EU-wide push expected on corporate long termism
New legislation and heavier enforcement actions could be on their way for EU companies following fresh concerns they are neglecting long-term value creation for shareholders.
Entitled, ‘Study on directors’ duties and sustainable corporate governance’, a white paper from the European Commission has laid out three options for encouraging greater long termism within EU companies.
Two of these (Options A and B) are regarded as non-legislative and soft, aimed at encouraging executive boards to champion long-term corporate approaches through awareness-raising activities, green papers and recommendation initiatives.
However, the third set of proposals – under Option C – are regarded as ‘hard’ by the commission, including new legislative frameworks and stronger enforcement functions.
This means shareholders could be set to benefit from a wide range of changes, from greater transparency about a company’s long-term sustainability progress right up to a radically different reporting calendar.
Tellingly, the commission may be inclined to pursue Option C with the admission that: “while it is worth acknowledging that regulatory provisions and voluntary initiatives aimed at promoting greater corporate sustainability have already been developed, these measures appear to be too patchy and lack strength”.
Earlier this summer the commission displayed its willingness to tweak legislation when it officially mandated the European Financial Reporting Advisory Group to update non-financial reporting standards.
The commission is now looking to tackle corporate short-termism across the region after research found EU companies had increasingly become short-term focused over recent years (with shareholder payouts increasing fourfold from 1% of revenues in 1992 to almost 4% in 2018).
As a result, the commission argues that this increasingly results in the neglect of long-term value. In the context of climate change and biodiversity loss, the commission argued that “no member state” is protected from the long-term impacts of unsustainability.
“The consequences of unsustainability are very serious and have EU-wide (and global) implications,” read the report. “Moreover, the achievement of the goals of the Paris Agreement on climate change and the UN Sustainable Development Goals is unlikely, given the status quo.
“Only EU action can ensure a level playing field for European companies.”
Proposals under Options A and B are the most similar and include initiatives such as information campaigns designed to promote the importance of sustainability at a board level, new advisory groups being established to monitor and encourage progress and top-level recommendations for member states to do more at fostering sustainable corporate governance.
Tellingly, the initiatives outlined under Option C – which call for harder and more mandatory changes – have been assessed by the commission as likely to have the most impact. These include changes to both existing legislation and proposals for totally new directives.
For example, Option C would see the Transparency Directive being amended to prohibit both earning guidance and quarterly reporting for listed companies while the commission would also propose a new EU directive to lay down rules on board composition.
Other measures include stronger enforcement for ensuring directors’ duties to meet the interests of their company and an EU-wide directive clarifying how these can be aligned. Further changes for the Shareholder Rights Directive II, which came into force earlier in September 2020, could also be on their way with the commission proposing the introduction of binding mechanisms to incentivise longer shareholding periods.
Repeatedly, initiatives highlighted under Option C were identified as having the biggest and best impact for long-term investors and society as a whole. However, in each instance the commission recognised that legislative changes could lead to higher compliance costs and difficulties for businesses being forced to adapt to them.
In addition, particularly when assessing potential solutions around board composition concerns, the commission stressed that mandatory measures should not stray into “box ticking” approach.
Last Updated: 11 September 2020