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Papadopoulos, Thomas
2020.
YSEC Yearbook of Socio-Economic Constitutions 2020.
Vol. 2020,
Issue. ,
p.
677.
Article contents
The Mythical Value of Voice and Stewardship in the EU Directive on Long-term Shareholder Engagement: Rights Do Not an Engaged Shareholder Make
Published online by Cambridge University Press: 25 October 2018
Abstract
Through the lens of assessing the likely regulatory impact of the 2017 EU Directive on Long-term Shareholder Engagement and its amendments to the 2007 Directive on Shareholder Rights, this article considers the mythical voice and stewardship role attributed by the EU to shareholders as active corporate governance gatekeepers and drivers of its long-term sustainability agenda. It identifies limitations of the Directive itself and practical challenges concerning the provisions on shareholder identification, executive pay, related party transactions, proxy advisors and shareholder engagement policies. It is argued that there is a considerable normative gap between the EU narrative of engagement and the challenge of engaging shareholders away from self-interest and rational apathy to fulfil a stewardship role.
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Footnotes
*
Associate Professor, School of Law, Trinity College Dublin.
References
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2 Directive (EU) No 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement: [2017] OJ L132/1 (‘the Directive on Long-term Shareholder Engagement’ or ‘the Directive’).
3 Directive (EC) No 2007/36 of the European Parliament and of the Council of 11 July 2007 on the exercise of certain rights of shareholders in listed companies: [2007] OJ L184/17 (‘the Shareholder Rights Directive’).
4 Ahern, D, ‘Turning Up the Heat? EU Sustainability Goals and the Role of Reporting under the Non-Financial Reporting Directive’ (2016) 13(4) European Company and Financial Law Review 599, pp 603–607 CrossRefGoogle Scholar .
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8 Ibid, Art 9.
9 COM (2014) 213 final, Proposal for a Directive of the European Parliament and of The Council Amending Directive 2007/36/EC as Regards the Encouragement of Long-Term Shareholder Engagement and Directive 2013/34/EU as Regards Certain Elements of the Corporate Governance Statement (‘the Proposal’).
10 For the purposes of this article, references to sustainability are to be understood to refer economic sustainability rather than focusing on broader aspects such as those related to environmental and social factors.
11 COM (2012) 740 final, Action Plan: European Company Law and Corporate Governance: A Modern Legal Framework for More Engaged Shareholders and Sustainable Companies.
12 See note 2 above, Rec 14.
13 See note 11 above. Previous EU consultations covering relevant themes canvassed again in the 2017 Directive included COM (2010) 284 final, Corporate Governance in Financial Institutions and Remuneration Policies, Green Paper, and COM (2011) 164 final, The EU Corporate Governance Framework, Green Paper.
14 Financial Reporting Council, The UK Stewardship Code (2012).
15 See note 2 above, Rec 14.
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17 Although there is certainly a groundswell of opinion acknowledging the pitfalls of a purely short-term approach, not every commentator considers short-termism to be the problem that it is made out to be. See, for example, Roe, M, ‘Corporate Short-Termism - In the Boardroom and in the Courtroom’ (2013) 68(4) Business Lawyer 977 Google Scholar ; Anderson, R, ‘The Long and Short of Corporate Governance’ (2015) 23(1) George Mason Law Review 19 Google Scholar .
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19 COM/2013/0150 final, Long-Term Financing of the European Economy, Green Paper.
20 Regulation (EU) 2015/760 of the European Parliament and of the Council of 29 April 2015 on European long-term investment funds: [2015] OJ L123/98.
21 See note 4 above, pp 603–06.
22 See note 5 above, p 15; European Parliament resolution of 6 February 2013 on corporate social responsibility: accountable, transparent and responsible business behaviour and sustainable growth 2012/2098(INI); European Parliament resolution of 6 February 2013 on Corporate Social Responsibility: promoting society’s interests and a route to sustainable and inclusive recovery 2012/2097(INI).
23 Report of the Reflection Group on the Future of EU Company Law, Brussels, 5 April 2011, p 37.
24 See note 23 above, p 38.
25 For a UK post-financial crisis policy perspective on this see J Kay, The Kay Review of UK Equity Markets and Long-Term Decision Making: Final Report (2012).
26 See note 2 above, Rec 15.
27 Ibid, Rec 2.
28 See note 9 above, p 1.
29 Ibid, p 2, Results of Consultations with Interested Parties and Impact Assessment.
30 E Micheler, ‘Custody Chains and Remoteness Disconnecting Investors from Issuers’ (Systemic Risk Centre, 2014) Discussion Paper No 14, available at http://eprints.lse.ac.uk/59293/1/__lse.ac.uk_storage_LIBRARY_Secondary_libfile_shared_repository_Content_System%20Risk%20Center_Discussion%20Papers_dp-14.pdf.
31 Art 3c(2) inserted into the Shareholder Rights Directive.
32 See further Zetzsche, D, ‘Shareholder Passivity, Cross-Border Voting and the Shareholder Rights Directive’ (2008) 8(2) Journal of Corporate Law Studies 289, pp 327–328 CrossRefGoogle Scholar .
33 Art 3d(3) inserted into the Shareholder Rights Directive.
34 There is some flexibility for Member States in implementing this in that they may choose to allocate the information collection and dissemination role to a central securities depository, intermediary or services provider.
35 Art 3a inserted into the Shareholder Rights Directive.
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39 The amended Shareholder Rights Directive enables the Commission to adopt rules to specify minimum requirements in relation to shareholder identification (Art 3a(8)), transmission of information (Art 3b(6)), and facilitating the exercise of shareholder rights (Art 3c(3)).
40 Art 14b inserted into the Shareholder Rights Directive.
41 See note 38 above.
42 P Böckli et al, ‘Shareholder Engagement and Identification’ (23 February 2015), available at SSRN: https://ssrn.com/abstract=2568741 or http://dx.doi.org/10.2139/ssrn.2568741.
43 Arts 3b and 3c inserted into the Shareholder Rights Directive.
44 Commission Recommendation (EC) No 2004/913 fostering an appropriate regime for the remuneration of directors of listed companies: [2005] OJ L385/55; Commission Recommendation (EC) No 2005/162 on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board: [2005] OJ L52/51; Commission Recommendation (EC) No 2009/385 complementing Recommendations 2004/913/EC and 2005/162/EC as regards the regime for the remuneration of directors of listed companies: [2009] OJ L120/28.
45 See note 9 above, 4.3 Insufficient link between pay and performance of directors.
46 Art 9a(6) inserted into the Shareholder Rights Directive.
47 Directive (EU) 2013/36 of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms: [2013] OJ L176/338, Art 94(1)(g).
48 Although required at Proposal stage this requirement had fallen by the wayside by the time of the Directive’s adoption.
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50 Art 9a(5) inserted into the Shareholder Rights Directive.
51 Art 9b(4) inserted into the Shareholder Rights Directive.
52 M Schwartz-Ziv and R Wermers, ‘Do Institutional Investors Monitor Their Large vs. Small Investments Differently? Evidence from the Say-On-Pay Vote’ (29 Jan 2018), available at ECGI: http://ecgi.global/working-paper/do-institutional-investors-monitor-their-large-vs-small-investments-differently.
53 Department for Business, Energy and Industrial Strategy, Corporate Governance Reform (2017), p 18.
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58 Division 9 of Part 2G.2 of the Corporations Act 2001 inserted by the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011.
59 European Company Law Experts, ‘A Proposal for Reforming Group Law in the European Union –Comparative Observations on the Way Forward (2016), available at https://europeancompanylawexperts.wordpress.com.
60 International Accounting Standard 24.
61 A Tarde, ‘Related Party Transactions in the Revised Shareholder Rights Directive’ (Oxford Business Law Blog, 8 February 2017), available at https://www.law.ox.ac.uk/business-law-blog/blog/2017/02/related-party-transactions-revised-shareholder-rights-directive.
62 See note 9 above, p 24, Art 9c(2).
63 Ibid, p 24, Art 9c(1).
64 For quantitative measures an anti-avoidance aggregation rule will apply in determining whether specified quantitative thresholds have been met. Thus the value of all transactions with the same related party within a financial year should be aggregated: Art 9c(8) inserted into the Shareholder Rights Directive.
65 OECD, Related Party Transactions and Minority Shareholder Rights (2012), available at http://www.oecd.org/daf/ca/50089215.pdf, p 9.
66 Art 9c(5) inserted into the Shareholder Rights Directive.
67 Art 9c(4) inserted into the Shareholder Rights Directive.
68 Art 9c(2) inserted into the Shareholder Rights Directive.
69 Art 9c(3) inserted into the Shareholder Rights Directive.
70 Art 9c(4) inserted into the Shareholder Rights Directive.
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72 See note 2 above, Rec 15. See also Report of the Reflection Group on the Future of EU Company Law, Brussels, 5 April 2011, p 49.
73 A Corporate Governance Framework for European Companies - European Parliament resolution of 29 March 2012 on a corporate governance framework for European companies (2011/2181(INI)), para 34.
74 On the concept of stewardship see Reisberg, A, ‘The Notion of Stewardship from a Company Law Perspective’ (2011) 18(2) Journal of Financial Crime 126 CrossRefGoogle Scholar ; Roach, L, ‘The UK Stewardship Code’ (2011) 11(2) Journal of Corporate Law Studies 463 CrossRefGoogle Scholar ; Chiu, I H-Y, ‘Reviving ‘Shareholder Stewardship’: Critically Examining the Impact of Corporate Transparency Reforms in the UK’ (2014) 38(3) Delaware Journal of Corporate Law 983 Google Scholar ; Winner, M, ‘Active Shareholders and European Takeover Regulation’ (2014) 11(3) European Company and Financial Law Review 364 CrossRefGoogle Scholar ; Sergakis, K, ‘EU Corporate Governance: The Ongoing Challenges of the Institutional Investor Activism Conundrum’ (2014) 16(4) European Journal of Law Reform 728 Google Scholar .
75 See note 2 above, Rec 19.
76 Art 3h(2)(c) inserted into the Shareholder Rights Directive.
77 See eg Bainbridge, SM, ‘Director Primacy and Shareholder Disempowerment’ (2006) 119(6) Harvard Law Review 1735 Google Scholar .
78 See eg Bebchuk, LA, ‘The Myth that Insulating Boards Serves Long-Term Value’ (2013) 113(6) Columbia Law Review 1637 Google Scholar .
79 Mallow, MJ and Sethi, J, ‘Engagement: The Missing Approach in the Bebchuck-Strine Debate’ (2016) 12(2) New York University Journal of Law and Business 385 Google Scholar .
80 Ibid.
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82 For some discussion on defining engagement see note 79 above, pp 390–91.
83 J Winter, ‘Shareholder Engagement and Stewardship: The Realities and Illusions of Institutional Share Ownership’ (2011), p 12, available at SSRN: https://ssrn.com/abstract=1867564 http://dx.doi.org/10.2139/ssrn.1867564.
84 Art 3(g).
85 See eg Moore, MT, ‘Whispering Sweet Nothings: The Limitations of Informal Conformance in UK Corporate Governance’ (2009) 9(1) Journal of Corporate Law Studies 95 CrossRefGoogle Scholar .
86 Asset managers are included within the net as they may be tasked with implementing institutional investors’ engagement policies and voting preferences.
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90 See note 9 above.
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92 Art 3j(2) inserted into the Shareholder Rights Directive.
93 Art 3j(3) inserted into the Shareholder Rights Directive.
94 See note 91 above: Final Report, p 16, para 14.
95 Ibid, Report: Follow-up on the Development of the Best Practice Principles for Providers of Shareholder Voting Research and Analysis, p 3.
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99 See note 81 above, 4.6.3 Price discrimination by intermediaries for cross-border transmission of information, including exercise of shareholder rights.
100 See note 9 above.
101 See note 87 above, p 40.
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118 See note 4 above, p 627.
119 A Corporate Governance Framework for European Companies - European Parliament resolution of 29 March 2012 on a corporate governance framework for European companies (2011/2181(INI)), para 29.
120 Birkmose, HS, ‘European Challenges for Institutional Investor Engagement: Is Mandatory Disclosure the Way Forward?’ (2014) 11(2) European Company and Financial Law Review 214, p 242 CrossRefGoogle Scholar . For a radical structural solution see Duruigbo, E, ‘Stimulating Long-Term Shareholding’ (2012) 33(4) Cardozo Law Review 1733 Google Scholar .
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126 OECD, Related Party Transactions and Minority Shareholder Rights (2012), p 14.
127 See the European Parliament study’s recommendation to prevent abusive exercise of voting rights in DG for Internal Policies, Rights and Obligations of Shareholders: National Regimes and Proposed Instruments at EU Level for Improving Legal Efficiency (2012), p 116, available at http://www.europarl.europa.eu/meetdocs/2009_2014/documents/juri/dv/pe462463_/pe462463_en.pdf.
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