A Comparative Analysis of the Legal Obstacles to Institutional Investor Activism in Europe and in the US

Abstract

Starting from the observation that at the multilateral level shareholder activism is considered as an important aspect of good corporate governance, this paper examines several legal and economic obstacles to institutional investor activism in the EU and in the US. We also examine the voting record of 76 institutional investors in the US and of several others in the EU.

We find that US investors seem to have easier access to proxy voting than in the EU (although recent EU legislation should remove several of the present legal obstacles) even though the SEC allows only long-term relevant shareholders to include nominees on the corporate proxy; that conflicts of interest seem to limit the activism of several categories of institutional investors both in the US and in the EU; that some national legislations in the EU limit the ability of institutional investors to coordinate their voting policies; that recent EU legislation has introduced discriminatory requirements for some institutional investors when they acquire control of listed and non-listed companies; that recourse to stock lending and other forms of separation of financial risk from voting rights seems to be practiced more by controlling shareholders at the expense of institutional investors than the opposite, something which should be clearer in the near future with an upcoming EU legislation which should extend the transparency requirements for all shareholders to borrowed securities, cash-settled derivatives and other instruments that allow to exercise voting influence in a company; and that proposed EU legislation introduces transparency requirements and permanent limitations to naked short selling largely in excess of the US regulatory framework.

We also find through descriptive statistics that institutional investors in the US seem to have a more adversarial voting pattern vis-à-vis company managements than in the UK; this might be due to the fewer voting rights given to shareholders by the US regulatory framework. As for Europe, institutional investors' voting pattern is by far the most adversarial in France, where there is a high incidence of control-enhancing mechanisms. Institutional investors seem to have an adversarial voting stance also in Greece, Belgium and Sweden, where control-enhancing mechanisms are also present, while in Italy they tend to have a low voting turnout. More in general, EU investors’ voting pattern seems to be sensitive to the presence of control-enhancing mechanisms, ownership concentration, and to the origin of the national legal system.

Keywords: Shareholder activism, shareholder voting, proxy voting, acting in concert, securities lending, institutional investors, legal origins, control-enhancing mechanisms, corporate governance, ownership concentration

JEL Classification: G3, G34, G2, G24, K2