The European Commission’s Pathway from Shareholders’ Democracy to Sustainable Corporate Governance
European Commissioner Frits Bolkestein, in a 2003 speech at the Roundtable on Corporate Governance and Company Law held by the European Policy Forum, stated: ‘I am convinced that there is a strong medium to long term case for aiming to establish real shareholder democracy in the EU. This is the basic philosophy behind all our proposals.’ The 2003 Action Plan for the modernisation of company law and the enhancement of corporate governance did in fact inaugurate a season of shareholder-friendly legislation at the EU level: the Shareholder Rights Directive and its amendment were approved in 2007 and 2017.
Today, the corporate governance of European companies is once again under the spotlight. Consistent with the massive package of normative proposals called ‘European Green Deal’, the Commission is planning to propose a new corporate governance directive in the second quarter of 2021. The rationale for this new intervention is short-termism: as part of the outlined strategy, the Commission writes that ‘many companies still focus too much on short-term financial performance compared to their long-term development and sustainability aspects’. To tackle the same problem, already outlined in the 2012 Action Plan, the Shareholder Rights Directive II (hereinafter, ‘SRD II’) introduced in 2017 provisions for promoting shareholders’ engagement. However, this time the Commission included the theme in a much broader context of reforms aimed at increasing the sustainability of finance, as part of the efforts made to tackle climate change and to achieve environmental goals.
While the SRD II’s approach to foster long-termism was based on institutional investors engagement, the 2018 Report of the High-Level Expert Group on Sustainable Finance focused on two different aspects. On the one hand, it underlined the importance of boards, and therefore of directors’ duties. The Commission remarked this point, assessing ‘the possible need to clarify the rules according to which directors are expected to act in the company’s long-term interest’. On the other hand, the 2018 Report pondered the possibility of extending the stewardship principles, for example by further emending the Shareholder Rights Directive, to strengthen their environmental and social component.
The Ernst & Young’s ‘Study on directors’ duties and sustainable corporate governance’, commissioned by the European Commission, evaluated different soft and hard-law options; it ranged from the amendment of SRD II ‘to introduce binding rules requiring Member States to introduce mechanisms to incentivise longer shareholding periods’ and ‘to align executive remuneration policy with the long-term and sustainability goals’, to rules concerning board composition and internal and external stakeholders’ engagement. A great emphasis has been put on directors’ duties (as the title of the report suggests) to proper balance different interests alongside the interest of shareholders, integrate sustainability aspects in the business strategies, and to enforce the directors’ duty to act in the interest of the company. The Commission used the Ernst & Young’s Report to formulate an inception impact assessment, to receive feedbacks from 30 July 2020 to 8 October 2020, and to subsequentially run a questionnaire-based public consultation that ended on 8 February 2021. Academia has heavily criticized the study, denouncing its flaws, and only the Commission’s proposal, once published, will show how much these dissenting voices are being taken into account during the current drafting.
As noted by Professor Möslein and Professor Sørensen, the E&Y’s Report attempted ‘to conclude that current company law promotes short‐termism … It started, so to say, on the wrong foot’. The core assumption of the Report is that companies are run in the short-term interest of shareholders, and that this phenomenon is necessary dysfunctional, clashing with a long-term management able to create value for society at large. However, such conception derives from the overlapping of two different issues: on the one hand, the debate over short-term vs. long-term shareholders’ value; on this point, in his response to the Commission’s feedbacks request, Professor Edmans noted: ‘Shareholder value is an inherently long-term concept. The study frequently uses the phrase “short-term shareholder value” and its variants. This makes no sense, because shareholder value is an inherently long-term concept – it includes all of the future cash flows of a company.’ On the other hand, another issue is whether the long-term value that the directors must pursuit is the one of shareholders, or of other stakeholders as well; long-termism per se could be intended as solely aimed at shareholders’ value maximization.
Which role for shareholders’ democracy?
A quote from the E&Y’s Report is particularly insightful: ‘the strength of the social norm of shareholder primacy in corporate governance theory and practice, combined with growing pressures from institutional and activist investors increasingly focused on the short-term market value of the shares, places intense pressure on corporate boards to prioritise the market valuation of the company and focus on short-term financial performance, driving down all other costs, at the expense of better employee compensation and stronger investments that are important for long-term productivity’. In this sense, the relationship between shareholders’ democracy (so to say shareholders’ rights, voice, and engagement) and sustainability is intended by the Report as conflictual. Similar considerations were contained in the recitals of the SRD II and already resulted in the provision on long-term engagement policies. However, this time the long-term horizon is not reserved to shareholders’ value, but integrated with stakeholders’ value; the underlining idea is that while self-interested shareholders, once able to express their voice, aim at maximizing their short-term returns, insulated boards could be able to better serve society in the long-term, once free to balance various interests. Conversely, understanding that shareholders’ democracy can be integrated with environmental and social goals would preserve shareholders’ voice, and dismiss the abovementioned conception, without the need to opt for directors-centred provisions.
The Commission’s pathway from shareholders’ democracy to sustainable corporate governance seems paved with good intentions. However, the way in which environmental sustainability will be considered intertwined with shareholders’ democracy will determine the future relationship between the two; sustainability could either integrate the steps towards shareholders’ democracy with environmental and social factors, expanding and enhancing shareholders’ duties of long-term engagement, or compress it, insulating directors to let them pursuit broader stakeholders’ interests.
 LLM Research Candidate at University of Glasgow
 Frits Bolkestein, SPEECH/03/298 (London, 13 June 2003).
 Directive 2007/36/EC of the European Parliament and of the Council of 11 July 2007. O. J. L 184, 14.7.2007, 17-24. Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017. O. J. L 132, 20.5.2017, 1-25.
 The roadmap can be consulted at: <https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance> accessed 5 May 2021.
 European Commission, ‘The European Green Deal’ (Brussels, 11 December 2019). COM/2019/640 final.
 European Commission, ‘Action Plan: European company law and corporate governance – a modern legal framework for more engaged shareholders and sustainable companies’ (Strasbourg, 12 December 2012). COM/2012/0740 final.
 Directive (EU) 2017/828 (n 3), art. 3g.
 European Commission, ‘Action Plan: Financing Sustainable Growth’ (Brussels, 8 March 2018). COM(2018) 97 final.
 Final Report 2018 by the High-Level Expert Group on Sustainable Finance, available at: <https://ec.europa.eu/info/files/180131-sustainable-finance-final-report_en>, 38, 40, accessed 5 May 2021.
 European Commission, ‘Action Plan: Financing Sustainable Growth’ (n 8), 11.
 Final Report 2018 (n 9), 40.
 The Final Report is available at: <https://op.europa.eu/en/publication-detail/-/publication/e47928a2-d20b-11ea-adf7-01aa75ed71a1/language-en> accessed 5 May 2021.
 ibid, viii.
 ibid, ix.
 ibid, viii, ix.
 See note 4.
 Information about the consultation can be found at: <https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance/public-consultation> accessed 5 May 2021.
 See the Comment by the European Company Law Experts Group on the European Commission’s Consultation Document (Oxford Business Law Blog, 9 December 2020), <https://www.law.ox.ac.uk/business-law-blog/blog/2020/12/ec-corporate-governance-initiative-series-comment-european-company> accessed 5 May 2021.
 Florian Möslein and Karsten Engsig Sørensen, ‘Sustainable Corporate Governance: A Way Forward’ (2021) ECGI Law Working Paper No. 583, 2.
 See the publications published by the European Corporate Governance Institute, at: <https://ecgi.global/content/sustainable-corporate-governance> accessed 5 May 2021.
 Alex Edmans, response submitted on 1 October 2020, available at: <https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12548-Sustainable-corporate-governance/F556360> accessed 5 May 2021.
 Mark Roe and others, ‘A Critique of the Sustainable Corporate Governance Report from the European Commission’ (The CLS Blue Sky Blog, 9 November 2020), <https://clsbluesky.law.columbia.edu/2020/11/09/the-european-commissions-sustainable-corporate-governance-report-a-critique/> accessed 5 May 2021.
 See note 12, at 28.
 See note 7.