(Continued from Part 1.)
Shareholders:
- Are there any EU legal rules that are contributing to inappropriate short-termism among investors? If so, how could these rules be changed to prevent such behaviour? (Short-termism could occur via asset manager relationships resulting from increased intermediation, automated and high-frequency trading and shorter retention periods, or “regulatory bias” (Green Paper wording) that could cause mispricing, herd behavior and increased volatility.)
- Are there measures to be undertaken in regards to the incentives and performance evaluation of asset managers (e.g., fees and commissions based on short term, relative performance), who manage long-term institutional shareholder portfolios, with a view to better aligning interests of asset managers with those of long-term institutional investors?
- Should EU law promote more effective monitoring by institutional investors (i.e., asset owners) over asset managers (i.e., agents of institutional investors) with regard to strategies, costs, trading and the extent to which asset managers engage with investee companies, with a view to greater transparency of fiduciary duties by asset managers, greater monitoring of activities that are beneficial for the long term interests of institutional investors, and more active stewardship of investee companies by asset managers?
- Should EU rules require a certain independence of the governing bodies of asset managers, or are other measures (e.g., legislation) needed to strengthen the disclosure and management of conflicts of interest?
- What is the best way for the EU to facilitate shareholder cooperation? (Shareholder cooperation means the ability of institutional investors, in particular those with diversified portfolios, to engage with one another successfully, without being in contravention of EU laws on “acting in concert,” which could hinder shareholder cooperation. Shareholder cooperation may be facilitated by setting up shareholder fora, for example, or an EU proxy solicitation system whereby companies set up a specific function on their website enabling shareholders to post information on certain agenda items and seek proxies from other shareholders.)
Shareholder cooperation is part of shareholder engagement. Shareholder engagement means “actively monitoring companies, engaging in a dialogue with the company’s board, and using shareholder rights, including voting and cooperation with other shareholders, if need be to improve the governance of the investee company in the interests of long-term value creation” (from the Green Paper). - Should the transparency of proxy advisors be enhanced (e.g., with regard to analytical methods, conflicts of interest, and whether and how a code of conduct is applied)? If so, how?
- Are legislative restrictions on proxy advisors necessary (e.g., to restrict the providing of consulting services to investee companies)?
- Should a mechanism (technical and/or legal) be in place to facilitate the identification of shareholders by issuers, in order to facilitate dialogue on corporate governance? If so, would this mechanism benefit cooperation between investors? If so, what would be the details of such a mechanism (e.g., the objectives to be pursued, preferred instrument, frequency and cost)?
- Should minority shareholders be accorded additional rights to represent their interests within companies with a controlling or dominant shareholder? (A controlling shareholder (the predominant governance ownership model in European companies) can be defined (by the author, as it is undefined in the Green Paper) as a shareholder with the ability, either in fact or law, to exercise a majority of the votes for the election of the board of directors. A significant shareholder could be an individual, a group of individuals (e.g., a family, a voting trust, etc.), or a corporation.)
The word “rights” and “represent,” above, can be interpreted to mean something more than simply augmenting the influence of minority shareholders, and stems from difficulties identified in the Green Paper that minority shareholders have in protecting their interests in companies with a significant shareholder and a within a “comply or explain” regime. Certain Member States for example have reserved the appointment of some board seats to minority shareholders. - Do minority shareholders need greater protection against related-party transactions? If so, what measures should be taken? (A related party transaction is defined (by the author, using concepts from a corporate governance proposals from the Canadian Securities Administrators in December, 2008) to be a conflict of interest between the related party (e.g., a control person, a significant shareholder, an officer, or a director of the corporation) and the corporation itself. If (in the author’s view) the board of directors does not take all appropriate action in light of the conflict, or shareholders (all shareholders, including minority) do not have full knowledge of, and the opportunity to approve, a significant related party transaction, the result could be self-dealing and appropriation of monies or opportunities by the related party at the expense of the corporation and/or minority shareholders. The Green Paper uses the terms “protection against potential abuse” in describing the extraction of benefits by controlling shareholders and/or boards to the detriment of minority shareholders. Examples of a related party transaction may be a contract, arrangement or transaction entered into between the company and a significant shareholder or control person; or a contract or decision that will benefit an officer or director.
- Should measures be taken at the EU level to promote share ownership by employees?
Monitoring and Implementation of Corporate Governance Codes:
- Should companies departing from corporate governance codes be required to provide detailed explanations for such departures, and describe alternative solutions employed? (Under a “comply or explain” regime, adopted by many countries and widely endorsed for its flexibility, it is permitted for companies to depart or diverge from the corporate governance code recommendations, providing that there is adequate disclosure to explain the rationale for the departure, and how the practices or actions taken achieve the objective of the principle or recommendation, for example – hence “comply or explain”. The issue has been the adequacy of disclosure, both for the “comply” and “explain” planks of the regime.)
- Should monitoring bodies (e.g., securities regulators and stock exchanges) be authorized to assess the informational quality of corporate governance compliance statements, and require more detailed explanations as necessary? If so, how should this be done, and what exactly should be their role?
Conclusion:
In response to the commentary, the European Commission will take next steps, with any future legislative or non-legislative changes to be accompanied by extensive impact analysis. The Green Paper is instructive because it provides Member States, the European Parliament, and other countries and legislative bodies an indication of what corporate governance reforms, many of which are significant and go beyond other global developments, may be emerging within Europe in the coming months.
For interested readers, a group of Canadians responded to 23 of the 25 questions, here (PDF). This group consisted of a mixture of academics and practitioners, was self-organizing, possessed expertise across a range of governance topics in order to address as many of the Green Paper questions as possible, and offered examples and experience from the Canadian setting and group’s work wherever possible.