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EU Commission Publishes Study on Sustainable Corporate Governance

In our latest Newsletter ESG and Law we report on the "Study on directors' duties and sustainable corporate governance" ("Study") recently published by the EU Commission.

The Study, compiled by EY on behalf of the EU Commission, addresses centrally the phenomenon of "short termism" in corporate governance. The focus of corporate decision-makers on short-term shareholder value maximisation instead of long-term corporate interests reduces the long-term economic, environmental and social sustainability of European companies, according to the underlying thesis of the Study. The Study identifies several causes ("Drivers") of short termism and finds that legal frameworks and market practices in Europe had the effect that a long-term orientation of corporate management played a relevant role neither in the duties, remuneration or liability of the management.

In order to counteract short termism, the Study argues that the time horizon and perspective of corporate decisions need to be broadened, for instance through measures such as:

  • Duty of corporate management to consider the long-term interests of the company (beyond 5 to 10 years) and other stakeholders, i.e. not only shareholders;
  • Duty of the corporate management to integrate sustainability aspects into the business strategy and, among other things, to identify and monitor measurable sustainability targets;
  • Improved enforcement of liability against corporate management, also by stakeholders.

To move away from short termism, the Study finds that "EU intervention" is needed, and offers two "soft" and one "hard legislative" option. The Study favours the "hard legislative" option, as does the EU Commissioner for Justice Didier Reynders.

The Study is a follow-up to the Commission's "Action Plan for Financing Sustainable Growth" of March 2018 and works through the Action 10 set out therein. The Study also fits into the global discussion on "stakeholder capitalism" as an alternative model to the "shareholder primacy model" (shareholder value).

For more details on the presentation and assessment of the "Drivers" of short termism, the three options for "EU intervention" proposed by the Study, and the question of whether a turnaround in corporate governance in Europe from "short termism" to "long termism" is imminent, please read our current Newsletter mentioned above.

Dr Matthias Etzel

Dr André Depping

Dr Daniel Walden

TAGS

Corporate Social Responsibilty ESG EU-Kommission Short-Termism

Contact us

Dr. Matthias Etzel T   +49 89 35065-1410 E   Matthias.Etzel@bblaw.com
Dr. André Depping T   +49 89 35065-1331 E   Andre.Depping@bblaw.com
Dr. Daniel Walden T   +49 89 35065-1379 E   Daniel.Walden@bblaw.com