The key role of governance

factor in ES policies

20 May 2021

- Avv. Fabio Alberto Regoli -

www.pwc-tls.it
Index

1. ESG as a declaration of value

2. How to reshape corporate governance?

3. Relationships of Directors v. Company, Directors v. Shareholders,

Directors v. Stakeholders

4. B-Corporations

5. Case Study
ESG as a
declaration of
value
What are Environmental, Social, and Governance (ESG) criteria?

Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that
socially conscious investors use to screen potential investments

❖ Environmental criteria consider how a company performs as a steward of nature.

❖ Social criteria examine how it manages relationships with employees, suppliers, customers and the
communities where it operates.

❖ Governance deals with a company’s leadership, executive pay, audits, internal controls and shareholder
rights.

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The E in ESG

Why more investors are weighing environmental criteria in their portfolios?

Investors are interested in how a company performs as a steward of the natural environment, in their direct
operations and across their supply chain → companies that embrace sustainability perform better financially.
Climate change, rising pollution levels and depletion of natural resources are major concerns and represent
tangible risks (and opportunities) for many companies.

Investors’ screening
Investors who pay attention to ESG performance use both positive and negative screens to exclude or include
companies in their portfolios:
❖ negative screens:
✓ companies that don't take appropriate steps to curtail pollution or to avoid environmental accidents can face
government or regulatory sanctions, criminal prosecution, and reputational damage;
✓ companies that fail to adequately plan for future impacts of climate change may be less profitable.

❖ positive screens:
✓ companies reducing energy consumption, greenhouse gas emissions and other forms of waste,
✓ companies protecting natural habitats, and
✓ companies finding business opportunities to be part of the solution to environmental challenges.

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The S in ESG

Why investors should care about a company's social impact?

Social criteria look at the company’s business relationships → S includes labor relations and diversity and
inclusion.
Companies that are considered good corporate citizens perform better financially:
✓ investors may look at whether a company provides a safe and healthy working environment for its
employees, or if it donates money or resources to give back to the communities where it operates;
✓ companies that treat employees well and give back to society are seen as less risky benefitting from higher
productivity and an ability to attract top talent.

Investors’ screening
Investors can screen for positive or negative social performance:
❖ negative screens:
✓ a company that faces labour unrest if its wages or hiring practices are considered to be unfair;
✓ a company that sources raw materials, such as cotton or cocoa, from suppliers or jurisdictions that violate human
rights or child labour standards.
❖ positive screens:
✓ companies that perform well by meeting international labour standards → hiring local workers, offering competitive
employee benefits, or helping communities tackle challenging social issues such as sustainable farming or affordable
housing.

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The G in ESG (1 of 4)

What does “Governance” mean? Directors:

- executive
- non
executive
The concept of “Governance”
- independent

❖ identifies the principles, mechanisms,

rules and relationships that govern the
management of a company, Best Practices Reporting

❖ encompasses all the relationships Governance

between the company's management,
board of directors and stakeholders,

❖ covers company's policies, standards,

information disclosure, auditing and Board of Chairman of
compliance. Statutory the Board of
Auditors Directors

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The G in ESG (2 of 4)

Why does governance matter to investors?

Investors may want to know that:

❖ accurate and transparent accounting methods are adopted and company business practices are ethical,

❖ shareholders are given an opportunity to vote on important issues,

❖ conflicts of interest in the choice of board members are avoided and an adequate compensation for
executive members is provided,

❖ gender diversity and gender equity are promoted through better representation of women on corporate,

❖ boards and in executive ranks and equal compensation and career promotion access,

❖ political contributions to obtain unduly favorable treatment are not used and illegal practices are not
performed.

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The G in ESG (3 of 4)

Why should a company adopt governance systems compliant with (ES)G criteria?

Changing the governance model plays a key role.

Only companies embracing advanced governance systems will be able to

❖ attract capitals and talents,

❖ follow the paths of sustainability,

❖ make the necessary investments for the "circular development" model,

❖ adopt behaviors that make ESG, CSR, CCR values and not just empty acronyms.

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The G in ESG (4 of 4)

Positive effects of (ES)G policies

❖ facilitating top-line growth → attract B2B and B2C customers with more sustainable products; achieve
better access to resources through stronger community and government relations;

❖ reducing costs → lower energy consumption; reduce water intake;

❖ minimizing regulatory and legal interventions → achieve greater strategic freedom through
deregulation; earn subsidies and government support;

❖ increasing employee productivity → boost employees motivation; attract talent through greater social
credibility;

❖ optimizing investment and capital expenditures → enhance investments returns by better allocating
capitals for the long term; avoid investments that may not pay off because of longer term environmental
issues.

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How to reshape
corporate
governance?
Working tips

In general (1 of 2)

From the stratification of bodies and obligations as a cost → to the systematic reconstruction of skills, roles,
procedures, information flows.

Purposes:

❖ value creation and opportunities,

❖ appropriate allocation of responsibilities,

❖ risk reduction,

❖ enhancement and diversification of skills.

Some legal-temporal elements → from 231/2001 to the new text of art. 2086 of the Italian Civil Code going, for
example, through Reg. EU 679/2016 ("GDPR") and the new Business Crisis Code (Legislative Decree
14/2019).

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Working tips

In general (2 of 2)

The creation of value in the company also passes through:

❖ the identification of the core values of the company itself,

❖ the perception of the supervisory bodies (Board of Statutory Auditors/Auditors, Supervisory Board,
etc.) as an opportunity and not as a mere cost,

❖ dialectic of the decision-making process within the corporate bodies,

❖ management of company’s information flows,

❖ appointment of independent directors.

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Working tips
Company information flows (1 of 3)

❖ Management of information flows in a unified, organized and coherent manner (refer to article
2381 of the Italian Civil Code):

✓ Chairman of the Board of Directors

▪ assurance of the smooth running of the Board of Directors, providing all the directors with
adequate information on the agenda’s items,
▪ convening of the board of directors and setting of the agenda.

✓ Board of Directors:
▪ assessment of the adequacy of the company's organizational, administrative and accounting
structure,
▪ delegation of powers to an executive committee setting out the related limits,
▪ assessment of the company's strategic, industrial and financial plans, if any.

✓ Delegated bodies (if any):

▪ assurance of organizational, administrative and accounting structure’s suitability with regard
to the nature and size of the company,
▪ reporting to the board of directors and the board of statutory auditors on the general
performance of operations and any significant transactions.

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Working tips
Company information flows (2 of 3)

✓ Art. 2086 of the Italian Civil Code

▪ The new Corporate Crisis Code (entry into force on 1 September 2021) amended art. 2086 of the
Italian Civil Code by adding the following:

"The entrepreneur, who operates in corporate or collective form, has the duty to establish an
organizational, administrative and accounting structure appropriate to the nature and size of the
company, also in relation to the timely detection of the crisis* of the company and the loss of business
continuity, as well as to take action without delay for the adoption and implementation of one of the
instruments provided by the system for overcoming the crisis and the recovery of business continuity".

▪ Decree to the Corporate Crisis Code → the setting up of appropriate organizational structures is
directors’ exclusive responsibility.

▪ Court of Milan → the interventions prepared by the director, in the lack of a business or debt
restructuring plan, represent "mere possibilities" for overcoming the crisis and denote "conduct in
itself not compliant with the managerial duties as of Article 2086 of the Italian Civil Code". The
correct fulfilment of these obligations assumes a planning of the interventions and operations
necessary to restore the conditions of economic and financial balance (recovery plan).

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Working tips
Company information flows (3 of 3)

✓ Corporate Governance Code of the Italian listed companies:

▪ adhesion is voluntary and shall be explained in the report on corporate governance;

▪ the board of directors shall adopt regulations defining its operational rules;

▪ the Chairman of the board of directors shall ensure:

o suitable pre-meeting and complementary information for the directors to act in an informed way,

o coordination of the activity of the board committees with the managing body,

o attendance to the meetings of the managers of the company for the purpose of providing any
necessary information on the agenda’s items,

o participation of all members of the board of directors and board of statutory auditors in initiatives
related to the business sectors in which the company operates,

o the adequacy and transparency of the self-assessment process of the board of directors.

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Working tips
Independent directors (1 of 2)
❖ Appointment of independent directors:

✓ non-executive directors meeting certain personal independence requirements;

✓ compulsory in two cases: if the company is listed or if it adopts the management and control one-
tier system;

✓ the independence of directors is not specifically defined → reference to the regulations governing
statutory auditors is made;

✓ Corporate Governance Code:

▪ board of directors shall be composed of executive and non-executive directors (a

significant component must be independent),

▪ a Lead Independent Director may be appointed among the independent directors, if:

• the Chairman is the CEO or has significant management powers, or

• it is requested by the majority of the independent directors.

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Working tips
Independent directors (2 of 2)

✓ the By-laws may provide the appointment of a director subject to the fulfilment of respectability,
professionalism and independence requirements;

✓ independent directors guarantees greater independence with regard to

▪ internal controls,

▪ identification and management of corporate risk,

▪ monitoring of the activities of managing directors and management;

✓ they deal with the adequacy of the relationship and information flows between executive and
non-executive directors.

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Working tips
Suggestions

The measures suggested are valid as a first check-list for striving towards an efficient and effective corporate
governance, also for the purposes of minimizing risks and responsibilities, for example by regulating:

❖ the interests of the directors of Joint Stock Companies,

❖ the conflict of interests of the directors of limited liability companies,

❖ the conflict of interests of the shareholders of Joint Stock Companies and limited liability companies,

❖ the (maintenance of) limited liability of shareholders,

❖ the proper performance of management and coordination activities,

❖ transactions with related parties.

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Working tips
The best practices

❖ Heterogeneous composition of the Board of Directors

❖ Appointment of independent non-executive directors

❖ Appointment of internal committees

❖ Board self-assessment systems

❖ Creation of long-term value for the benefit of stakeholders

❖ Allocation of powers of management and control

❖ Independence of the supervisory body

❖ Evaluation and implementation of systems other than the traditional one such as the monistic and dualistic
models

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Relationships of
Directors v.
Company,
Directors v.
Shareholders,
Directors v.
Stakeholders
Relationships of Directors v. Company, Directors v. Shareholders,
Directors v. Stakeholders

❖ The Italian system

❖ The liability of Directors towards the Company, Shareholders and Stakeholders in the Italian system

❖ The growing centrality of the Stakeholders as a reputational choice also in unlisted companies

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Relationships of Directors v. Company, Directors v. Shareholders,
Directors v. Stakeholders

ESG factors

❖ Environmental

❖ Social

❖ Governance

ESG as a reference for Directors' behavior

▪ Value creation,

▪ Market opportunities,

▪ Requirements for obtaining financial means.

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Relationships of Directors v. Company, Directors v. Shareholders,
Directors v. Stakeholders

Directors

Listed Companies
Benefit
Corporations

Company Employees

Shareholders Stakeholders
Società
Benefit
Suppliers

Other
stakeholders
(clients,
creditors, public
administrations)

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B Corporations
B-Corporations

❖ The corporate model of Benefit Corporations was born in 2010 in Maryland (USA).

❖ For the time being, Italy represents the first, and the only, European State to have recognized a legal status for
Benefit Corporations (Article 1, paragraphs 376-384 and Annexes 4 - 5 of Law no. 208/2015, so-called "Legge
di Stabilità 2016").

❖ The Italian legislation does not provide for exceptions to the rules of company law currently in force, but
introduces new and additional requirements that Benefit Corporations must comply with and regarding:
✓ the By-Laws provisions (in particular Law no. 208/2015 establishes that these companies must indicate within their
corporate purpose the specific common benefit purposes they intend to pursue); and
✓ corporate governance (directors’liability: reference is made to Danone’s case study).

❖ Distinctive character: pursuit - in addition to profit generation as a result of the business activity - of a common
benefit aimed at producing a specific impact on one or more categories of Stakeholders.

Benefits: reputational impact and attraction of new talents

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B-Corporations
❖ Benefit companies and unfair competition

Law no. 208/2015 provides that, in the event of failure to pursue the common benefit, the company may be
sanctioned by the Antitrust Authority for breach of the

✓ regulations on misleading advertising, and

✓ Consumer Code.

This provision is aimed at guaranteeing the correctness and truthfulness of a market communication regarding the
pursuit of objectives other than profits, preventing companies that do not actually achieve them from

✓ benefitting from a competitive advantage over other companies, and

✓ deliberately misleading consumers.

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B-Corporations
❖ Benefit companies and corporate welfare

The internal organization of human resources and their valorization is the subject of the Annual Report on the
common benefit drafted by the Benefit Company.
The company should adopt internal evaluation standards and reporting principles based on labor best practices
including, but not limited to:

✓ hiring and promotion of workers, new job creation, equal opportunity and non-discrimination, implementation
of smart-working;

✓ working hours, work-life balance, maternity protection, access to health services;

✓ social dialogue: consultation and exchange of information between government representatives, employers,
workers and trade unions;

✓ occupational health and safety: improvement of workers’ well-being, risk analysis and monitoring, elimination
of psychosocial risks;

✓ human development and training on-the-job.

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B-Corporations
❖ Duties and responsibilities of directors

Directors of Benefit Corporations have some specific duties in addition to those set forth in the Italian Civil
Code.

Specifically, they must:

✓ balance the interest of the company and the shareholders with the interests of “people, communities,
territories and environment, cultural and social assets and activities, bodies and associations and other
stakeholders” and,

✓ pursue the purposes of common benefit in compliance with the provisions of the By-Laws.

Breach of the aforementioned management obligations may constitute a failure to comply with directors’
obligations set forth by law and the By-Laws.

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B-Corporations
❖ The person in charge of pursuing the common benefit

Benefit Corporations must identify, through the managing body, "the responsible person(s) to whom entrust
functions and tasks aimed at the pursuit of the aforementioned purposes [of common benefit]."

The Person in Charge, who may be an internal subject of the company or an external consultant, must:

✓ strengthen the company's organizational structure,

✓ assist the directors in the pursuit of the common benefit,

✓ supervise the suitability of company procedures for the achievement of the common benefit,

✓ be responsible in the event of failure to pursue the common benefit.

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B-Corporations
❖ The By-Laws (1 of 3)

The By-laws of a company that intends to become a Benefit Corporation shall remain mainly unchanged. The
provisions to be amended and/or incorporated are the following:
✓ corporate purpose → the Benefit Corporation must specify in the relevant article that it is established to generate
a general common benefit and one or more specific common benefit.
Example

“The ultimate goal of the company is the happiness of all who are part of it, whether as members and in other roles, through a
motivating and satisfying engagement in prosperous economic activity.

As a Benefit Corporation, the company intends to pursue one or more purposes of common benefit and to operate in a
responsible, sustainable and transparent manner towards people, communities, territories and environment, cultural and
social goods and activities, institutions and associations and other stakeholders.

The corporate purpose regards:

[…]

❑ the following specific purposes of common benefit:

• the promotion of economic and social models and systems, in particular the Benefit Corporations model and the legal
form of Benefit Corporations in different Italian economic sectors;

• the design and introduction of sustainable innovation practices and models in companies and institutions to boost a
positive transformation of the economic, production, consumption and cultural paradigms, so that they tend towards the
systematic regeneration of natural and social systems;

• collaboration and synergy with no profit organizations, foundations whose purpose is aligned and synergistic with that of
the Benefit Corporations, to contribute to their development and amplify their positive impact.

(follows…)

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B-Corporations
❖ The By-Laws (2 of 3)

The company undertakes, in carrying out its activities:

• not to cause harm,

• to research and apply methods for the purpose of not taking anything from the natural systems and not wasting
anything,

• with the vision of generating a net benefit for people and the biosphere.

The company sets particular emphasis on contributing to the ability of its people to satisfy their basic human needs (Rest,
Understanding, Identity, Participation, Affection, Creation, Freedom, Protection) as a basis for their happiness, and seeks
solutions that tend towards the possibility of meet the basic human needs of people who are impacted by the activities in
which it is involved.

The company, in particular, is committed to pursuing the creation of the best possible conditions for attracting, growing and
retaining talented people”

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B-Corporations
❖ The By-Laws (3 of 3)

✓ "Provisions on Benefit Corporations" → addition of provisions on the figure of the impact manager, the
impact report and the measurement impact.

Example

“The company identifies the responsible person or persons to whom it entrusts the functions and tasks aimed at the
pursuit of the purposes of common benefit referred to in Article [*] (Corporate Purpose) of this B-Laws.

The responsible party is called the Impact Manager.

The company shall prepare an annual report on the pursuit of the common benefit, attached to the financial statements,
which shall include information required by law for such report.

The report shall be made public through the corporation's website and in such other form that the Impact Manager should
deem useful for the purpose of maximization of transparency.

The assessment of the impact generated by the pursuit of the aims of common benefit will be carried out by the company
on the basis of the international B Impact Assessment (BIA)”

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Case study
Danone-Faber affair: financial performance v. responsible
capitalism (1 of 2)

The Danone case is a lesson of realism with respect to responsible capitalism.

While many shareholders approve a purpose-driven and sustainable approach to the company, in the end it is still
the results playing a key role in assessing the performance of managers.

Although the goal of a more “sustainable” business proposed by CEOs and shareholders may coincide, there may
not necessarily be a common understanding of the means.

The most recent example of this clash can be found in the firing of Emmanuel Faber, CEO and Chairman of the
Board of Directors of Danone, the largest company in the world with the status of B-Corp (a standard that certifies
stakeholder engagement in companies).

The man who had adopted the multi-stakeholders model and the idea of the purpose-driven corporation was
dismissed due to a campaign of criticism led by active shareholders Artisan Partners and Bluebell Capital Partners
that persuaded the majority of the board of directors that Faber was an obstacle to the company's development.

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Danone-Faber affair: financial performance v. responsible
capitalism (2 of 2)

Artisan Partners and Bluebell Capital Partners, far from being speculative hedge funds, are supporters of ESG
policies and signatories of the UN PRI (Principles of Responsible Investing).

Faber's undisputed commitment to sustainability was not enough to save it from criticism linked to its poor
performance in financial terms, which led Danone to be overcome by competitors such as Unilever and Nestlé, and
a low distribution of dividends.

The Danone-Faber affair gives us two important lessons and namely:

• shareholders are not reluctant to a purpose-driven and sustainable approach to business →

Danone, in fact, moved to B-Corp on June 2020 with the approval of shareholders representing
99,4% of the corporate capital of the company;

• “purpose” alone is not enough if it is not accompanied by competitive returns.

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Contatti

Avv. Fabio Alberto Regoli

PwC TLS – Avvocati e Commercialisti
10122 - Torino, Corso Palestro, 10
Direct: +39 011 5922778 | +39 02 91605271
Mobile: +39 3357632581
fabio.alberto.regoli@pwc.com