Evidence of Shareholder-Driven Short-Termism Weak, Says EFAMA

EC consultation on sustainable corporate governance directive finds support for broader c-suite responsibilities and objectives

Shareholders are not only interested in short-term financial returns, said Tanguy van de Werve, director general of the European Fund and Asset Management Association (EFAMA), in response to the European Commission’s consultation on a proposed directive to encourage long-term value creation.

“Investors value businesses that keep stakeholders’ interests in mind and adopt a long-term perspective with regards to sustainability and risk,” he added.

“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.”

EFAMA, the trade association of the European investment management industry, nevertheless welcomed the Commission’s initiative.

The Commission closed yesterday its consultation regarding ways to increase sustainability in the corporate governance of companies.

The initiative seeks to better align the long-term interests of management, shareholders, stakeholders and society. It aims to incentivise corporate governance boards to integrate stakeholder interests and sustainability risks among others.

Pressure on companies to deliver short-term returns has led to under-investment, stopping firms from investing in sustainable growth, reports have found in the past.

”While it is possible to identify a steep upward trend in short-termism in the nineties, over the last two decades the indicators that proxy short-termism seem to have stabilised around high levels of pay-outs and low investment intensity,” a 2020 report prepared by accounting firm EY for the European Commission, DG Justice and Consumers, wrote.

The report found an upward trend in shareholder pay-outs, increasing from less than 1% of revenues in 1992 to almost 4% in 2018. Meanwhile, the ratio of capex and R&D investment to revenues has been declining since the beginning of the 21st century, it said.

It identified regulatory frameworks and market practices as root causes of short termism, flagging in particular narrow interpretations of directors’ duties and increasing demand from investors for short-term returns.

Non-profit organisation CDP commented in its feedback on the consultation that short-termism would have negative consequences beyond corporations and their investors.

“Encouraging through regulation long-term environmental risks into decision making to give forward looking analysis will be critical for our financial system at the time of supporting well below 2-degree or 1.5-degree pathways. Therefore, bringing environmental risks into focus allows investors to better price and manage them and enables companies to make long-term investments without fearing share price dips,” it said.

Purpose-driven law firm Frank Bold suggested in its feedback that executive remuneration should be linked to the achievement of sustainability targets.

The Principles for Responsible Investment also focused on leadership responsibilities in its response. “We recommend the Commission to provide clarity and consistency on director duties across the EU; undertake a rigorous legal and impact analysis to support any EU legislation on director duties; establish a legal duty for companies to undertake environmental and human rights due diligence; and all the while ensure consistency across proposed reforms within DG JUST and other EU directorates,” it said.

A legislative proposal is expected to be published by the Commission in Q2 2021.

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