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EC Corporate Governance Initiative Series: ‘A Response From the Copenhagen Business School’


Time to read

10 Minutes


Claus Richter
Senior Advisor, Centre for Corporate Governance, Copenhagen Business School
Steen Thomsen
Novo Nordisk Foundation Professor of Enterprise Foundations at the Center for Corporate Governance, Copenhagen Business School
Lars Ohnemus
Director of the Center for Corporate Governance, Copenhagen Business School

Thank you for the opportunity to comment on the Study on directorsʼ duties and sustainable corporate governance report prepared by EY and published and submitted by the European Commission for consultation.

We work at the Center for Corporate Governance (CCG) at Copenhagen Business School, which is one of the largest of its kind in the European Union.  Our main research areas are stewardship (responsible, long-term ownership), board work, and compliance. We find that the EY ‘Study on directors’ duties and sustainable corporate governanceʼ, published on 29 July 2020 has serious and systematic flaws in all three areas.


We are very concerned about the overall content of the EY report and in particular, the ultimate consequences for European business that would result from the suggested interventions.

It is our assessment that the EY study has been strongly biased towards creating certain predetermined results without using a neutral, systematic and comprehensive methodology, which must be a strict minimum given the importance of this topic. In our view, the report cannot be regarded  as an impartial and fair analysis. It does not meet basic standards for research integrity and is therefore unsuitable as a basis for regulation at EU level.

The report paints a misleading picture of businesses in the EU as short-sighted, unsustainable, and greedy without regard for society or the environment. This is plainly wrong. On the contrary, European companies have taken a strong and proactive stance on sustainability, which has often been ahead of the public sector and the political system.

We recognize the need for companies to work strategically on sustainability and community issues. However, companies do not make law, policies, or environmental regulation. They work within a framework given by public policy and react to its guidelines and incentives. To put it bluntly, the EU should not blame companies for its own failure to act. The starting point for European sustainability must be that the political system takes responsibility for resolving challenges like climate change, and violations of human rights. European companies are already moving on these issues; the Commission should try to support them on their journey rather than creating unnecessary complications and obstacles for them.


The EY study suffers from serious methodological problems, which render the entire investigation untrustworthy.

Firstly, the report builds on the unsubstantiated assumption that management decisions suffer from short-termism. The whole report is biased by this basic assumption. On the contrary, in comparison with the US, the UK and much of the rest of the world, European businesses are characterized by less short-term financial ownership and more concentrated, long-term ownership by family businesses, cooperatives, mutuals, foundations, and government-owned enterprises. Short-termism is simply less of a problem in the EU. Moreover, the demonization of short-term financial investors is misplaced and not supported by scientific research. Both short-term agility—by financial investors—and long-term responsibility by concentrated shareholders are necessary for efficient business and green transformation. For example, short-term investors contribute to green transformation by exiting unsustainable and irresponsible businesses or, for that matter, by shortening their shares.

Secondly, the report is based on a review of only 16 out of 27 European countries and around 4,700 companies, and one third of the companies come from the UK. As we all know, the UK has left the European Union. The fact that the UK is not a part of the EU makes the whole study unsuitable because the report is intended solely to form the basis for reforms in all countries of the EU other than the UK. Moreover, it is an aggravating circumstance that the report has not addressed the major differences in the corporate regulation of British companies compared to the corporate regulation in the other EU countries that are examined in the report.

The industry analysis is basically focused on so-called sunset industries without paying attention to the many European companies that have digital and sustainable business models.

The empirical part of the report is also based on a European web survey with only 62 useful answers. Yes, this is true: only 62 observations out of several hundred thousand European companies. The report does not provide any background information about respondents, eg nationality or professional background. In addition, the report bases its claims on 10 case studies and 48 selected interviews, without a summary or background data on these qualitative data. This is invalid research.

Furthermore, given the importance of this matter, it is essential to make a comparative analysis of the global situation and context; ultimately, EU firms would have to compete against the US, China, and other leading Asian nations. A study of this nature cannot be inward-looking, but must be seen in a dynamic global context

EY has supplemented its empirical study with a review of existing literature in this area. Unfortunately, the choice of literature and sources is highly biased towards the misrepresentation of the basic premise that European businesses are irresponsible and unsustainable. This prejudice permeates the whole report.

The very far-reaching policy proposals that the report recommends must be based on solid empirical evidence provided through in-depth scientific research based on generally accepted research methods, and on an in-depth analysis of their possible impact on the existing legal systems in EU member states. The data and documents referred to by EY do not meet any of these requirements. The report is unsuitable as a guide for regulation at EU level. 


In addition to the methodological problems, the report lacks information when it comes to the use of research-based data and analysis. We have chosen to highlight only the most important problems from a research point of view in the following sections.

Corporate structure

If the European Commission wishes to make decisions to change corporate governance rules, this requires reliable and up-to-date information on corporate ownership structures, particularly in EU countries, but also in the rest of the world. The report completely ignores the fact that ownership structures are very different across Europe and that ownership has a significant impact on the performance of a company.

Continental Europe, unlike the UK, is characterized by more concentrated ownership structures, in many cases with one or a few strong, sometimes controlling owners dominating listed companies. Such shareholders are typically long-term owners with investment horizons that span decades ahead, and for some types of company, namely the enterprise foundation-owned companies , the time horizon is, in principle, infinite. Moreover, many institutional investors, especially those who manage pension capital and other assets with a long-term return expectation, can also have investment horizons almost in line with many companies with dominant owners.

Other research analyses of 5,232 companies in 13 different European countries show that typically, companies are widely owned (36.93%) or family-owned (44.29%). Dispersed ownership is more widespread in the UK and Ireland, and family-controlled businesses are more widespread in continental Europe. Financial and large companies are more likely to be widely owned, while non-financial and small businesses are more likely to be family-owned. 

The EY report is incomplete because it has a geographical preponderance of the UK and in the definition of company structure is too narrow, thus disregarding the importance of the different ownership types.


The basis of the report's analysis and recommendations is the assumption that European listed companies are characterized by short-termism and at the same time indifferent to society's interest. 

The report selects two indicators used to measure the concept of short-termism. (1) Distributions to shareholders (dividends plus repurchases), and (2) capital expenditures (on physical assets), both in relation to gross and net income. Theoretically, neither of the two indicators can be used as a universal measure of short-term behaviour. But the report claims that the higher the ratio between dividends and share repurchases on the one hand and net income on the other, the greater the company's short-term behaviour, because it is an indicator that dividends are not reinvested in the company, implied in sustainable and long-term investments. We are aware that short-termism can be a problem , but the problem is exaggerated by the analysis.

US studies on S&P 500 companies show that net shareholder payments from all companies from 2007 to 2016 accounted for only 41% of net income, both for direct and indirect share issues. And during this decade, investment increased significantly, while cash flow also grew. In short, S&P 500 shareholder payout figures may not provide much basis for the notion that short-termism has deprived companies of the capital needed to invest in sustainability. 

In fact, recent studies on dividends and share repurchases in the EU-15 show that in the EU, as in the US, the proportion of companies paying dividends is falling, while total  dividends are increasing. The research also demonstrates that higher frequency financial reporting rates are associated with higher dividend payouts. 

In general economic theory, the prospects for competitive returns are crucial to the ability of companies to attract risk capital. The well-documented mechanism, often referred to as sunset and sunrise industries, is the cornerstone of economic policy in most countries of the EU. The mechanism specifically requires capital to be reallocated from companies that do not have profitable investment alternatives to companies with profitable projects. From a European point of view, it is good that this dynamic works so that investments are not maintained in analogue industries, for example, but are instead passed on and invested in digital industries.

Without knowing the companies of the future, we know that knowledge-intensive service industries are less capital intensive than traditional industrial companies and have larger intangible assets. This development alone will change the cost of capitalism without a link between long-termism and short-termism.

The report builds on the assumption that dividends ‘disappearʼ in private consumption. That is, of course, wrong. Institutional owners such as pension funds, enterprise foundations and similar institutions already own the main part of the shares. The situation is similar in many EU member states. In Denmark alone, enterprise foundations control about 43% of the stock exchange.

Dividends received are essentially distributed across new investments listed companies, other areas of business eg entrepreneurs or transferred to cutting-edge research.

A long-term perspective is also built into shareholder interest. A shareholder expects a good return on the capital invested, assuming a solid balance sheet in the company and taking risks into account. In recent years, sustainability elements aimed at ensuring the company’s long-term ‘licence to operateʼ in the community have also been included as a factor in the shareholders’ interest.

All in all, the interest of most modern listed shareholders—institutional, private, industrial, or public—is neither to prioritize short-term profit production nor to maximize it at all costs, but to achieve the best available return on invested capital in accordance with the behaviour of the society in which the company operates, and which ensures its long-term survival and prosperity.


We share the Commission's attitude about ensuring that European companies work strategically with the ESG. Both the UN Agenda 2030 and Directive No. 2014/95 / EU have promoted a marked improvement in sustainability information, especially for larger companies. We also share the view that short-termism can result in organizational inaction on climate change.

The report further claims that there is no link between dividends, the composition of the Board of Directors and their mandate on the one hand, and the sustainability objectives on the other. Before applying far-reaching action to European companies, the European Commission should carefully examine the latest research in this field. First, it demonstrates that companies prefer environmental and social priorities over corporate governance objectives.  Secondly, companies tend to implement a business-tailored ESG approach to achieve organizational efficiency and competitiveness. Thirdly companies have been mainly mature, strategically, and long-term oriented to ESG. 

We recommend that the Commission draw inspiration from the Nordic model of corporate governance, which has performed well in recent decades, in terms of both economic growth and sustainable development. In the Nordic countries, we have legal systems, high governance ratings and low levels of corruption. Other characteristics include concentrated ownership, foundation ownership, semi two-tier board structures, and employee representation. As a side note, in our experience, employee representatives do not express concern about short-termism. 

Just as the Commission should look at the Nordic model of corporate governance, so should the family-owned companies in the EU, which also show great responsibility concerning sustainability and climate.

There is evidence that companies in countries with high-performing stock markets (all other things being equal) have a lower carbon footprint than countries with less developed stock markets. One reason is that better access to risk capital leads to more research and development, and a greater number of environmental patents, and leaves room for greater risk-taking in forward-looking industries with less impact on the climate.

In the light of the chosen methodology and the lack of research evidence, we encourage the EU Commission to withdraw its current initiatives on these issues and return to the research institutions to obtain a more comprehensive, thorough and evidence-based approach to addressing the current issues.


The report concludes by outlining a number of policy recommendations that should be implemented on the basis of the study. Some of these are very far-reaching and, if implemented, will fundamentally change the general rules on corporate governance for the worse, which will obstruct innovation and entrepreneurship in most countries within the European Union.

The most far-reaching and at the same time most harmful of these policy proposals is the proposed change in the concept of the company interest. Traditionally, the company interest has been perceived as derived from the interests of the owners. The company interest is managed with due regard to the legitimate interests of a number of other parties interested in or affected by company activities, such as customers, employees and other ‘stakeholdersʼ, with whom the entity must have mutually beneficial relationships for a license to operate.

The report states that the company has only its own interests, which are separated from all other interests. This is very problematic. First, it rests on the perception of the company as a self-driving autonomous entity, operated without regard to founders, shareholders, or other stakeholders. A change in stakeholder governance will undermine the existing decision-making structure of the companies from the general meeting via the board of directors to the executive board where the owners have the ultimate decision-making right. This would be a step backwards from four decades of achievements of modern corporate governance, the main purpose of which has been to ensure accountability of companies to owners, boards, stakeholders and regulators. 

The proposal will also change the rules on liability to include a wider range of stakeholder groups. But accountability to multiple stakeholders effectively means accountability to no one. It is good that the report points out that the directors have a duty to act in the long-term interest of the companies in which they serve, but it is unclear where the responsibility lies when the companies has many stakeholders. Equal consideration of the interests of all stakeholders should not be the ultimate objective for businesses, particularly considering that the interests of stakeholders are often contradictory.

Claus Richter is a Senior Advisor at the Centre for Corporate Governance at Copenhagen Business School.

Steen Thomsen is a Novo Nordisk Foundation Professor of Enterprise Foundations at the Center for Corporate Governance at Copenhagen Business School.

Lars Ohnemus is Director of the Center for Corporate Governance at Copenhagen Business School.


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