The Transatlantic Debate over Shareholder Rights

Effective and sustainable shareholder engagement is a cornerstone of the corporate governance model of listed companies, which is based on a system of checks and balances among boards, management, and stakeholders. Enhancing the involvement of shareholders in corporate governance is therefore an important factor in improving the financial and non-financial performance of companies, particularly with respect to environmental, social, and governance issues, as set forth in the United Nations’ principles of responsible investment (Recital 14 of the Directive, available here). And this is even more the case in view of the fact that the increased involvement of all stakeholders, particularly employees, in corporate governance plays a major role in ensuring that listed companies adopt a longer-term approach.

Against this backdrop, the EU’s Directive 2017/828 aims to review the framework of the topic by offering a set of tools that can lead to more comprehensive and well-informed engagement with shareholders and other stakeholders in of EU public companies.

Instead of dwelling on the specific aspects of the recent regulation, in a new paper, we offer a descriptive and critical analysis of the new shareholders’ directive (EU directive 2017/828, Shareholders’ Rights Directive II), to illustrate the innovative features and the potential convergence in this field with U.S. provisions. It offers a preliminary and introductory analysis of the so-called “second shareholders’ directive.”

The directive (EU) 2017/828 aims to make the involvement of institutional investors a systemic element, one uniquely capable of balancing corporate interests with the proper development of corporate governance. It calls upon shareholders to actively participate rather than maintain their traditionally passive role, often referred to as “rational apathy.”

The goal, as stated by the EU regulation, is clear: to develop a system that promotes maximum disclosure, can break down market information asymmetries, and ensure a proper flow of information from institutional investors to the public, particularly on how votes are exercised (as in Recital 18).

The tool is accurate and based on a precise and analytical set of norms. In particular, we focus on provisions designed to implement concrete change and more serious and steady shareholder activism. First, our paper considers the issue of proxy advisers and the problem, particularly evident after the financial crisis, of director compensation. If the role of proxy advisers in internal decision-making and the subsequent involvement of shareholders is highlighted, a detailed analysis is offered, aiming at a review of the various disciplines nationally and at understanding whether and how the stock market reacted to the enhanced control granted to shareholders with regard to the compensation of directors (so-called say on pay).

Directive (EU) 2017/828 also pays particular attention to the thorny issue of shareholder involvement in determining director compensation. The issue is addressed by the measure a widespread manner (in Recitals 28 to 41 and Articles 9a and 9b). The proposal is intended to regulate the content of the report on remuneration and the procedures for processing directors’ data contained therein) and follows an argumentative line that would seem to elevate control over managers’ remuneration both as an incentive method and as a fundamental tool for reducing agency costs, thereby aligning all the interests at stake.

The proposal of the second shareholders’ directive is affected to a limited extent by recent EU positions aimed at resolving the well-known contrast between shareholder primacy and director primacy; in other words, whether to grant shareholders a specific right to express views on the remuneration of managers, which would allow individual shareholders to take responsibility and deter opportunistic behavior. Nevertheless, the European solution could apparently bring together future national implementing provisions, the rules applicable to listed companies, with those applicable to supervised listed companies, such as banks and insurance companies, thus promoting higher standards.

After sketching the relevant rules, out paper focuses on a sample of 1053 observations, related to 211 listed companies, corresponding to all corporations listed on the Italian stock exchange’s main market (MTA) over the period analyzed (2012-2016), with the exclusion of banks and insurance companies. The analysis is two-sided: (i) it concentrates on the impact of shareholders’ dissent on executives’ remuneration (with particular reference to the remuneration of the CEO and the chairman), and (ii) it examines the reaction of the market to shareholders’ dissent and the reduction of CEOs’ remuneration. The result is clear and it shows that the market reacted positively to shareholder dissent to high remuneration and the resulting reduction of the compensation at the general shareholders’ meeting. Obviously, complete shareholder control over directors’ remuneration could have negative consequences, leading to the exit of prominent the boards of listed companies. In any case, this issue is worth taking into consideration and should be kept under close observation at a national and international level.

Finally, with respect to related party transactions, the Shareholders’ Directive takes the commendable approach of focusing on the involvement of shareholders and directors in the preparation and approval of transactions. It says that Member States shall: (i) ensure that material related-party transactions are approved by the general shareholders’ meeting or by the board or the supervisory body of the company, in accordance with the procedures that prevent the related party from taking advantage of its position and that are aimed to protect the interests of the company and of those shareholders who are not related parties, including minority ones; (ii) provide that shareholders have the right to vote on material related-party transactions approved by the board of directors or the board of statutory auditors of the company; and (iii) create a mechanism by which, if the related party transaction involves a director or shareholder, such director or shareholder shall not vote.

This post comes to us from Maria Lucia Passador a research fellow at Bocconi University and a former visiting researcher at Columbia Law School, and Federico Riganti, a post-doctoral fellow at the University of Turin. It is based on their recent paper, “Shareholders’ Rights in Agency’s Conflicts: Selected Issues in the Transatlantic Debate,” available here.

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