What is the Brussels Effect?
What is the Brussels Effect, and how does it impact corporate governance across the world? This guide will answer your questions.
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The Brussels Effect is perhaps a shining example of how modern regulators cause worldwide ripples in their efforts to introduce new rules to markets.
Most corporate governance professionals will be familiar with the importance of adhering to state-level or national rulebooks. Still, the Brussels Effect adds a new dimension, in that someone who makes a rule well outside your market, and thousands of kilometres away, could still end up forcing a change in your business practices.
What is the Brussels Effect, and how does it impact non-EU companies?
The Brussels Effect describes any scenario where laws made for the European Union market end up being followed by companies that operate outside it. The EU does not have an official capital, but some of its most important institutions are located in the Belgian capital, Brussels, hence the name.
In some extreme cases, the Effect sees laws being de facto adopted worldwide.
The main reasons are:
- The EU – with 452 million people – is a massive and wealthy market. If it were a country, it would be the third most populous, even ahead of the United States. For many companies, a presence in this market is crucial.
- The bloc is quite ambitious about consumer-centric regulation, so it is often at the forefront of new rules to guide industry standards.
- Since companies can’t afford to leave the market, and since they lack the resources to implement multiple compliance strategies, many will decide to simply apply EU standards to their global operations. This is the Brussels Effect.
Examples of the Brussels Effect in action include a global revamp of corporate websites in the mid-2010s to comply with the EU’s GDPR (data protection) regulations. More recently, the EU’s decision to allow only devices that accept USB-C chargers has coincided with some tech companies (notably Apple) abandoning their own designs worldwide on new phones and laptops in favour of it.
Why is the Brussels Effect a critical priority for corporate boards?
A common misconception among boards and executives of companies based outside the EU is that the bloc’s laws shouldn’t be of interest. Practically, however, they often end up being important for a variety of reasons.
Having a physical presence inside the EU market is the most obvious reason. Others include being part of a supply chain that feeds into the EU market (yes, you could be asked for compliance and reporting in cases like this), or having a longer-term goal of entering the EU market.
Since top-line decisions over standards, strategy and performance rest with the board of directors and the executives they work with, the question of the Brussels Effect automatically becomes a core part of the board’s fiduciary duty, and therefore something that should appear on the boardroom agenda whenever necessary.
Which EU regulations trigger the Brussels Effect for global enterprises?
There are multiple regulations; you may have heard of them already:
- The General Data Protection Regulation (GDPR), which took effect in 2018. It sets out extensive rules for the handling of personal data, who can initiate conversations between businesses and customers, as well as when. Any corporate strategy involving sales, marketing or events rapidly had to adjust to being “GDPR-compliant”.
- The Corporate Sustainability Reporting Directive (CSRD), which governs transparency around sustainability. It sets minimum standards and benchmarks for reporting and frequencies for when this reporting must be submitted. Crucially, in some cases, it compels EU businesses to report on their supply chains, even if companies within those chains are based outside the EU – an example of the Brussels effect in action.
- The EU AI Act, which is a global frontrunner in AI regulation and comes into force gradually across the 2020s. It splits AI systems into multiple tiers based on the risks associated with each, and compels companies to follow new standards and report on how this goes in practice. Again, the EU’s definition of who needs to follow the AI Act is extremely broad. Companies outside the bloc, whose systems are deemed to have been active inside the bloc, are bound by the same rules.
Is the Brussels Effect a risk or a competitive advantage?
That is entirely up to your board and executives. Most will weigh company strategy against goals and compliance requirements to decide how they view the Brussels Effect.
In general, the advantages of the Effect are that it can help streamline your business models long-term. The phenomenon of companies harmonising their global activities because of one region’s laws means that, in the long term, you will likely have less siloed approaches that can make top-down leadership easier.
The risks are more short-term. Compliance can become a nightmare for businesses that are unprepared or actively resist the Brussels Effect. EU regulators know this and have tended to dilute or delay enforcement dates of new laws to give companies time to catch up, but the volume of work for many businesses doesn’t change, and so it can be a challenge.
What concrete steps should directors take to govern Brussels Effect risks?
- Look at the scope of your audit committee. Map global operations against emerging EU mandates and decide on a confirmed list of priorities for the committee to take responsibility for in the course of its work.
- Know your supply chain inside-out. Be aware of the amount of reporting you may need to do in this regard.
- If you’re part of a supply chain feeding an EU company, check if your relationship meets the criteria for reporting under the bloc’s regulations.
- Assess the idea of forming or changing the unified global standards of your products. If the EU will force you to change, it’s important to know if your company is better off applying this change worldwide. Source the right boardroom expertise wherever necessary to help you decide this.