21 January 2019
Rafael Savva reflects on his paper titled ‘Shareholder Power as an Accountability Mechanism: The 2017 Shareholder Rights Directive and the Challenges Towards Enhancing Shareholder Rights’, as it was presented at the 3rd International Conference on European Company Law and Corporate Governance in Zagreb, Croatia.

Company Law is a cornerstone to establishing the principles and rules which ensure good corporate governance practices. Political decisions though affect company law’s regulation, as it can contribute to the development of views of what is considered to be good corporate governance; as well as determining the way the principles, rules and power dynamics surrounding it should be reformed or regulated to achieve it.

The EU’s recent political agenda on company law seeks to have this effect on current corporate governance practices. The aftermath of the financial crisis and the continuous corporate scandals occurring in continental Europe signal the need for a reprioritisation in company law and the making of visible regulatory responses that will ensure appropriate corporate control and accountability mechanisms. In doing so, EU regulation aspires to support national company law to keep up with economic, market and technological developments. Such effort is made to secure sustainable corporate growth which will make European markets more attractive to investments and will help overcome future and pressing challenges that the fast-pacing technological and market developments bring.

The 2017 Shareholder Rights Directive is an output of such political will to reform the area for the abovementioned objectives. The changes the Directive brings in company law and corporate governance re-affirm the long-standing view of the EU that the responsible exercise of shareholder rights can contribute to the advancement of accountability in corporate governance. The Directive seeks to do that by focusing on strengthening shareholder power with a vote on directors’ remuneration policies and a number of related-party transactions. At the same time, the Directive eases access to the information needed and alleviates costs associated with the exercise of shareholder rights; while impliedly imposing a duty to exercise such rights by disclosing shareholders' engagement policies and investment strategies.

Despite the EU's welcoming endeavours to facilitate the exercise of shareholder rights, the Directive makes more apparent than substantial regulatory changes. Such is the message the author wishes to convey in his paper, as it was presented at the 3rd International Conference on European Company Law and Corporate Governance in Zagreb, Croatia. The paper argues that the Directive is only a starting point towards facilitating shareholder power as a credible accountability mechanism, as the Directive did not address effectively practical and theoretical considerations related to shareholder power that may affect the extent it can contribute to enhancing accountability in corporate governance.

The author identifies that first by considering the need for shareholders to engage in a collective action to confer accountability. The paper acknowledges that shareholders have numerous collective action problems which include free-riding, the effect modern capital market practices have on shareholders' incentives to exercise their rights, and the disincentives arising from the limited power shareholders possess. The author, however, disclaims the application of the classic perception of collective action on shareholders; and argues that shareholder collective action will take place if the concentration in shareholding ownership is high enough to gain an economically rational advantage; to the extent that no other incentives or rules encourage or oblige them respectively to engage in such an action. In arguing this, the author denotes that the parameters of costs, availability and access to information, the capacity of power and the existence of rules encouraging or obliging the exercise of shareholder power are the key determinants that facilitate shareholder collective action. The Paper argues that the Directive partially deals with these parameters, but it is questionable whether the Directive will affect the way shareholders operate in practice.

The Paper subsequently deals with the orientation the Directive provides for shareholders to exercise their rights. The Directive imposes an obligation on shareholders to outline how their engagement policy and investment strategy will contribute to the advancement of the medium to the long-term performance of their shareholding assets, having regard to the financial and non-financial performance of the company.  The Author argues that such orientation will not make any meaningful changes in countering short-termism. The orientation of the medium to long-term value still conforms to the theory of shareholder primacy and the belief that such orientation will benefit other stakeholders in the company.  Shareholder primacy though, regardless of orientation, cannot determine effectively whether good corporate governance practices are adopted. In arguing this, the Paper points out that company law requires a new corporate objective for making shareholder power a credible accountability mechanism; but it notes that such consideration requires dealing with fundamental legal issues related to the exact role and position of shareholders in the company. 

On its face then, the Directive falls short of making any meaningful changes in the exercise of shareholder rights or the extent such rights will be exercised to confer accountability in corporate governance. It is understandable that the constant change of corporate governance practices makes regulation at times experimental. In the presence of adequate know-how that can tackle such challenges though, this should not become a traditional excuse for not making substantial changes to achieve welcoming objectives. If EU (and national) regulators wish to substantially contribute in the furtherance of sustainability and growth in company law, fundamental concepts that are integral to company law and corporate governance need to be addressed meticulously.