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The Mythical Value of Voice and Stewardship in the EU Directive on Long-term Shareholder Engagement: Rights Do Not an Engaged Shareholder Make

  • Deirdre AHERN

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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Associate Professor, School of Law, Trinity College Dublin.

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1 Chander, A, ‘Minorities, Shareholder and Otherwise’ (2003) 113(1) Yale Law Journal 119, p 150 .

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 603607 .

5 See generally COM (2010) 2020, EUROPE 2020: A European Strategy for Smart, Sustainable and Inclusive Growth.

6 For a comparative contextual assessment see Pinto, AR, ‘The European Union’s Shareholder Voting Rights Directive from an American Perspective: Some Comparisons and Observations’ (2009) 32(2) Fordham International Law Journal 587 .

7 See note 3 above, Art 6.

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.

16 On shareholder voice, see generally Black, BS, ‘Agents Watching Agents: The Promise of Institutional Investor Voice’ (1992) 39(4) UCLA Law Review 811 ; Donald, DC, ‘Shareholder Voice and its Opponents’ (2005) 5(2) Journal of Corporate Law Studies 305 .

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 ; Anderson, R, ‘The Long and Short of Corporate Governance’ (2015) 23(1) George Mason Law Review 19 .

18 See note 9 above at 2, Results of Consultations with Interested Parties and Impact Assessment.

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 327328 .

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.

36 For a discussion of the issue in a UK context, see Nolan, RC, ‘Indirect Investors: A Greater Say in the Company?’ (2003) 3(1) Journal of Corporate Law Studies 73 .

37 See note 11 above, 2.3 Shareholder Identification.

38 Directive (EC) 2004/109 of the European Parliament and of the Council of 15 December 2004 on the harmonisation of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC including subsequent amendments: [2004] OJ L389/38, Art 2(1)(e).

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.

49 See further Loh, J, ‘Could the Pay Ratio Disclosure Backfire: Examining the Effects of the SEC’s Pay Ratio Disclosure Rules’ (2017) 4(3) Texas A&M Law Review 417 .

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.

54 Ndzi, E, ‘UK Shareholder Voting on Directors’ Remuneration: Has Binding Vote Made Any Difference?’ (2017) 38(5) The Company Lawyer 139, p 141 .

55 Ibid, pp 141–42; ‘State Street Ramps Up Pressure on Excessive Executive Pay’ (Financial Times, 3 February 2018).

56 ‘Individual Directors Targeted by Investors over Excessive Pay’ (Financial Times, 29 January 2018).

57 ME Thompson et al, ‘Do Directors Suffer External Consequences for Failing to Align Executive Pay Practices with Shareholder Preferences? Evidence from Say-on-Pay Votes’ (31 August 2017), available at SSRN: https://ssrn.com/abstract=3069124 or http://dx.doi.org/10.2139/ssrn.3069124.

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.

71 Enriques, L, ‘Related Party Transactions: Policy Options and Real World Challenges (With a Critique of the European Commission Proposal)’ (2015) 16(1) European Business Organisation Law Review 1, pp 3233 .

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 ; Roach, L, ‘The UK Stewardship Code’ (2011) 11(2) Journal of Corporate Law Studies 463 ; 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 ; Winner, M, ‘Active Shareholders and European Takeover Regulation’ (2014) 11(3) European Company and Financial Law Review 364 ; Sergakis, K, ‘EU Corporate Governance: The Ongoing Challenges of the Institutional Investor Activism Conundrum’ (2014) 16(4) European Journal of Law Reform 728 .

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 .

78 See eg Bebchuk, LA, ‘The Myth that Insulating Boards Serves Long-Term Value’ (2013) 113(6) Columbia Law Review 1637 .

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 .

80 Ibid.

81 Commission Staff Working Document, Impact Assessment Accompanying the document Proposal for a Directive of the European Parliament and of the Council on 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 and Commission Recommendation on the quality of corporate governance reporting (‘comply or explain’) SWD/2014/0127 final, 4.1, Background.

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 .

86 Asset managers are included within the net as they may be tasked with implementing institutional investors’ engagement policies and voting preferences.

87 Strand, T, ‘Short-Termism in the European Union’ (2015) 22(1) Columbia Journal of European Law 15, p 38 .

88 See, for example, LA Stout, ‘Why Should ISS Be the New Master of the Corporate Governance Universe?’ (Corporate Governance, 4 January 2006); Belinfanti, TC, ‘The Proxy Advisory and Corporate Governance Industry: The Case for Increased Oversight and Control’ (2009) 14(2) Stanford Journal of Law, Business & Finance 384 ; Choi, S et al, ‘The Power of Proxy Advisors: Myth or Reality’ (2010) 59(4) Emory Law Journal 869 ; Edelman, S, ‘Proxy Advisory Firms: A Guide for Regulatory Reform’ (2013) 62(5) Emory Law Journal 1369 ; Gallego Córcoles, A, ‘Proxy Advisors in the Voting Process: Some Considerations for Future Regulation in Europe’ (2016) 13(1) European Company and Financial Law Review 106 ; Balp, G, ‘Regulating Proxy Advisors through Transparency: Pros and Cons of the EU Approach’ (2017) 14(1) European Company and Financial Law Review 1 .

89 Gallego Córcoles, note 88 above, p 132.

90 See note 9 above.

91 An Overview of the Proxy Advisory Industry: Considerations on Possible Policy Options (European Securities and Market Authority, 2012) Discussion Paper; Feedback Statement on the Consultation regarding the Role of the Proxy Advisory Industry (European Securities and Market Authority, 2013) Final Report; Follow-up on the Development of the Best Practice Principles for Providers of Shareholder Voting Research and Analysis ESMA/2015/1887 (European Securities and Markets Authority, 2015) Report.

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.

96 Eckstein, A, ‘Great Expectations: The Peril of an Expectations Gap in Proxy Advisory Firm Regulation’ (2015) 40(1) Delaware Journal of Corporate Law 77 .

97 See note 14 above.

98 G20/OECD, Principles of Corporate Governance (2015), p 21.

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.

102 Barontini, R, Bozi, S and Ferratini, G, ‘Executive Remuneration Standards and the “Conformity Gap” at Controlled Corporations’ (2017) 21(3) Journal of Management and Governance 573 .

103 See note 16 above, Black, p 831.

104 On this in a UK context see Cheffins, BR, ‘The Stewardship Code’s Achilles’ Heel’ (2010) 73(6) Modern Law Review 1004 .

105 Pacces, AM, ‘Exit, Voice and Loyalty from the Perspective of Hedge Funds Activism in Corporate Governance” (2016) 9(4) Erasmus Law Review 199 .

106 ‘Investor Activism is Springing in Continental Europe’ (The Economist, 24 August 2017).

107 See Gillan, S and Starks, LT, ‘The Evolution of Shareholder Activism in the United States’ (2007) 19 Journal of Applied Corporate Finance 55 ; Cheffins, BR and Armour, J, ‘The Past, Present, and Future of Shareholder Activism by Hedge Funds’ (2011) 37 Journal of Corporate Law 51 ; Rose, P and Sharfman, BS, ‘Shareholder Activism as a Corrective Mechanism in Corporate Governance’ (2014) 5 Brigham Young University Law Review 1015 ; Wells, H, ‘A Long View of Shareholder Power: From the Antebellum Corporation to the Twenty-First Century’ (2015) 67(3) Florida Law Review 1033 ; Hill, JG, ‘Good Activist/Bad Activist: The Rise of International Stewardship Codes (2018) 41 Seattle University Law Review 497 .

108 Cheffins, BR and Armour, J, ‘The Past, Present, and Future of Shareholder Activism by Hedge Funds’ (2011) 37 Journal of Corporate Law 51 .

109 See note 87, p 22.

110 Birkmose, HS, ‘Forcing Shareholder Engagement – Theoretical Underpinnings and Political Ambitions’ (2018) 23(4) European Business Law Review 613 .

111 For a distributive justice argument as to the social duty of institutional investors to engage see Villiers, C, ‘Controlling Executive Pay: Institutional Investors or Distributive Justice?’ (2010) 10(2) Journal of Corporate Law Studies 309 .

112 On rational apathy see Gordon, JN, ‘The Mandatory Structure of Corporation Law’ (1989) 89(7) Columbia Law Review 1549, p 1576 ; Black, BS, ‘Shareholder Passivity Re-examined’ (1990) 89(3) Michigan Law Review 520 .

113 Hirschmann, AO, Exit, Voice and Loyalty: Responses to Declines in Firms, Organizations and States (Harvard University Press, 1970) .

114 See generally in a US context Admati, AR and Pfleider, P, ‘The “Wall Street Walk” and Shareholder Activism: Exit as a Form of Voice’ (2009) 22(1) The Review of Financial Studies 2645 ; Gorman, A, ‘Exit Versus Voice: A Comparison of Divestment and Shareholder Engagement’ (2017) 72(1) New York University Annual Survey of American Law 113 .

115 See note 81 above at 4.1 Background.

116 Arsalidou, D, ‘Corporate Governance in the Aftermath of the Global Financial Crisis: Issues and Action’ (2017) 38(2) Business Law Review 42 .

117 See note 81 above, 5.1 Baseline scenario.

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 . For a radical structural solution see Duruigbo, E, ‘Stimulating Long-Term Shareholding’ (2012) 33(4) Cardozo Law Review 1733 .

121 See note 81 above, Figure 2 Average Holding Period – Selected Exchanges.

122 ‘Quarterly Reporting Falls as Companies Focus on the Long-Term’ (Investment Association, 4 September 2017), available at https://www.theinvestmentassociation.org/media-centre/press-releases/2017/quarterly-reporting-falls-as-companies-focus-on-the-long-term.html.

123 García Aparicio, J., ‘Enhancing Shareholder Rights in Intermediated Securities Holding Structures Across Borders’ (2017) 13(2) New York University Journal of Law and Business 465 .

124 See note 98 above, pp 23–24.

125 Anabtawi, I and Stout, LA, ‘Fiduciary Duties for Activist Shareholders’ (2008) 60(5) Stanford Law Review 1255 ; see note 107 above, Hill.

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.

* Associate Professor, School of Law, Trinity College Dublin.

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