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Call for Reflection on Sustainable Corporate Governance

Please note that the call reflects solely the views and opinions of the undersigned scholars. The ECGI does not, consistent with its constitutional purpose, have a view or opinion

Posted on behalf of Alex Edmans, Luca Enriques, Jesse Fried, Mark Roe and Steen Thomsen


We welcome the European Commission’s efforts to ensure that companies create long-term social value. The need for business to serve wider society is particularly pressing given the scale of challenges such as climate change, resource depletion, diversity and inclusion, biodiversity loss, and the displacement of workers through automation.

We are delighted that the European Commission has approached this ambitious task in line with best practices for effective policy-making, first commissioning an external Study on directors’ duties and sustainable corporate governance and then already engaging in two consultations, before issuing its proposal. In the process, important concerns about the Study were voiced and high-quality evidence pointing to different diagnoses and treatments uncovered. For example, the European Corporate Governance Institute organised a 3-day seminar on the Study, in which some of the world’s leading corporate governance scholars across a variety of fields – economics, finance, accounting, and law – expressed significant concerns over the Study’s methodology and policy recommendations. However, it would appear that analyses published to date, such as the Inception Impact Assessment and the text of the 26 October 2020 consultation, have taken the Study’s findings at face value.

We thus propose a “Call for Reflection”. Rather than moving to action based on the Study, we recommend that the Commission carefully consider the substantial concerns raised through the consultation. Our recommendation for further reflection is not because we believe that the challenges facing society are not urgent. In contrast, it is due to their urgency that we must ensure that any solutions are guided by the very best evidence. Well-intentioned but ill-considered prescriptive corporate governance reform can make it harder, not easier, to address the pressing social challenges referred to in the first paragraph.

Specifically, we believe that the following points deserve further reflection[1]:

  1. Separation of Problems
  • The policy debate around sustainable governance initiated by the Commission has so far tended to conflate two separate issues: the horizon (short-term vs. long-term) and the objective (shareholder value vs. stakeholder value). Both deserve serious consideration, but they are also separate:
    • Short-term actions can be good for society. For example, the study assesses the energy sector as short-termist due to its high payouts. This is good for society as it leads to this sector downsizing and reallocates capital to other sectors.
    • Long-termist actions can be bad for society. For example, engaging in tax avoidance or lobbying requires short-term investment but benefits the company, although not society, in the long-term.
  • Separating out the problems is critical since each may require different solutions:
    • Solving one problem may not require addressing the second. For example, lengthening a company’s horizon need not require overturning shareholder primacy;
    • Solving one problem may exacerbate the second. For example, tying pay to stakeholder targets may lead to short-term behaviour to hit the targets;
    • A solution may be desirable even if it only addresses one of the problems. For example, taxing externalities or breaking-up monopolies ensures that shareholder value more closely aligns with stakeholder value. These measures may be desirable even though they do not affect a company’s horizon.


  1. The Horizon: Short-Term vs. Long-Term
  • The policy debate has also been framed by reference to “short-term shareholder value”. Yet, shareholder value is by definition a long-term concept – it is the present value of all future cash flows. This is true in practice, not just theory: many of the world’s most valuable companies derive their worth from their growth opportunities, not their current profits. A company can only create shareholder value if it invests for the long-term.
  • Many factors associated with shareholder value actually improve long-term stakeholder value, such as shareholder engagement, shareholder payouts (particularly from dying industries or from firms with heavy negative externalities), stock-based compensation, and stock liquidity. Overturning shareholder primacy is likely to shorten company horizons, not extend them.
  • In contrast, short-termism is often a result of insufficient focus on true shareholder value and an excessive focus on current profits or the current stock price, such as quarterly reporting and pay tied to short-term targets.


  1. The Objective: Shareholder Value vs. Stakeholder Value
  • The policy debate has typically assumed a “fixed pie”, that shareholder value is at the expense of stakeholder value and so the former must be reduced for the latter to be increased. However, improvements to stakeholder value typically increase (long-term) shareholder value. Actions to increase accountability for shareholder value, such as shareholder engagement and stock-based pay, typically improve outcomes for stakeholders as well as shareholders. Moreover, shareholder welfare includes more than just shareholder value; shareholders are concerned with externalities and take actions to address them.
  • The bigger danger for stakeholder value is not shareholder capitalism but “managerial capitalism”, where unaccountable managers shrink the pie for both shareholders and stakeholders. This may be through errors of commission (pursuing managerial self-interest through excessive acquisitions) or errors of omission (coasting and failing to innovate).
  • Due to market failures, some measures of stakeholder value may not improve shareholder value, even in the long-term. Regulation should be focused on addressing these market failures – prohibiting or taxing negative externalities, subsidising positive externalities, and addressing monopoly power – to align shareholder value more closely with stakeholder value, rather than reducing managers’ accountability to shareholders.

To conclude:

  • Good corporate governance is vital for firms to be run well – which is in turn vital for economies to be run well. However, improving corporate governance is extremely complex and prescriptive mandating of governance structures will likely do more harm than good.
  • Attempts to regulate sustainability may pressure companies to take actions to comply with the law even at the expense of long-term value, lead to an emphasis on sustainability factors that can be measured rather than those that matter, promulgate one-size-fits-all structures that are suboptimal for most firms’ unique circumstances, and reduce managers’ accountability to both shareholders and stakeholders.
  • Regulation should instead focus on correcting market failure, through taxing externalities, curbing monopoly power and improving information disclosure.


Signatories (*)

Renée Adams, University of Oxford

Rui Albuquerque, Boston College

John Armour, University of Oxford

Rob Bauer, Maastricht University

Theodor Baums, Goethe University Frankfurt

Alon Brav, Duke University

Iris H Chiu, University College London

Vicente Cunat, London School of Economics

Sudipto Dasgupta, Chinese University of Hong Kong

Paul Davies, University of Oxford

Diane Del Guercio, University of Oregon

Ingolf  Dittmann, Erasmus University Rotterdam

Espen Eckbo, Dartmouth College

Alex Edmans, London Business School

Andreas Engert, Freie Universität Berlin

Luca Enriques, University of Oxford

Isil Erel, Ohio State University

Vivian Fang, University of Minnesota

Nuno Fernandes, IESE Business School

Guido Ferrarini, Universita di Genova

Fabrizio Ferri, University of Miami

Vyacheslav Fos, Boston College

Julian Franks, London Business School

Paolo Fulghieri, University of North Carolina

Jesse Fried, Harvard Law School

Jennifer Hill, Monash University

Xavier Gabaix, Harvard University

Mariassunta Giannetti, Stockholm School of Economics

Ronald J. Gilson, Columbia Law School and Stanford Law School

Mireia Gine, IESE Business School

Marc Goergen, IE Business School

Jeffrey Gordon, Columbia Law School

Assaf Hamdani, Tel Aviv University

Jarrad  Harford, University of Washington

Christopher Hennessy, London Business School

Gerard Hertig, ETH

Clifford  Holderness, Boston College

Wei Jiang, Columbia University

Michael Klausner, Stanford Law School

Yrjo Koskinen, Calgary University

Philipp Krueger, University of Geneva

Kayja Langenbucher, Goethe University

Doron  Levit, University of Washington

Kai Li, University of British Columbia

Hao Liang, Singapore Management University

Amir Licht, Harry Radzyner Law School, Interdisciplinary Center Herzliya

Stefano Lombardo, Free University of Bozen-Bolzano

Michelle Lowry, Drexel University

Jonathan Macey, Yale Law School

Nadya Malenko, University of Michigan

Pedro Matos, University of Virginia

Ron Masulis, University of New South Wales

Ernst Maug, University of Mannheim

Daniel Metzger, Erasmus University Rotterdam

Curtis Milhaupt, Stanford Law School

Peter Muelbert, Johannes Gutenberg-Universität Mainz

Alexandra  Niessen-Ruenzi, University of Mannheim

Oyvind Norli, BI Norwegian Business School

Thomas  Noe, University of Oxford

Charlotte Ostergaard, BI Norwegian Business School

Alessio Pacces, University of Amsterdam

Marco Pagano, University of Naples

Anete Pajuste, Stockholm School of Economics

Alain Pietrancosta, Sorbonne Law School

Dan W. Puchniak, National University Singapore

Luc Renneboog, Tilburg University

Rafael Repullo, CEMFI

Wolf-Georg Ringe, University of Hamburg

Mark Roe, Harvard Law School

Maribel Saez, Universidad Autónoma de Madrid

Zacharias Sautner, Frankfurt School of Finance & Management

Henri Servaes, London Business School

Rolf  Skog, University of Gothenburg

Javier Suarez, CEMFI

Johan Sulaeman, National University of Singapore

Oren Sussman, University of Oxford

Karin Thorburn, Norwegian School of Economics

Steen Thomsen, Copenhagen Business School

Tobias Tröger, Goethe University

Christoph Van Der Elst, Tilburg University and Ghent University

Kristin Van Zwieten, University of Oxford

Marco Ventoruzzo, Bocconi University

Theo Vermaelen, INSEAD

Alexander Wagner, University of Zurich

Hannes Wagner, Bocconi University

Charles Wang, Harvard Business School

Fei Xie, University of Delaware

Xiaoyun Yu, Indiana University

Josef Zechner, Vienna University


(*) Prior to publication, this call has been circulated exclusively among the speakers of the ECGI 3-day seminar on the Study on Directors’ Duties and Sustainable Corporate Governance.


ECGI Research Members are welcome to co-sign this call; to do so, please write to


[1] For further discussion of these points, see, e.g., the responses to the Study by Alex Edmans and by Mark Roe, Holger Spamann, Jesse Fried and Charles Wang.

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