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Update on EU directors' duties

The EU picks up on the shareholder primacy v stakeholder capitalism debate

A recent study published by the European Commission investigates the causes of ‘short termism’ in corporate governance and its detrimental effects on long-term economic, environmental and social sustainability. The prevalence of short termism is evidenced by data that identifies a fourfold increase in shareholder pay-outs (between 1992 and 2018) and a declining ratio of investment to revenues. The study delineates the relationship between these short-term focused activities and the resulting negative long-term impacts. The study proposes three broad tiers of possible EU action options.

The study aligns with the Commission’s push for sustainability to become integrated into the corporate governance framework. The possible EU actions are proposed with a view of attaining United Nations Sustainable Development Goals (UN SDGs) and the goals of the Paris Agreement on climate change. The proposals also come as a result of entrenched shareholder primacy (which has been identified as one of the main barriers to sustainability) and the ongoing debate around the meaning and scope of directors’ duties. The study makes clear that the risk of inaction is a threat to the survival of business and a negative impact on a wide range of stakeholders.