Investor Associations Respond Cautiously to European Commissions’ Sustainable Corporate Governance Consultation
Investor and sustainable finance associations, including the European Fund and Asset Management Association (EFAMA) and pan-European sustainable and responsible investment organization Eurosif, have published responses to the European Commission’s consultation on sustainable corporate governance.
The commission launched the consultation in October 2020, running until earlier this week, seeking stakeholder input with regard to possible initiatives on sustainable corporate governance, covering topics including the need and objectives for EU intervention as well as different policy options, assessing the costs and benefits of the policy options, and to gather knowledge about certain specific issues, in particular as regards national frameworks, enforcement mechanisms and current jurisprudence.
The investor associations were generally supportive in their responses to the EC’s goals of further embedding sustainability into the corporate governance framework, encouraging businesses to consider environmental, social, human and economic impacts in their business decisions, and to focus on long-term sustainable value creation. However, the organizations raised concerns regarding issues including the use of legislation to clarify certain areas of directors’ duties, and the perceived conflicts between the interests of shareholders and other stakeholders.
Some of the main concerns were raised in relation to the EC’s questions regarding directors’ duty of care. The consultation asked:
“Do you believe that corporate directors should balance the interests of all stakeholders, instead of focusing on the short-term financial interests of shareholders, and that this should be clarified in legislation as part of directors’ duty of care?”
EFAMA in particular noted that the consultation assumed a fundamental conflict between the interests of shareholders and of other stakeholders, and inaccurately depicted shareholders as exclusively interested in short-term financial returns.
Tanguy van de Werve, Director General of EFAMA, said:
“Investors value businesses that keep stakeholders’ interests in mind and adopt a long-term perspective with regards to sustainability and risk. Through a wide range of engagement activities, the asset management industry plays an increasingly important role in positively impacting investee companies on issues such as sustainability, governance, due diligence, executive remuneration and the overall business strategy. We firmly reject the assumption that shareholders are exclusively interested in short-term financial returns as it does not match the reality. We ask that more tools be given to asset managers to further strengthen their stewardship role.”
While Eurosif stated that that it is necessary to clarify that the duty of care of directors involves balancing the interests of different stakeholders, it warned that EU-level legislation defining these duties may not be the most effective approach. In its response, Eurosif suggested:
“A more effective approach… may be to ensure that board of directors/supervisory boards are setting the right incentives in remuneration packages, to ensure particularly that variable remuneration of directors is aligned with the right sustainability objectives and the right time-horizons.”
Another area of focus in the EC consultation was the issue of share buybacks. In the consultation, the commission argued that pay-out to shareholders in the form of buybacks and dividends “arguably reduces the company’s resources to make longer-term investments including into new technologies, resilience, sustainable business models and supply chains,” and asked for feedback on the EU taking action on the issue. While both organizations supported further research into the role of payouts, they also noted that buybacks have an appropriate and useful role in corporate finance considerations. EFAMA strongly disagreed that the EU should take action, citing academic research that indicated that, contrary to the EC’s suggestion, corporate payouts typically leave ample cash for investment. EFAMA stated that buybacks “contribute to value creation by concentrating the firm’s ownership, re-orientating directors’ interests towards the long-term resilience and sustainability of the company,” while “dividends are a core component of a company’s overall approach to capital management.”
Giorgio Botta, Regulatory Policy Advisor at EFAMA, said:
“Investors would benefit from an EU legal framework that provides guidelines and increases transparency for companies, provided it remains consistent with the revised NFDR and avoids duplication with the requirements for financial institutions, such as those under the Sustainable Finance Disclosure Regulation. But it is also critical that this framework does not put EU companies at a competitive disadvantage. We, therefore, advocate for such a framework to be developed and promoted in coordination with other initiatives at an international level.”