The European Commission's Sustainable Corporate Governance Report: A Critique

22 Pages Posted: 21 Oct 2020 Last revised: 3 Dec 2020

See all articles by Mark J. Roe

Mark J. Roe

Harvard Law School

Holger Spamann

Harvard Law School; ECGI

Jesse M. Fried

Harvard Law School; European Corporate Governance Institute (ECGI)

Charles C. Y. Wang

Harvard Business School

Date Written: October 14, 2020

Abstract


In July 2020, the European Commission published the “Study on directors’ duties and sustainable corporate governance” by EY. The Report purports to find evidence of debilitating short-termism in EU corporate governance and recommends many changes to support sustainable corporate governance. In this paper, we point out deep flaws in the Report’s evidence and analysis. We recently submitted the content of this paper in response to the European Commission’s call for feedback.

First, the Report defines the corporate governance problem as one of pernicious short-termism that damages the environment, the climate, and stakeholders. But the Report mistakenly conflates time-horizon problems with externalities and distributional concerns. Cures for one are not cures for the others and a cure for one may well exacerbate the others. Second, the Report’s main ostensible evidence for an increase in corporate short-termism is rising gross payouts to shareholders (dividends and stock repurchases). However, the more relevant payout measure to assess corporations’ ability to fund long-term investment is net payouts (gross payouts minus equity issuances), which is much lower and has left plenty of funds available for long-term and short-term investment. Third, when the Report turns to other evidence for short-termism, it selectively picks academic studies that support its views on short-termism, while failing to engage substantial contrary literature. Significant studies fail to detect short-termism and some substantial studies show excessive long-termism. Conceptually, some short-termism is an unfortunate but an inevitable side effect of effective corporate governance and may not be a first-order problem warranting wholesale reform. Finally, the Report touts cures whose effectiveness has little evidentiary support and, for some, there is real evidence that the cures could be counterproductive and costly.

Keywords: corporate governance, short-termism, hedge funds, shareholder activism, European Union, securities regulation, agency costs, research and development, political economy, investment, payouts, repurchases

JEL Classification: D72, E71, G18, G34, G38, G41, K22, L21

Suggested Citation

Roe, Mark J. and Spamann, Holger and Fried, Jesse M. and Wang, Charles C. Y., The European Commission's Sustainable Corporate Governance Report: A Critique (October 14, 2020). European Corporate Governance Institute - Law Working Paper 553/2020, Harvard Public Law Working Paper No. 20-30, Available at SSRN: https://ssrn.com/abstract=3711652 or http://dx.doi.org/10.2139/ssrn.3711652

Mark J. Roe (Contact Author)

Harvard Law School ( email )

Griswold 502
Cambridge, MA 02138
United States
617-495-8099 (Phone)
617-495-4299 (Fax)

Holger Spamann

Harvard Law School ( email )

Cambridge, MA 02138
United States

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Jesse M. Fried

Harvard Law School ( email )

1575 Massachusetts
Griswold Hall 506
Cambridge, MA 02138
United States
617-384-8158 (Phone)

HOME PAGE: http://www.law.harvard.edu/faculty/directory/10289/Fried

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Charles C. Y. Wang

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

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