysis suggests that causal complexity was at work. Varieties of Capitalism – the dominant approach in comparative political economy of the past fifteen years – contributes nothing towards an explanation: despite its status as a quintessential LME, the UK supported the Directive, while Germany fiercely opposed it. The positions of the UK and Germany are thus exactly the opposite of what VofC would have us expect.

Firms’ Environmental, Social, and Governance performance is only weakly correlated with support: sustainable companies are somewhat more likely to support binding regulation than less sustainable, but there are many high-performing businesses that have no interest in upward regulatory harmonization. Countries with a large number of Medium-sized enterprises tend to oppose the Directive. Support has come from civil society activists, socially responsible investors, some social-democratic governments, and leading figures in EU institutions. But one of the most important source of support is domestic regulation: countries which already mandate non-financial reporting for companies in the private sector have high reporting rates and supportive business associations. The latter's importance is hard to underestimate, given that this arena is governed by the dynamics of ‘quiet politics.’ Business interests are main reason why it is difficult to regulate CSR-related issues such as non-financial reporting: non-regulation remains the equilibrium and business’s preferred strategy.