Nudging for Corporate Long‐Termism and Sustainability? Regulatory Instruments from a Comparative and Functional Perspective

Due to climate changes, population growth and environmental degradation, the quest for sustainability ranks high on the political agenda. As a consequence, the question whether company law should be used to promote long-termism and sustainability is currently much discussed and also likely to remain a subject of future debates. In our recently published paper we take a somewhat different angle. While we assume that legislators decide to take advantage of company law as a means to promote long-termism and sustainability, we focus on the subsequent question, namely how company law can contribute to achieve these (pre-defined) aims. We therefore examine how different jurisdictions have introduced various forms of regulation to this end.

The focus is on developments in the EU, although experiences from other jurisdictions are also taken into account. Moreover, we examine different corporate forms in order to ensure that company law solutions adopted with respect to some specific types of companies, namely social enterprises, are also considered as a possible template for regulation. Our examination of existing company law regulations is subdivided into three parts, each focusing on different corporate actors who may be incentivized to enhance the respective company’s focus on long-termism and sustainability, namely its management, shareholders and other stakeholders.

Our analysis reveals that there is already a wide variety of different regulatory interventions in place that aim at promoting either long-termism, sustainability, or both. They range from soft law and nudging at one end, to hard law regulation at the other end. Nudges are primarily applied in general company law and corporate governance instruments whereas respective hard law approaches are largely limited to social enterprises. However, a number of generally applicable regulations may be considered to be in the grey zone between soft law and hard law, for instance in the form of disclosure requirements. The number of such disclosure requirements aiming (also) at promoting long-termism and sustainability has been growing considerably over the last couple of years – in the EU, for example, by the adoption of the Directive on Disclosure of Non-financial Information and the more recent adoption of the Revised Shareholder Rights Directive.

Based on these findings, we analyze how a coherent and effective regulatory strategy can be developed, taking into account the experiences gained in different jurisdictions. We conclude that due to the natural reluctance of regulators to offer a precise definition of what constitutes long-termism and sustainability, regulation in the form of nudging seems most appropriate for a wider group of companies. A regulatory strategy that encourages companies to define how best to achieve a long-term and sustainable focus, allows them to implement the solution that best suits their specific business case. The difficulties of precisely defining these regulatory aims also favors procedural regulation over material regulation. On the other hand, for companies that have opted into special regimes for social enterprises, and therefore have more precisely defined their targets in terms of how to achieve long-termism and sustainability, hard law regulations are more advisable in order to ensure that management and shareholders stay committed to these targets. As a consequence, the regulatory solutions for social enterprises and for conventional companies must necessarily differ. Such variety of different regulations also promises to have several benefits in itself since it allows for regulatory diversity and provides companies with more freedom of choice. It seems important, however, to effectively and precisely tailor the scope of such different, coexisting, regulatory solutions.

Finally, the paper discusses how best to introduce incentives to the three different groups mentioned above. We conclude that incentives for both management and shareholders are essential, whereas incentivizing only one of these target groups is unlikely to work. There are many experiences of incentivizing management, while incentives for shareholders are only slowly developing within some few jurisdictions. In the EU, however, the recently Revised Shareholder Rights Directive is about to implement such an approach. Incentivizing other stakeholders may, at first glance, seem less important. However, since the aim is to ensure that all relevant interests are taken into account, such aim can only be enhanced if other stakeholders are involved in a company’s decision-making. While most attempts to include other stakeholders concentrate on employees, there seems to be a case for experimenting with methods to ensure the involvement of a broader group of stakeholders.

Florian Möslein is Professor of Law at the Philipps-University Marburg.

Karsten Engsig Sørensen is Professor of Law at Aarhus University.