Commission publishes study on directors’ duties and sustainable corporate governance

Today, the Commission published the findings of its study on directors’ duties and sustainable corporate governance. The study shows that listed companies within the EU still tend to focus on short-term benefits of shareholders rather than on the long-term interests of companies. In its Communication on the European Green Deal as well as the recent Repair and prepare recovery plan, the Commission had highlighted that sustainability should be further embedded into the corporate governance framework. Didier Reynders, Commissioner for Justice, said: “I am committed to achieving a more sustainable corporate governance. By sustainable, we mean encouraging businesses to frame decisions in terms of environmental, social and human impact for the long-term, rather than focuses on short-term gains. This study, focusing on directors ‘duties, helps us see the root causes of ‘short-termism’ and identify possible EU-level solutions. We see support for mandatory rules, encompassing both director duties and a corporate due diligence duty. Therefore the Commission is launching work for an initiative on sustainable corporate governance. The aim is to enable companies to overcome short-term pressures, act in the best long-term interest of the company while being accountable for the sustainability of their companies’ business conduct.  This will be beneficial for the sustainability of the businesses as well as for reaching the UN Sustainable Development Goals and the goals of the Paris Agreement on climate.” The data assessed by the study indicates a clear upward trend in corporate payouts to shareholders compared to revenues, while the ratio of investment to revenues has been declining. Its main findings suggest that there is growing pressure from investors as well as a lack of a strategic perspective over sustainability risks, impacts, and opportunities. The study also finds that current board remuneration structures and board expertise pose challenges for sustainability. Furthermore, there is a lack of stakeholder input in the company’s decision-making and limited enforcement of the directors’ duties when it comes to acting in the long-term interests of the company. A public consultation on sustainable corporate governance will be launched in autumn 2020. The Inception Impact Assessment for the initiative laying out the Commission’s initial ideas on the reasons for and the aims of the initiative is open for feedback. Today’s study has been conducted under Action 10 of the Commission’s 2018 Action Plan on Financing Sustainable Growth, together with the Study on Due Diligence requirements through the supply chain. Full details can be read on the study.