Encouragement of long-term shareholder engagement: A corporate governance analysis of the proposed shareholder rights directive from an efficiency perspective

Anna Sofie Engelsby Hansen & Pia Holm Møller

Student thesis: Master thesis

Abstract

During the past few years a range of corporate governance shortcomings have been identified. In particular, there seems to be a lack of interest among shareholders to hold management accountable for their actions, and this is intensified by the fact that shareholders appear to have short holding periods. The European Commission has identified a need to enhance transparency and engage shareholders, and has therefore proposed amendments to the Shareholder Rights Directive (the ‘proposed directive’) as regards encouragement of long-term shareholder engagement. This thesis analyses whether the proposed directive will increase efficiency in the relationship between shareholder and company, when taking the objective of the proposed directive into accountBy applying a legal and corporate governance perspective to the proposed directive, the thesis shows how the proposed provisions fulfil their specific and overarching objectives, respectively. The main part of the proposed provisions fulfil their specific objectives of 1) increasing the level of engagement of asset owners and asset managers with their investee companies; 2) enhancing transparency and shareholder oversight on related party transactions; 3) ensuring reliability and quality of advice of proxy advisors; 4) facilitating the exercise of rights by shareholders. Contrarily, the proposed articles on 5) creating a link between pay and performance of company directors do not fulfil their specific objectives. The analysis further demonstrates that the proposed provisions on asset managers and asset owners are the only provisions with a direct link to the overarching objective of long-term shareholder engagement. The analysis shows that the main parts of the articles lead to shareholder engagement, except for the proposed provision on transparency of proxy advisors, which proves to be detrimental to engagement. The thesis provides relevant alternatives to the measures in the proposed provisions, when alternatives are more appropriate. The thesis provides sound arguments that the proposed provisions will lead to majority shareholder engagement and long-term managerial decisions from a game theoretical point of view. Efficiency is however not achieved when applying the Kaldor-Hicks criterion. The proposed articles do not create incentives for minority shareholder engagement, and managerial decisions are conversely short-term, when facing a minority shareholder. This outcome is efficient, but without fulfilling the overarching objective to achieve long-term shareholder engagement.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2015
Number of pages119