Efforts by the European Commission to introduce new corporate governance laws have stepped up a gear, with a fresh consultation proposing mandatory human rights due diligence and new obligations on company directors to balance the “interests of all stakeholders”.
The consultation follows stiff criticism from academics of the initial research undertaken for the Commission by EY on short-termism in corporate thinking.
The Commission says the aim of new corporate governance rules are to “enable companies to focus on the long-term sustainable value creation rather than short-term benefits”.
Critics say the assumption that most companies in Europe are “short-termist” is incorrect.
The fresh consultation ranges across a numbers of topics, aiming to embed sustainability into corporate governance across EU member states. The Commission hopes to have governance measures in place by 2021.
One area the consultation examines is expanding a director’s “duty of care” to potentially cover the interests of employees, supply chains, and customers and communities affected by corporate activity. Section 172 of the UK Companies Act 2006 already has many of those issues included.
The consultation considers whether directors should be required by law to identify stakeholders and their interests to “manage the risks”, as well as asking whether stakeholders should be given a role in enforcing directors’ duties.
It also explores the content of a mandatory human rights due diligence duty. Among the options are companies taking a “principles-based” approach or the European Union setting a minimum standard of requirements.
Short-termism in the EU
The consultation has already prompted controversy. The EY study on which it is based concludes that far too many company directors across the EU continue to think “short term”. “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.
However, the research has been widely panned. In one recent article, law professors from Harvard say the report contains “deep flaws”, fails to engage with alternative sources of evidence and “touts cures” backed by “little evidentiary support”. The Harvard team concludes: “No EU policymaker should rely on this report.”
They are not alone in hitting out at the study. A group of business school professors in Copenhagen say EY “paints a misleading picture of businesses” in the EU as short-sighted and unsustainable.
“This is plainly wrong. On the contrary, European companies have taken a strong and proactive stance on sustainability, which has often been ahead of the public sector and the political system.”
They add that unlike the US, UK and elsewhere, European businesses are characterised by “less short-term financial ownership and more concentrated, long-term ownership by family businesses, cooperatives, mutuals, foundations, and government-owned enterprises.” They conclude: “Short-termism is simply less of problem in the EU.”
Meanwhile, Alex Edmans, a professor at London Business School, remarks in a blog post for the Oxford University Faculty of Law that it was “surprising” the EY research had no academic input.
Edmans argues that while the EY study assumes “shareholder value” is a short-term concept it is, on the contrary, “an inherently long-term concept”. A focus on growing “shareholder value”, he says, increases stakeholder value.
Perhaps his biggest criticism though is an argument that the EY research treats sustainability as a “compliance exercise”.
“A far more effective approach,’ he writes, “is to emphasise the business case for sustainability—that it is a company’s own interests to take sustainability seriously, as doing so improves long-term company performance and thus shareholder value.”
The Commission’s consultation runs until 8 February 2021.