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

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

Mark Roe, Holger Spamann, Jesse Fried, Charles Wang

Series number :

Serial Number: 

Date posted :

November 17 2020

Last revised :

April 28 2021
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  • Corporate governance • 
  • short-termism • 
  • Hedge Funds • 
  • shareholder activism • 
  • European Union • 
  • securities regulation • 
  • agency costs • 
  • research and development • 
  • political economy • 
  • investment • 
  • payouts • 
  • Repurchases

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 shortterm 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.

Published in

Published in: 
Publication Title: 
Yale Journal on Regulation Bulleting