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    The European Commission’s Sustainable Corporate Governance Report: A Critique
    13 Nov 2020Working Paper Summaries

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

    by Mark Roe, Holger Spamann, Jesse Fried, and Charles Wang
    The European Commission commissioned a report on sustainable corporate governance that purports to find serious problems of corporate short-termism. The report is wholly flawed: it conflates time horizon problems with externality problems, mismeasures investment and its financing, and proposes ineffective, possibly harmful reforms.
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    Author Abstract

    The European Commission released the study it had sought from EY, “Study on directors’ duties and sustainable corporate governance” in July 2020 and sought comments on that Report. The Report sees significant and debilitating short-termism in EU corporate governance and recommends many changes to EU corporate governance. In our comment to the EU, we show its deep flaws. 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.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: August 2020
    • HBS Working Paper Number: HBS Working Paper 21-056
    • Faculty Unit(s): Accounting and Management
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    Charles C.Y. Wang
    Charles C.Y. Wang
    Glenn and Mary Jane Creamer Associate Professor of Business Administration
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