Degraded Shareholder Rights Threaten Stewardship, EC Warned
Behind-closed doors AGMs and multiple-class share structures endanger small and minority shareholders’ ability to engage with investee companies.
European investors’ stewardship activities risk being hampered by rising barriers to their ability to exercise their shareholder rights, the International Corporate Governance Network (ICGN) has warned.
In a letter to European Commission President Ursula Van Der Leyen earlier this week, the investor-led group called for the removal of obstacles to shareholder voting, the harmonisation of AGM practices and the introduction of safeguards for multiple-class share structures.
“ICGN members – both asset owners and asset managers – are concerned by the legal and operational obstacles to the exercise of their rights, which make their stewardship work much more difficult,” Severine Neervoort, Global Policy Director at ICGN, told ESG Investor.
“Stewardship is a fundamental aspect of an investor’s fiduciary duty to protect and enhance long-term value for beneficiaries and clients, such as pensioners and retail investors. To engage effectively and address systemic issues, investors need to be able to use the full stewardship toolbox [and] they need their shareholder rights to be protected.”
The warning follows actions by regulators and companies in several European jurisdictions curtailing voting rights and ahead of revisions to the Shareholder Rights Directive (SRD) II.
Neervoort added that investors’ ability to act as “responsible and effective” stewards is reliant on them having rights and protections, such as the right to vote on major issues affecting investee company, participate in AGMs, and access information.
“At a time when regulators are encouraging investors to play a greater, and more responsible, stewardship role in promoting the long-term success of companies through monitoring, voting and engagement, the imposition of weaker voting rights will have the opposite effect by inhibiting investor influence,” said Neervoort. “Many asset owners are concerned and being vocal about this.”
The IGCN represents investors with assets under management of around US$77 trillion and is focused on promoting high standards of corporate governance and investor stewardship globally.
Harmonisation and hybrid models
The ICGN recommended removing shareholder voting obstacles, including physical attendance requirements at AGMs, highlighting the SRD II revision as an opportunity to “remove remaining barriers to a modern and efficient voting process”.
The network also noted the need to harmonise AGM practices, flagging investor concerns over some member states opting to make fully virtual AGMs or closed-doors AGMs permanent. The ICGN said this “significantly limits” the ability of shareholders, especially minority shareholders, to interact with boards and management.
“The AGM is an essential part of shareholder democracy, and it is often the only time of the year when shareholders can not only meet the management of the company, but also ask questions, submit ideas and proposals and speak openly in front of other shareholders or press representatives,” said Mauro Meggiolaro, a member of institutional investor network Shareholders for Change’s (SfC) secretariat. “We are still facing dramatic differences between legislations all over Europe regarding AGM participation.”
Earlier this year, Italy adopted legislation allowing companies to conduct AGMs in a ‘closed door’ format, which the ICGN flagged as significantly limiting the ability of minority shareholders to interact with boards and management, saying the move clashed with the principles of shareholder democracy.
Neervoort said it was particularly important for shareholders to be able to interact company representatives on “contentious proposals”.
Earlier this week, SfC member Ethos Foundation called on Germany’s largest listed firms to stop holding virtual-only AGMs and to instead opt for a hybrid model in future.
The ICGN’s recommendations urged companies to provide hybrid AGMs to give investors the option of virtual or live participation.
Meggiolaro said the lack of interaction through AGMs is a key issue for small and minority shareholders. “Bigger investors have many other opportunities to enter in a dialogue with companies and discuss any issue, while smaller shareholders don’t have such opportunities.
“The relation between companies and shareholder should be democratic, and I think this should be understood by bigger investors,” he added. “Our fear is that shareholder rights become even more of rift between bigger shareholders and small to medium-sized shareholders.”
Multiple choice
The ICGN also recommended the introduction of safeguards for multiple-class share structures, cautioning that unequal voting rights can cause misalignment between control and economic interests, diluting the voice and influence of minority shareholders.
The network called for multiple-class share structures to be modified to include a set of minimum mandatory safeguards in all EU member states, as well as a mandatory time-based sunset clause of seven years or less. It also urged the introduction of a mandatory shareholder vote on the continuation of multiple voting rights.
Last month, the EU formally adopted the Multiple Vote Share Structures Directive, which was criticised by SfC for its negative impact on investor influence. During the last year, several European countries have introduced multiple-class share structures, including Germany in December 2023 and Italy in March this year. These also lack the mandatory time-based sunset clause that investors have called for.
Investors in the UK and US have also been raising concerns about dual class share structures (DCSS), which allow companies to issue two different kinds of shares with different voting powers.
“We particularly welcome the ICGN’s comments on DCSS,” said Caroline Escott, Senior Investment Manager at Railpen. “The evidence shows that any benefits of DCSS for firm value decline only a few years after listing, [so] it’s vital that European policymakers institute mandatory safeguards, particularly a time-based sunset clause of seven years or less.”
In 2022, the Railpen-led Investor Coalition for Equal Votes (ICEV) was launched to campaign against DCSS. The coalition has grown to US$4 trillion of global AUM, with ICGN among its supporters.
“DCSS gives greater voting power to a select group of insiders, meaning that independent shareholders’ ability to influence company behaviour is significantly diluted,” Escott warned. “This is bad news both for long-term value creation and the effective functioning of capital markets.”
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