Too Much Short-Termism in EU Corporate Governance

03-09-2020

 

In July 2020, the European Commission Directorate-General for Justice released an external study on directors’ duties and sustainable corporate governance. The study follows the evolution over the last 30 years (1992-2018) of key indicators on the economic performance of listed EU companies in 10 key sectors, including garment and food. 
 
The project aims to analyse current corporate practices and identify possible EU-level interventions, with a view to contributing to the attainment of the Sustainable Development Goals (SDGs) and the goals of the Paris Agreement on climate change. As part of the European Green Deal, Repair and Prepare Recovery Plan and one of the three ways to shape corporate due diligence, the European Commission is considering reforming EU company law.
 
Too Much Short-Term Thinking
 
The study shows that EU corporate governance is characterised by short-termism, as demonstrated by a high level of payments to shareholders and low investment in EU-listed companies. This trend is particularly clear for the food, oil & gas and garment sectors.
 
The study identifies a total of eight factors contributing to short-termism:
 
1. Shareholders’ primacy and poor inclusion of sustainability risks and impacts in board duties
2. Pressure from investors
3. Lack of alignment of sustainability targets with high-level objectives such as the SDGs and lack of systematic monitoring through KPIs
4. Share-based remuneration and scarce integration of ESG factors in board remuneration
5. Limited competence and expertise on sustainability of board members
6. Limited stakeholder involvement
7. Low enforcement level of directors’ duties 
8. Failure of Non-Financial Reporting Directive to provide meaningful, comprehensive and comparable data
 
Such factors will not only harm the environment and exacerbate social inequalities but will also undermine businesses’ performance in the long run. Moreover, data shows that companies focusing on the short term have been less resilient to unexpected shocks, such as the COVID-19 pandemic.
 
The study concludes that EU intervention in all the above-mentioned areas would have positive long-term effects on companies, the planet and society. The suggested reforms include: requiring directors to identify and mitigate sustainability risks and impacts (both internal and external) that are connected to the company’s business operations and value chain, and to balance the interest of shareholders with the long-term interests of the company, employees, customers, local and global environment and society at large.
 
The European Commission has published its Roadmap on Sustainable Corporate Governance which will be open to feedback until 8 October and is planning to launch a public consultation soon.
 
amfori’s work
 
amfori has recently replied to the EU consultation on the Non-Financial Reporting Directive to ask the EU to bring clarity and simplification while ensuring that the needs of SMEs are taken into account.
 
Our experts from the Advocacy team are monitoring legislative developments to help our members stay informed. Keep an eye on our website for further updates.
 
If you have questions, please get in touch with mitsuru.suzuki@amfori.org, Social & Environmental Policy Advisor.
 
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