Studying the wording and meaning of laws, regulations and case law forms an essential part of a lawyer's daily work. But what about soft law? Why is it crucial for solving our clients' business challenges and an essential aspect of sound legal advice? And why are soft controls sometimes the hardest? Lisa Schoenmakers, Harm Kerstholt and Geert Raaijmakers explain.
It may be legal, but is it right? In the legal order, legislation is just the tip of the iceberg. So-called soft law, such as the UN Global Compact, OECD Guidelines for Multinational Enterprises, and UN Guiding Principles on Business and Human Rights, may not be legally binding. However, they can be just as important as legislation for companies seeking to manage their legal risks.
Energy lawyer Lisa Schoenmakers studied soft law at law school. “Soft law may often be voluntary, but it’s not without obligations,” she says. “Soft control is about how to operate in a socially responsible way. The combination of soft and hard law – and how they interact to achieve socially responsible behaviour – can be confusing. We help clients navigate this shifting landscape.”
Companies operate in an ever-changing system of international treaties, codes of conduct, social responsibility charters and all kinds of best practices – from privacy to labour standards, compliance to governance.
"Corporate social responsibility transformed from a PR issue – often with a strong philanthropic component – into a serious area of compliance for companies."
NautaDutilh Corporate and M&A partner Harm Kerstholt spent five years at our New York office before returning to Rotterdam in 2019. During his time in the US, he witnessed the transformation of corporate social responsibility from a PR issue – often with a strong philanthropic component – into a serious area of compliance for companies.
“Big corporates today must all think about how to operate responsibly, and their considerations go beyond legal obligations,” explains Harm. “This is an incredible shift in attitude: our corporate clients can no longer afford to disregard soft law on responsible business conduct.”
This also means taking responsibility for suppliers and service providers, not just one's own actions. “Companies have to take at least some responsibility for people and planet issues in their pursuit of profit – and be transparent about this,” says Harm. He cautions that when it comes to managing legal risks, there are many examples of companies having learned the hard way that compliance with legislation alone, is too narrow a focus.
"Soft law is increasingly developed from the bottom up; companies participate in the development of guidelines which may turn into legislation."
Lisa notes that the shift in attitude that Harm describes has resulted in companies taking more of an interest in the development of soft law. “Soft law is increasingly developed from the bottom up; companies participate in the development of guidelines which may turn into legislation,” she explains, adding that soft law impacts corporate reporting obligations if this doesn't occur. “Once there’s an obligation to report on soft controls, you can’t really claim it’s voluntary anymore.”
Corporate Governance partner Geert Raaijmakers notes that soft controls play a significant role in corporate governance and management. Large corporates and financial institutions frequently invite him to their board meetings to observe their processes and avoid mismanagement. “They want to know if decisions were taken in a transparent way and how the board decision would be viewed by the Enterprise Division of the Amsterdam Court of Appeal,” he explains.
"Courts and regulators increasingly focus on ethics, behaviour, culture and the right incentives for directors."
For Geert and his team, the job is to look at governance not only from a purely legal point of view but also from a more holistic perspective. “Courts and regulators increasingly focus on ethics, behaviour, culture and the right incentives for directors. Companies turn to us for guidance as we are able to examine these topics from the perspective of a court or supervisory authority,” says Geert. “During board meetings, discussions often involve culture, internal dynamics, the company’s relationship with the board, amongst many other issues. Not only legal ones.”
“Advising on soft law is a sign of the times,” says Lisa, and a part of her daily practice. “A good lawyer can no longer be a technocrat. Together with our clients, we feel a strong duty of care for future generations. We are in the midst of an energy transition, and in the energy department, we clearly see a heightened focus on sustainability. Clients don’t want to hear about how they can avoid social responsibility: they seek our advice on how to apply and implement soft controls in their daily business and culture.”
"In this day and age, you simply can’t ignore soft controls. Companies need to learn how to identify and implement responsible business conduct principles and guidelines effectively."
Harm agrees: “In this day and age, you simply can’t ignore soft controls. Companies need to learn how to identify and implement responsible business conduct principles and guidelines effectively. And also be more transparent when it comes to the social and environmental impact of their business operations – throughout the entire supply chain.”
In a company's day-to-day business, soft law is sometimes even more important than hard rules. “Sure, you can enforce internal policies with a strong legal framework and penalties,” says Geert. “However, soft law depends on seamless cooperation between HR, compliance, risk management and corporate governance teams. It is more a matter of integrity and culture than legislation. A good lawyer can help clients immensely if he or she will also look at these wider aspects.”
"Knowledge of best practices and relevant governance codes allow us to guide clients through this ever-changing landscape."
For Lisa, soft law helps society and businesses build the next set of rules, while waiting for legislatures and the courts to catch up. “Many new climate laws are still being drafted, so we have to anticipate what comes next,” she says. “Knowledge of best practices and relevant governance codes allow us to guide clients through this ever-changing landscape.”