Corporate Governance, Cross-Border Voting and the Securities Law Directive – Enhancing Investor Engagement through Standardization

Abstract

This paper analyzes recent developments with respect to institutional investors and cross-border voting. Based on a cross-country comparison of more than 20 countries we show that the recently enhanced regulation imposes an implicit duty to vote on institutional investors. This implicit duty reflects the regulators’ expectation that institutional investors exercise their voting rights in order to comply with good corporate governance standards. The duty to vote-concept puts institutional investors in a difficult situation because they face today significant barriers to cross-border voting that are mainly due to the public good structure of corporate governance and conflicts of interests of issuers, intermediaries and other stakeholders and which regulators could not remove due to inefficiencies of the regulatory process and limited regional jurisdiction. Analyzing the Market Standards for General Meetings provided by the Giovannini Joint Working Group on General Meetings as well as the proposal for the Securities Law Directive framework, this paper shows that a cooperative solution is the best method to overcome the disincentives to invest in cross-border voting. Establishing a global Voting Platform is the most efficient way to facilitate cross-border voting. A well-structured Voting Platform can overcome the barriers due to inefficiencies of the regulatory process and conflicts of interests of issuers, intermediaries and other stakeholders. Drawing on networks effects and the economics of standardization in software markets, the paper develops a suitable framework, including the functions and the ownership structure of such a Voting Platform. It then recommends how legislators and regulators can support the Voting Platform to enable investors to exercise their voting rights efficiently to fulfill their duty to vote. The barriers to vote will be overcome if a sufficient number of first movers that are motivated to achieve lasting improvements for a substantial issue of their own and the public good: enhanced voting representation. Their initial outlay could be substantially (if not fully) reduced by eliminating costs for redundant and time-consuming services in the present voting chain.

Keywords: corporate governance, shareholder voting, securities law directive, cross-border voting, institutional investors, standardization, network effects, market standards for general meetings, Giovannini Barriers, depositary, custodian, custody chain, transaction costs, duty to vote, stewardship code, AIF

JEL Classification: G10, G20, G30, G34, G38, K20, K22, K23