“One-Share / One-Vote” discussion
Background
One area of frequent tension between shareholders and companies, but also governments, is the weight that should be given to each shareholder with regards to their right to vote. There exist many special regimes, such as so called “privileged” or “golden” shares, which effectively allow shareholders to hold a disproportionate number of voting rights. While there are many possible reasons to create such a regime, one of its side effects is that it allows management to gain more control over companies, for example by granting special regimes to “friendly” shareholders. As a result, companies’ governance standards are diminished, and the views of other investors can become less powerful or simply less visible when votes are counted. As a consequence, many investors would like to see a “one share/one vote” system of shareholder democracy enforced across Europe.
Eurosif position
Eurosif believes that this is an important topic for SRI investors and one that should be further discussed. Eurosif does not take a position yet on the One Share / One-Vote discussion, but does insist that where possible, shareholders should be incentivised to exercise their votes for the long-term results of companies. It still remains to be seen how to best do this, and as Eurosif’s ultimate position on this issue becomes clearer, it will be communicated directly.
One Share One Vote Seminar
To encourage market side and European regulatory side to discuss this issue, Eurosif co-organised a seminar held in Brussels in December 2006, organised by the European Capital Markets Institute and in cooperation with the pension fund ABP. The general outcome of the seminar was that the One Share One Vote principle is still fraught with controversy but appears to be gaining more acceptances; many hurdles still need to be overcome and it will not become the standard in the short term. Academics present at the seminar did not see a reason to mandate One Share One Vote in EU law, arguing that this would create adverse effects, and it would not be in line with the subsidiary principle. On the other hand, European institutional investors increasingly see the benefits of more shareholder activism and thus proportionality between capital & vote. Moreover, the pressure in this direction will grow as a result of the implementation of the Takeover bids Directive (2004/25/EC), which introduces the “breakthrough rule” once a firm has acquired 75% of the shares of a target company, meaning that from this point onwards, the One Share One Vote principle applies.
During the seminar, a representative of DG Market explained that the Commission had no intention at the moment to mandate “One Share One Vote” but was waiting for the results of a study contracted externally. One of the study’s goals was to identify the existing deviations between Capital & Control and their raison d'être.
Study on the issue
The Commission published in May 2007 the external studies it commissioned on this issue. The study’s main findings are the following:
- On the basis of the academic research available, there is no conclusive evidence of a causal link between deviations from the proportionality principle and either the economic performance of listed companies or their governance.
- However, there is some evidence that institutional investors perceive the “control-enhancing mechanisms” (such as multiple voting shares, priority shares, voting rights ceilings etc.) negatively and are likely to place a discount on companies that used them.
- They also consider that more transparency would be helpful in making investment decisions.
The study was commissioned to provide input for an impact assessment that the Commission carried out in the fall 2007.The study can be downloaded from the Commission website:
http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/751&format=HTML&aged=0&language=EN
Commission abandons the idea of a reform
In a speech to Parliament's Legal Affairs Committee on October 3, 2007, Commissioner Charlie McCreevy said that he would let go of plans, put forward two years ago, to make shareholder voting more "democratic" with a "one share, one vote" reform.
In his speech in the UK on December 6, 2007 to the House of Lords – Charles McCreevy further explained his decision to abandon the reform. :
“My recent decision not to propose any EU measure on one-share-one-vote does not mean that I do not believe in one-share-one-vote any more. I continue to believe it is in the best interest of companies and their investors. However, I do not believe that EU action would be useful or fruitful […]
To inform the debate, the Commission contracted external consultants to do a study […] The study concluded that there is no clear economic evidence that control enhancing mechanisms have a negative effect on companies' performance or their governance […]
There is some evidence that market pressure results in a gradual elimination of certain control enhancing mechanisms. Although a very wide-range of control-enhancing mechanisms are available in most Member States, their actual use in practice is more limited. The driving force behind such market pressure is institutional investors. Institutional investors perceive control enhancing mechanisms negatively.
However, what is important above all is an appropriate level of transparency. This is vital for investors to take reasoned and efficient investment decisions. We already have at EU level a number of transparency measures which should help in this area […] In consequence; I decided that an added layer of transparency at EU level was not the way to go.
Legislators should never propose new legislation when there is no compelling evidence that it is the appropriate way to deal with an issue. And on "one-share-one-vote" I looked at all the evidence very carefully, I listened to all views and then I made my decision based on facts rather than wishes. So I have told my staff they are to stop working on the subject”.
(Last Updated: December 2007)
