The Transformation of Passive Institutional Investors to Active Owners- Mission Impossible?
Hanne S. Birkmose
Aarhus University - Department of Law, Business and Social Sciences
June 22, 2011
The European Financial Market in Transition, Hanne Birkmose, Mette Neville, Karsten Engsig Sørensen, eds., Kluwer Law International, 2011
Nordic & European Company Law Working Paper No. 10-16
The shareholders in Europe – and in particular the institutional shareholders – have been challenged by the European Commission. Shareholder activism has been on the Commission’s agenda for years, and their approach reflects the traditional view on the role of shareholders as that of owners, who contribute to the long term viability of the company by controlling the board of directors. However, it has become evident that in a number of cases control by shareholders has proven to be non-existent or at least ineffective. Consequently, in the two green papers “corporate governance in financial institutions and remuneration policies” and “The EU corporate governance framework” the Commission raises the bar; the Commission wants more shareholder engagement and in doing so the shareholders should act as responsible owners.
This policy objective might prove difficult to achieve, though. Despite an improved regulatory framework for activism, European shareholders have for most remained passive. It is therefore necessary to consider whether it is possible to transform the passive investors to active owners, or it is mission impossible.
In my paper I discuss alternative models that the Commission can choose to enhance shareholder activism and point at advantages and disadvantages in relation to each of these models. The theories behind shareholder activism are discussed in order to determine the understanding of the concept in general. Further, the legal framework for shareholder activism discussed and the effect the design has on costs and consequently the level of activism. In this respect, in particular company law is of importance, as shareholder rights often stem from company law. If it is not possible to create sufficient incentives by adjusting the legal framework alone, it must be considered if more “persuasive” means are necessary. Consequently, it is discussed whether institutional shareholders can be obliged by either soft or hard law to undertake certain kinds of activism. Finally, the question of how to ensure long-term shareholder activism is discussed shortly.
I find that even though it is possible to create a more favorable environment for shareholder activism than what is found in Europe today, it is difficult to conclude which effect the different approaches will have on the level and quality of shareholder activism. Thus, the conclusion is not that the transformation of passive investors to active owners is a mission impossible – rather it is a mission that has only just begun and more research is needed before the outcome can be predicted.
Number of Pages in PDF File: 28
Keywords: corporate governance, institutional investors, shareholder activism, shareholder rights, responsible ownership
JEL Classification: K22
Date posted: June 22, 2011 ; Last revised: January 4, 2013