If there is one theme that characterises debate about corporate governance over the past decade it is the conflict between short-term and long-term strategy and decision-making.
The European Commission has now weighed in with a study that concludes that far too many company directors across the EU continue to think short term instead of acting in the long-term interests of their stakeholders.
The commission concludes action is needed to shift decision-making. “An EU policy intervention is required to lengthen the time horizon in corporate decision-making and promote a corporate governance that is more conducive to sustainability,” the study says. Researchers worry that without new policies “shareholder primacy and short-term pressures from the finance markets will likely continue to influence corporate decision-making”.
Long-term strategy and stakeholderism
The conclusion comes despite evidence that a few high-profile fund managers have attempted to shift board and corporate thinking towards long-term aims and strategies—even during the Covid-19 crisis.
In some quarters campaigners claim to have found evidence that the crisis has accelerated a shift to “stakeholderism”. The Sustainability Board Report, a not-for-profit campaign group, says its own report shows that “the pandemic has accelerated a shift away from a world of shareholder primacy to one of stakeholder pluralism.” While “stakeholder pluralism” doesn’t necessarily equate to long-term strategy and sustainability, it is considered closely aligned.
The commission’s anxiety is that short-termism in corporate thinking across the EU does not fit with a contribution to the UN’s Sustainable Development Goals nor the Paris Agreement on climate change.
The study’s evidence seems to prove the point. Looking at data from 1992 to 2018, researchers found shareholder pay-outs increased fourfold from less than 1% of revenues to almost 4%. They also say the ratio of capex and R&D investment to revenues has been declining.
A number of drivers were identified. They included a narrow interpretation of directors’ duties and company interests favouring “short-term maximisation of shareholder value”; pressure from investors; absence of a strategic “perspective” for sustainability; executive pay structures that favour a focus on shareholder value; board composition; governance frameworks that fail to focus on long-term thinking; and a lack of enforcement for directors’ duties.
The report contains a warning on where all this might lead. “Short-term time horizons that fail to capture the full extent of long-term sustainability risks and impacts could amount to overwhelming environmental, social and economic consequences for companies, shareholders, investors and society at large.”
And directors beware: the commission lists a range of options to tackle the short-termism problem. Some of these are “soft” options based on encouraging a change in culture. But the report contains a raft of “hard” legislative proposals too. These include legal measures to encourage long-term share holdings; banning quarterly reporting; a new set of directors’ duties written into law; amendments to the Shareholder Rights Directive forcing companies to align executive pay with sustainability goals and mandatory integration of sustainability risks into business strategy.
It is too early to know how any of this might work at the EU level or how national governments might interpret and enforce new laws. But it is an indication that the “sustainability” and climate change debate still has a long way to run and could yet result in tougher rules from Brussels.
This is likely. The EU is enthusiastically driving a green agenda for companies. And though the EU moves slowly, this area in particular is moving fast.