The wave of European nationalism regarding takeovers has come at an awkward time for the European Commission’s latest directive on shareholder rights. Just as its proposal is about to be discussed in the European parliament, member states have become consumed by angst about takeover threats to their national champions.
This, therefore, is not the best moment for members of the European parliament to begin talking about the merits of shareholders. But one hopes they will rise above the emotion and see the directive for what it is – a useful and practical means of promoting the single market and helping keep the burden of regulation borne by European companies to a minimum.
Its basic purpose is practical: to make it easier for shareholders in European companies to exercise their votes at general meetings even when they cannot be present. It provides for shareholders to be properly informed, vote in absentia and appoint a proxy to vote and speak for them. It will no longer be possible to block trading of shares being voted.
This will remove some severe hindrances, especially to voting across borders. The result should be a higher voting turnout at general meetings, which will make companies more accountable to shareholders. The more companies are accountable, the less they need formal regulation. It would be an enormous pity if the current protectionist mood allowed this laudable objective to be derailed.
It is no coincidence that in the US, where shareholders lack the power to appoint or sack directors, the prescriptive and burdensome Sarbanes-Oxley Act was the response to the corporate scandals of a few years ago. When shareholders have a real say over board behaviour, they will seek to protect their investments from unnecessary risk but this will be balanced by a desire, less relevant to regulators, to ensure companies are entrepreneurial and generate good returns.
Dealing with the mechanics of voting is only a start. If businesses are to be properly accountable, Europe will also need to look at two other aspects of shareholder rights. These do impinge on takeover defences, which is why the lead set by the parliament now is especially important.
One is whether shareholders have the franchise in the first place. Are they entitled to vote in proportion to the capital they hold? A study last year by the Association of British Insurers and Deminor, the Belgian governance specialists, showed this is frequently not the case. Under the Swedish multiple voting rights system, for example, one-third of the capital of companies by value votes two-thirds of the shares.
The other is whether shareholders have the right to vote on key decisions. The most important of these is the appointment and dismissal of directors. But other decisions are also crucial, including the right to vote on bids.
Especially in the present climate,
giving any particular priority to shareholder rights may seem questionable to those Europeans who espouse a stakeholder-centric philosophy. The directive may seem to play to the advantage of predatory institutions – the people famously described by a senior German politician last year as “locusts”.
It is important, therefore, that MEPs fully consider shareholder rights. The current directive will benefit all shareholders, including small investors with cross-border holdings, but the institutional investors who will be able to vote more easily should be a particular force for stability.
In some European markets voting turnout at general meetings is disconcertingly low. In Germany, it averages 46 per cent and can be much lower. Low turnout makes companies vulnerable to being hijacked by a determined hedge fund or other single block holder. If the silent majority of institutions can at last more easily register their votes, this risk should diminish and the vote will become more genuinely representative. Moreover, these institutions are investing the savings of ordinary citizens who are relying on a reasonable return to meet pension and other obligations. Ultimately, these are stakeholders, too.
The parliament now has a real opportunity to show leadership. If it can focus on the undoubted benefits of the current proposal, there will be more chance of following through with the other aspects of shareholder rights, companies will be less bound by regulation and the single market will be closer to reality. Some of the damage wrought by the flawed earlier takeover directive can be repaired.
The writer is director of investment affairs at the Association of British Insurers