The traditional legal and economic theory of the company is based on the foundational understanding that equity ownership is a bundle of ‘cash flow rights’ and ‘voting rights’. However, this assumption is no longer adequate in today's economic and financial reality.
Developments in derivatives and capital markets have facilitated the decoupling of economic rights from voting rights and have consequently jeopardised the fundamental assumption that underlies the shareholder voting mechanism.
Reducing the agency problem intrinsic to the nature of the company while maintaining the efficiency of managerial discretion is the central issue of corporate governance. In order to achieve this, the shareholder primacy paradigm relies on shareholder and creditor activism. However, this tandem is increasingly losing its effectiveness. Credit institutions have become less client-driven and more market-driven. This evolution potentially alters the debtor-creditor relation and reduces the impact of debt finance on corporate governance. Shareholder activism, on the other hand, has been diminished by the growing spread in shareholder ownership and more recently by the presence of short-term shareholders.
Decoupling is a recent phenomenon that strikes at the heart of the predominant corporate governance model since stockholders lacking economic interest, or a fortiori with a negative interest, might be present at the General Meeting. This democratic deficit undermines the ‘one share, one vote’ concept as well as the concurrency of shareholders' and the corporation's interests.
The following analysis states that ‘the new vote buying’ should not mark the end of the ‘shareholder primacy model’. Already quite some time before the decoupling era, voting had ceased playing a pivotal role as a mechanism to lower agency costs. Invoking the decoupling phenomenon to bury the ‘shareholder primacy model’ would therefore be an oversimplification. However, I believe that awareness of the impact of decoupling is not sufficient to keep the ‘shareholder primacy model’ alive. Evidence is provided that the negative effects of this so-called ‘empty shareholder’ phenomenon can be counterbalanced by contractual provisions and industry standards, a new disclosure regime and voting reforms. The recent amendment to the Transparency Directive of the European Union should therefore be welcomed.