Forcing Shareholder Engagement – Theoretical Underpinning and Political Ambitions

Abstract

The rights and duties of shareholders have increasingly been included in the European debate on how to ensure good corporate governance, particularly in listed companies. The 2008-2009 financial crisis added urgency to the debate as it revealed a lack of critical oversight by shareholders, and in particular by institutional investors. The response of the EU Commission, as well as the Member States, has been to promote legislative initiatives aimed at increasing shareholder engagement and accountability.

The aim of this paper is to examine three lines of argument that have been made to support initiatives to promote shareholder engagement in company law and to discuss the legitimacy of shareholder engagement. Undoubtedly, other arguments can be made as well, but as the Commission has chosen to promote shareholder engagement through the Shareholder Rights Directive and thereby the existing company law framework, the paper will not include arguments found outside the company law sphere.

The starting point of this paper is the traditional argument for shareholder engagement in corporate governance theory. These theories presented in section II may give an understanding of the mechanisms of shareholder engagement and the limitations of shareholder engagement as a corporate governance mechanism. Second, this paper discusses the post-crisis critique of shareholder passivity and the references to shareholders’ ownership. The discussions in section III seek to establish what a shareholder owns and how ownership may determine the rights and duties of a shareholder, in particular whether ownership may justify that shareholders should increase their engagement with investee companies. Finally, the paper examines the Commission’s emphasis on the overall corporate governance framework as a tool to ensure the long-term sustainability of EU companies. Section IV borrows from stakeholder theory and public policy theory in order to seek to establish whether the call for increased shareholder engagement can be justified by shareholder accountability. Summarizing the findings in section II to IV, section V discusses the implications and justification of the apparent shift from traditional corporate governance concepts to a stronger emphasis on shareholder engagement and shareholder accountability.

Keywords: Shareholder Engagement

JEL Classification: K22