European corporate governance reform is at a crossroads. For the past 15 years, the European Union (EU) has, with some success, been pursuing a policy of strengthening company boards, increasing information flows, and encouraging institutional investor oversight. However, following the completion of the revised Shareholder Rights Directive (SRD II), which is characterised by a series of arguably “disparate” initiatives,¹ the future governance agenda in Europe lacks clarity.

In this report, CFA Institute aims to help define a practical future vision for European corporate governance. Our findings are developed on the basis of interviews with leading European institutions and three half-day workshops with 30 investors and governance professionals who have responsibility for governance oversight. These professionals were drawn from Europe’s leading institutional investment firms, with geographic representation from a range of European countries.

The workshops identified that investors believe there is still much that could be done in Europe to simplify mechanisms to enhance corporate accountability and realise maximum value from reforms that have already been undertaken. The findings note that investors are open to many stakeholder issues, such as promoting board diversity, environmental reporting, or good corporate citizenship more generally. Importantly, however, the findings also highlight investors’ concerns that there is still inadequate protection against abuse by controlling shareholders as well as a continued opportunity to further enhance board accountability to minority shareholders.

Workshop participants felt that governance systems need to be flexible and that the flexibility might best be achieved by comply-or-explain mechanisms along with some limited hard laws to ensure accountability. They also noted that currently, the investment industry falls short in carrying out its full stewardship responsibilities and that those in the industry as well as other participants in the governance ecosystem need to be reminded and encouraged to carry out their proper roles and responsibilities.

For the future, the report findings suggest that pressures influencing governance policies will reflect differing views of capital markets and corporate purpose. Champions of a shareholder-focussed governance system may be at odds with advocates of a stakeholder-focussed system, or an “open market” system, in which governance requirements may be laissez faire and more subject to market forces than standard setters. These competing propositions with a shareholder primacy model will not go away and will continue to exert an influence on the policy process. A distinctive feature of this report is the examination of policy options through these different lenses.

Investors will need to understand these differing perspectives and how to adapt to them. While promoting their own rights and responsibilities, shareholders must recognise stakeholder needs as well as the broader economic need for capital markets to stimulate sustainable economic growth and development.

However, there is a considerable opportunity to aspire to a “sweet spot” in which shareholder, stakeholder, and open market perspectives can be reconciled—as a type of trialectic synthesis. Our discussions identified a number of opportunities for progress and at least a general aspiration that the shareholder, stakeholder, and open market perspectives can fit together in relative harmony. Many stakeholder interests can be accommodated without diluting investors’ rights or interests. Indeed, stakeholder considerations can strengthen long-term value creation. This approach suggests a common understanding of roles and responsibilities can be found, which can have lasting positive effects for both shareholders and stakeholders.

This vision is one that European policymakers and investors alike should seek to explore in their future policy agenda. With a renewal of the investor vision for European corporate governance and with proper attention to the governance “ecosystem,” there is a considerable prize to be won in the growth, productivity, social, and environmental responsibility of European public companies. But it is unclear whether we are currently on a course to realise these benefits.

We conclude this report with action memoranda directed to the different policymakers and market participants involved in framing and implementing good governance. Better corporate governance, similar to better political governance, cannot be achieved by regulation alone. It also depends on an understanding among participants of their appropriate roles, rights, and responsibilities. Properly framed, we believe that there is considerable room for the development of better governance in the EU.

The action memoranda speak for themselves, but the following provides a summary.