{"id":1532,"date":"2021-06-22T13:10:36","date_gmt":"2021-06-22T13:10:36","guid":{"rendered":"http:\/\/blogs.kcl.ac.uk\/kslrcommerciallawblog\/?p=1532"},"modified":"2021-06-22T15:00:52","modified_gmt":"2021-06-22T15:00:52","slug":"the-european-commissions-pathway-from-shareholders-democracy-to-sustainable-corporate-governance","status":"publish","type":"post","link":"https:\/\/blogs.kcl.ac.uk\/kslrcommerciallawblog\/2021\/06\/22\/the-european-commissions-pathway-from-shareholders-democracy-to-sustainable-corporate-governance\/","title":{"rendered":"The European Commission\u2019s Pathway from Shareholders\u2019 Democracy to Sustainable Corporate Governance – Michele Corgatelli"},"content":{"rendered":"

The European Commission\u2019s Pathway from Shareholders\u2019 Democracy to Sustainable Corporate Governance<\/strong><\/p>\n

\u00a0<\/strong><\/p>\n

Michele Corgatelli[1]<\/strong><\/a><\/em><\/p>\n

 <\/p>\n

Introduction<\/strong><\/p>\n

European Commissioner Frits Bolkestein, in a 2003 speech at the Roundtable on Corporate Governance and Company Law held by the European Policy Forum, stated: \u2018I 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.\u2019[2]<\/a> 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.[3]<\/a><\/p>\n

Today, the corporate governance of European companies is once again under the spotlight. Consistent with the massive package of normative proposals called \u2018European Green Deal\u2019, the Commission is planning to propose a new corporate governance directive in the second quarter of 2021.[4]<\/a> The rationale for this new intervention is short-termism: as part of the outlined strategy, the Commission writes that \u2018many companies still focus too much on short-term financial performance compared to their long-term development and sustainability aspects\u2019.[5]<\/a> To tackle the same problem, already outlined in the 2012 Action Plan,[6]<\/a> the Shareholder Rights Directive II (hereinafter, \u2018SRD II\u2019) introduced in 2017 provisions for promoting shareholders\u2019 engagement.[7]<\/a> 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.[8]<\/a><\/p>\n

Long-termism<\/strong><\/p>\n

While the SRD II\u2019s 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\u2019 duties.[9]<\/a> The Commission remarked this point, assessing \u2018the possible need to clarify the rules according to which directors are expected to act in the company\u2019s long-term interest\u2019.[10]<\/a> 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.[11]<\/a><\/p>\n

The Ernst & Young\u2019s \u2018Study on directors\u2019 duties and sustainable corporate governance\u2019,[12]<\/a> commissioned by the European Commission, evaluated different soft and hard-law options; it ranged from the amendment of SRD II \u2018to introduce binding rules requiring Member States to introduce mechanisms to incentivise longer shareholding periods\u2019[13]<\/a> and \u2018to align executive remuneration policy with the long-term and sustainability goals\u2019[14]<\/a>, to rules concerning board composition and internal and external stakeholders\u2019 engagement.[15]<\/a> A great emphasis has been put on directors\u2019 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\u2019 duty to act in the interest of the company.[16]<\/a> The Commission used the Ernst & Young\u2019s Report to formulate an inception impact assessment,[17]<\/a> 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.[18]<\/a> Academia has heavily criticized the study, denouncing its flaws,[19]<\/a> and only the Commission\u2019s proposal, once published, will show how much these dissenting voices are being taken into account during the current drafting.<\/p>\n

As noted by Professor M\u00f6slein and Professor S\u00f8rensen, the E&Y\u2019s Report attempted \u2018to conclude that current company law promotes short\u2010termism \u2026 It started, so to say, on the wrong foot\u2019.[20]<\/a> 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\u2019 value;[21]<\/a> on this point, in his response to the Commission\u2019s feedbacks request, Professor Edmans noted: \u2018Shareholder value is an inherently long-term concept. The study frequently uses the phrase \u201cshort-term shareholder value\u201d and its variants. This makes no sense, because shareholder value is an inherently long-term concept \u2013 it includes all of the future cash flows of a company.\u2019[22]<\/a> 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;[23]<\/a> long-termism per se<\/em> could be intended as solely aimed at shareholders\u2019 value maximization.<\/p>\n

Which role for shareholders\u2019 democracy?<\/strong><\/p>\n

A quote from the E&Y\u2019s Report is particularly insightful: \u2018the 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\u2019.[24]<\/a> In this sense, the relationship between shareholders\u2019 democracy (so to say shareholders\u2019 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.[25]<\/a> However, this time the long-term horizon is not reserved to shareholders\u2019 value, but integrated with stakeholders\u2019 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\u2019 democracy can be integrated with environmental and social goals would preserve shareholders\u2019 voice, and dismiss the abovementioned conception, without the need to opt for directors-centred provisions.<\/p>\n

Conclusion<\/strong><\/p>\n

The Commission\u2019s pathway from shareholders\u2019 democracy to sustainable corporate governance seems paved with good intentions. However, the way in which environmental sustainability will be considered intertwined with shareholders\u2019 democracy will determine the future relationship between the two; sustainability could either integrate the steps towards shareholders\u2019 democracy with environmental and social factors, expanding and enhancing shareholders\u2019 duties of long-term engagement, or compress it, insulating directors to let them pursuit broader stakeholders\u2019 interests.<\/p>\n

 <\/p>\n

[1]<\/a> LLM Research Candidate at University of Glasgow<\/p>\n

[2]<\/a> Frits Bolkestein, SPEECH\/03\/298 (London, 13 June 2003).<\/p>\n

[3]<\/a> 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.<\/p>\n

[4]<\/a> 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.<\/p>\n

[5]<\/a> European Commission, \u2018The European Green Deal\u2019 (Brussels, 11 December 2019). COM\/2019\/640 final.<\/p>\n

[6]<\/a> European Commission, \u2018Action Plan: European company law and corporate governance \u2013 a modern legal framework for more engaged shareholders and sustainable companies\u2019 (Strasbourg, 12 December 2012). COM\/2012\/0740 final.<\/p>\n

[7]<\/a> Directive (EU) 2017\/828 (n 3), art. 3g.<\/p>\n

[8]<\/a> European Commission, \u2018Action Plan: Financing Sustainable Growth\u2019 (Brussels, 8 March 2018). COM(2018) 97 final.<\/p>\n

[9]<\/a> 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.<\/p>\n

[10]<\/a> European Commission, \u2018Action Plan: Financing Sustainable Growth\u2019 (n 8), 11.<\/p>\n

[11]<\/a> Final Report 2018 (n 9), 40.<\/p>\n

[12]<\/a> 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.<\/p>\n

[13]<\/a> ibid, viii.<\/p>\n

[14]<\/a> ibid, ix.<\/p>\n

[15]<\/a> ibid.<\/p>\n

[16]<\/a> ibid, viii, ix.<\/p>\n

[17]<\/a> See note 4.<\/p>\n

[18]<\/a> 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.<\/p>\n

[19]<\/a> See the Comment by the European Company Law Experts Group on the European Commission\u2019s Consultation Document (Oxford Business Law Blog<\/em>, 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.<\/p>\n

[20]<\/a> Florian M\u00f6slein and Karsten Engsig S\u00f8rensen, \u2018Sustainable Corporate Governance: A Way Forward\u2019 (2021) ECGI Law Working Paper No. 583, 2.<\/p>\n

[21]<\/a> See the publications published by the European Corporate Governance Institute, at: <https:\/\/ecgi.global\/content\/sustainable-corporate-governance> accessed 5 May 2021.<\/p>\n

[22]<\/a> 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.<\/p>\n

[23]<\/a> Mark Roe and others, \u2018A Critique of the Sustainable Corporate Governance Report from the European Commission\u2019 (The CLS Blue Sky Blog<\/em>, 9 November 2020), <https:\/\/clsbluesky.law.columbia.edu\/2020\/11\/09\/the-european-commissions-sustainable-corporate-governance-report-a-critique\/> accessed 5 May 2021.<\/p>\n

[24]<\/a> See note 12, at 28.<\/p>\n

[25]<\/a> See note 7.<\/p>\n","protected":false},"excerpt":{"rendered":"

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