CLS Blue Sky Blog

A Call for Reflection on Sustainable Corporate Governance

Together with other European Corporate Governance Institute (ECGI) research members, we have recently issued a Call for Reflection on Sustainable Corporate Governance to express our concerns over the risk that new legislation on EU companies’ governance is adopted without properly considering the concerns raised by many academics and interested parties during the consultations that have taken place so far. These concerns, as detailed below, focus on the three misconceptions in the approach of the European Commission and the Study on directors’ duties and sustainable corporate governance it has commissioned: (1) the conflation of two separate issues, namely corporations’ horizons and objectives; (2) the belief that shareholders are only concerned with short-term value; (3) the idea that the pursuit of shareholders’ interests must come at the expense of other stakeholders’ interests.

For convenience, the Call for Reflection is reproduced below.

We welcome the European Commission’s efforts to ensure that companies create long-term social value. The need for business to serve wider society is particularly pressing given the scale of challenges such as climate change, resource depletion, diversity and inclusion, biodiversity loss, and the displacement of workers through automation.

We are delighted that the European Commission has approached this ambitious task in line with best practices for effective policy-making, first commissioning an external Study on directors’ duties and sustainable corporate governance and then already engaging in two consultations, before issuing its proposal. In the process, important concerns about the Study were voiced and high-quality evidence pointing to different diagnoses and treatments uncovered. For example, the European Corporate Governance Institute organised a 3-day seminar on the Study, in which some of the world’s leading corporate governance scholars across a variety of fields – economics, finance, accounting, and law – expressed significant concerns over the Study’s methodology and policy recommendations. However, it would appear that analyses published to date, such as the Inception Impact Assessment and the text of the 26 October 2020 consultation, have taken the Study’s findings at face value.

We thus propose a “Call for Reflection”. Rather than moving to action based on the Study, we recommend that the Commission carefully consider the substantial concerns raised through the consultation. Our recommendation for further reflection is not because we believe that the challenges facing society are not urgent. In contrast, it is due to their urgency that we must ensure that any solutions are guided by the very best evidence. Well-intentioned but ill-considered prescriptive corporate governance reform can make it harder, not easier, to address the pressing social challenges referred to in the first paragraph.

Specifically, we believe that the following points deserve further reflection (see also here and here).

1. Separation of Problems

2. The Horizon: Short-Term vs. Long-Term

3. The Objective: Shareholder Value vs. Stakeholder Value

To conclude:

This post comes to us from professors Alex Edmans at the London Business School, Luca Enriques at the University of Oxford Faculty of Law, Jesse Fried at Harvard Law School, Mark J. Roe at Harvard Law School, and Steen Thomsen at the Copenhagen Business School’s Center for Corporate Governance. It first appeared on the Oxford Business Law Blog. 

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