Key Governance Issues—Ways for the Future

Christian Strenger is Academic Director at the Center for Corporate Governance at HHL Leipzig Graduate School of Management. This post is based on a publication by Mr. Strenger and Jörg Rochell, President and Managing Director at ESMT Berlin, for a symposium held in Berlin on November 9, 2017, sponsored by ESMT Berlin and the Center for Corporate Governance at HHL Leipzig Graduate School of Management.

In early November 2017, a group of senior representatives from leading investors, large companies, academia and regulators met for a roundtable symposium under Chatham House Rules to discuss particularly timely issues for the future of corporate governance.

The three introductory presentations of the moderators and the main results of the engaged discussions are set out below to provide relevant approaches for future-oriented solutions.

  • Board Independence: the Quality Question and dealing with Insider Issues
    Session Moderator: George Dallas, Policy Director, International Corporate Governance Network (ICGN)
  • Executive Compensation: Limits, Complexity and Say on Pay Issues
    Session Moderator: Peter Montagnon, Associate Director, Institute of Business Ethics, previously Senior Investment Adviser, Financial Reporting Council, UK
  • Shareholder Identification and Proxy Voting Issues
    Session Moderator: Prof. Dr. Dirk Andreas Zetzsche, Universities of Düsseldorf and Luxembourg

Session 1: Board Independence: the Quality Question and dealing with Insider Issues

Session Moderator and Session Briefing: George Dallas, Policy Director, International Corporate Governance Network (ICGN)


A reliable formula for board effectiveness has been elusive, but the importance of effective boards warrants ongoing reflection and research by both academics and practitioners.

In spite of the diversity of governance models around the world, the concept of independence plays a prominent role in most, if not all, codes of governance globally as an intrinsic component of good board structure. For example, independence features, to varying degrees of emphasis, in the governance frameworks of the US, UK, Germany and Japan. It is also reflected in global frameworks, such as the ICGN Global Governance Principles or the OECD Corporate Governance Principles.

But what does independence mean in a corporate governance context, and does it deliver what we want it to? This session seeks to challenge how we think about independence and addresses several fundamental questions relating to boards and corporate governance:

  • Is board independence essential to quality in corporate governance—or is independence simply a placebo that doesn’t do anything but makes us feel better?
  • What do we expect board independence to achieve in practical terms?
  • Are independent directors really in a position to monitor and control corporate insiders?

These are questions that have relevance for company managers and directors, but also for investors, regulators and stakeholders.

Role of boards

A company’s board of directors is at the core of its corporate governance. Boards play a range of advisory and control functions. This includes strategic direction and risk/control oversight, along with the monitoring and reward of executive management.

At a more overarching level, agency theory suggests that one of the key roles of the board is to serve as an agent protecting the interests of shareholders vis-à-vis company management or controlling owners. This reflects a duty of care to support the company’s long-term success and sustainable value creation and to ensure the alignment of interests between management, controlling owners, minority investors—taking into account stakeholder interests as well.

Why is independence a good idea?

Shareholders and other stakeholders expect boards to have the ability and authority to think and act independently from company executives or controlling owners. The board may be unable to serve effectively in its agency role if its directors’ judgements are not free of conflicts or any other external influence other than promoting the long-term success of the firm.

What are the problems related to independence?

It is important to recognise that independence has to be looked at in the context of how it affects board processes, decisions and overall governance. Yet spite of the inherent virtues of independence, its realisation in practice is not an easy fix; nor does it intrinsically enhance board effectiveness. A director must be able to contribute something other than independence alone, whether that is in the form of sector knowledge, commercial experience, international experience, technical skills or other areas that support the board’s oversight of company management.

Moreover, independence is ultimately a state of mind, not a product of definitions. There are many different sets of criteria that seek to define independence for individual directors. While these sorts of criteria can be useful, they can also be crude, misleading or incomplete.

The Lehman Brothers board in 2008, the year of its demise, was an example of a nominally independent board. But was this board able to operate independently of a strong Chair/CEO? Was there enough financial sector expertise amongst this group of independent directors to provide a rigorous challenge? (See Annex 1 in the complete publication).

Does independence ensure quality? What is the evidence?

Independence may be real, but it can be hard, if not impossible, to measure in a meaningful way. It is much easier to measure structural features of boards than it is to measure the quality of board processes. But sometimes what is easily measurable is not worth measuring. So while it is possible (and very common) to calculate simple ratios, such as independent directors/total directors a common gauge of board independence, they may not tell us much. Indeed, the evidence of empirical studies using simplistic/conventional measures of independence has been inconclusive (See Annex 2).

Many board attributes, including independence, which are regarded as “best practice” lack clear empirical grounding, at least in an econometric context. So, in many features of our corporate governance codes we are dealing in effect with opinions more than facts.

How to deal with insider influence and vested interests?

Insider influences can vary depending on the nature of the company. For widely-held companies, the vested interests of executive management often take the form of high pay for limited performance. In controlled companies vested interests may be the controlling owners themselves in terms of entrenchment and self-dealing.

Are independent directors really equipped to challenge these insiders? Or is that possibly asking for a bit too much? The empirical evidence cited above suggests that independent directors may not have a meaningful impact on board governance. But the evidence does suggest in the area of audit committees that independence is important. This makes logical sense, but it also suggests that for an independent director to provide meaningful oversight, independence must be combined with other important attributes, including sectoral knowledge and financial expertise. Independence as a determinant of board effectiveness therefore may be a necessary, but not a sufficient, condition.


We need to recognise that independence may be overrated, or at least not always live up to its billing. At least as it is conventionally defined, independence has not proven to be a panacea or silver bullet to ensure good corporate governance. At the same time, however, the concept of board independence is important and worth preserving, if nothing else as an aspirational ideal.

Discussion Results

Independent directors seem to be an intuitive solution for the agency problem stemming from the separation of ownership and control, but also for limiting the power of controlling shareholders in a corporation.

The starting point of the discussion was: Why do we need independence in the first place? As investors and other stakeholders want to see their interests served and protected by the board, the absence of potential conflicts of interest between non-executive directors and managers or undue influence from a major shareholder are the answers. Disclosure of meaningful ties of the non-executive directors to the management or controlling shareholders is important. The discussion also emphasized that reasonable diversity can be a contributing factor for board independence, and that truly independent board members can play a key role in avoiding too much convergence in decision making, as well as in focusing on the well-being of the company itself, and not any separate vested interests. While the discussion highlighted many benefits of board independence, it also pointed to potential costs: board independence may come with costs relating to problems in information flows, access to information and processing. Thus, it is important to complement board independence with proper board procedures and processes.

A key point of the discussion was the definition of independence itself. Besides the obligatory disclosure of relevant ties of a non-executive board member to management or controlling shareholders, regulators tried to formalize criteria to define independent board members. Academic literature also strives to evaluate how predefined criteria affect company decisions. However, results of these efforts are mixed and can hardly achieve “true” independence. The description of certain characteristics could introduce independence on paper, but may not reflect correctly the individual case of a board member. A predefined strict categorization would in practice suffer from a “ticking the box” approach. Independence from a controlling shareholder is equally hard to define as thresholds for shareholdings may not reflect the individual circumstances. The discussion also highlighted that strict definitions of independence might also require companies to replace experienced board members with new independent board members. That could lead to a temporary loss of experience and industry expertise.

Ways for the Future:

The realistic description of board independence needs a detailed assessment of the individual and a disclosure of ties of a non-executive board member to the management or controlling shareholders. Furthermore, disclosure of the selection process of the nomination committee should bring important insights for investors and the stakeholders.

The discussion further emphasized that formal characteristics alone could be misleading to determine the independence of a board member, focusing on “independence in mind” as an important aspect. As this factor is difficult to gauge or measure, investors may have to communicate with the chair in individual cases.

A sensible and company specific skillset of personnel management, industry knowledge and experience must be represented in the board as a priority, as formal independence alone is not a sufficient prerequisite for the selection process. The discussion emphasized that extensive information is key to allow proper evaluation of true independence. This should be complemented by sufficient access to the chair for communication with investors. The latest German code revision emphasizes that chairs make themselves available to investors for such supervisory board related issues.

Ways for the Future:

Full disclosure of important ties between individual board members with management and controlling shareholders should be obligatory. To properly evaluate the board member proposals, the disclosure of the skillsets of board members and the selection process would bring further important insights for investors. An idea proposed to support the process was the development of a “board skills matrix” for individual boards.

The discussion highlighted the key role of the nomination committee in the identificatio n and evaluation of independent directors. It was therefore suggested that the chair of the nomination committee should make himself available to investors. This point was controversially discussed due to possible loss of a “One Voice” communication strategy, so that communication should be confined to the chair of the supervisory board.

Another important point of the discussion was the regular evaluation of non-executive board members, as this may bring improvements for independent guidance and decision making of the full board. It could also identify areas of strength and weaknesses for an improved performance of both boards. A key prerequisite for a successful evaluation is the independence of the conducting leader.

The discussants raised the issue of the differences emerging from national governance environments, such as different shareholder structures and cultural differences. While the Anglo American approach to independence appears to work in the UK, this differs from continental European countries such as Germany and France.

Ways for the Future:

A solution to cross-country differences is the development of “local optima” that reflect the special circumstances in each country, rather from pursuing a “one fits all” approach.


The participants concluded that board independence remains a central issue in the corporate governance debate. The discussion identified definition issues as critical. It was also highlighted that full disclosure of the individual independence is important. Formal independence alone does not ensure board or director effectiveness. It must be accompanied with skills, knowledge and experience to obtain satisfactory board work results. Disclosure on the individual board members’ selection process and independence characteristics should be made available to investors and the other stakeholders.

Session 2: Executive Compensation: Limits, Complexity and Say on Pay Issues

Session Moderator and Session Briefing: Peter Montagnon, Associate Director, Institute of Business Ethics, previously Senior Investment Adviser, Financial Reporting Council, UK

Executive compensation has become a significant political issue in both Europe and the US. On both sides of the Atlantic, reforms have been proposed and implemented, but it is not certain whether they will solve the problem, namely growing public aversion to the disparity between the trend in compensation for “elite” executives and for the ordinary population. It is very difficult indeed to show that the outcomes achieved for executives reflect the performance delivered.

This raises difficult questions for practitioners used to seeing executive compensation as primarily a market matter. Most agree that the compensation of executives should not be set by politicians. Businesses need to attract talent and must pay competitive rates to do so. Political intervention is not helpful to this.

Policy-makers have therefore tended to favour solutions nudge the market towards a different approach, while avoiding direct intervention. They have sought to make the process more transparent and accountable by requiring extensive disclosure, imposing independence requirements on compensation committees and giving shareholders a greater right to become involved. For critics, however, these measures are too weak. There is not much evidence they have been effective in curbing excess.

The forces that drive executive compensation are powerful. It is true, though sometimes the effect is exaggerated, that the market for genuine talent is quite narrow and the unlisted sector offers lucrative alternatives. Yet equally, if not more important in their effect, are some other factors.

Compensation consultants drive a ratchet. Because they need repeat fees, they are always keen to tweak existing arrangements in a way which usually involves higher quantum. Both boards and shareholders are risk averse. In large companies even very large compensation amounts are a tiny fraction of market cap. The risk of the executive flouncing off if demands are not met may be small, but the loss of value could be great if this does happen. Agreeing to a rich package is a small premium to insure against this risk.

Against this backdrop, current measures do not appear radical.

  • Say on pay: is now becoming more common, but the vote is usually advisory, limiting the response that companies make to oppositi In Germany this cut across the formal position that supervisory boards, not shareholders, are responsible for overseeing executive compensation. The UK has introduced binding votes on remuneration policy but it is too early to judge the impact.
  • Publication of ratios: between the compensation of the chief executive and the level prevailing in the workforce as a whole was first introduced in the US and is now spreading. This may be a source of shame and a spur to public pressure, but ratios are imprecise and can be gam
  • Enhanced disclosure: can give the shareholders and other interested parties a greater understanding of what has happened as well as of whether and how compensation is aligned to performanc The UK rules require calculation of a single finger, but the basis on which is calculat ed is weak and the result can be misleading.
  • Clawback of bonuses and other unvested benefits: in the event of a major adverse event hitting the company is now written into European banking rules and has been adopted more wid This looks good in theory but may bring legal consequences in their wake and the provisions are rarely used.
  • Greater representation of the workforce on boards and compensation committees:
  • This has been proposed in the UK but raises questions about unitary board

German companies already have worker representatives on the supervisory board, but the experience is of limited usefulness due to quid pro quos being negotiated by the employee side.

If measures like these are simply “sticking plaster” solutions, the question arises whether deeper solutions should be found. The problem is not just one of an inexorable rise in quantum. It is also that the complex share-based schemes hitherto in vogue lead to wildly fluctuating results, often driven by elements, such as the overall tone of the market, which executives cannot control. This leads to short-termism and distortions in decision-making, exemplified by the predilection of executives, particularly in the US, for share buy-backs ahead of options vesting.

The characteristics of a new approach would be:

  • Simplicity: The schemes should be easy to understand so that everybody could see what the executive is receiving at the time it is handed over.
  • Measurability: It should be possible to measure remuneration in a way that is now impossible with performance-linked share schemes and bonuses.
  • Alignment to the long-term: Compensation should incentivise executives to deliver for the long term. This means avoiding performance conditions that micro-manage for the short term or that encourage short-term decision-making.
  • A clear connection between the outcome and the delivery of value.

Discussion Results

The participants identified the problems of the current state of executive compensation to define ways for the future regarding the topics: Compensation structure, say-on-pay, disclosure and claw back.

The public debate about the absolute pay level for executives continues unabated, especially after the financial crisis. The increased demand for pay disclosure has triggered a new complexity of detailed numbers, which also vary between different jurisdictions and between companies. Thus results in a lack of comparability therefore hurts the idea of transparency, the first goal of regulators. It is today therefore even more challenging for investors and the public to get behind the real drivers of executive payment and the right link between pay and sustainable performance.

Key to improve the current state of executive compensation are simpler compensation schemes, also to allow for better comparability between companies and countries. The discussion highlighted that individual long-term executive pay is the main driver of complexity, often raising the question whether even the beneficiaries understand them sufficiently. Proposals for a simplification through higher portion of fixed pay and high amounts of restricted share compensation have recently circulated. This approach, however, entails different problems. While restricted shares can reduce the complexity and increase understandability, they can create problems, like the appropriate vesting period and tax issues.

Concerns were raised that too extensive share compensation could unduly benefit from external factors, such as the macroeconomic environment, which should not drive executive compensation. It was also felt that executive pay should be in the first place reward outperformance over the long-term.

The implementation of “Say-On-Pay” has been achieved in different ways in different jurisdictions. The discussion also showed the differences of how “Say-On-Pay” is implemented in the legal systems. Non-binding “Say-On-Pay” seems to have no strong effect on the levels of absolute pay, but binding “Say-On-Pay” is often seen as severe limitation of the board’s freedom of action. The discussion also highlighted the importance to differentiate between voting on the individual board members or the board members as a group.

Ways for the Future

Two points merit particular attention: First, the shareholder vote should be only on the system of compensation and not on individual pay. Second, a binding vote on the system could be justified as the past record of boards has not been overly convincing from due to too stray focus on the company share price only and not against a benchmark of industry competitors.

A key discussion point was the increasing complexity in remuneration reporting that have grown substantially. An important issue discussed was the lack of comparability of the compensation disclosures made by companies.

Ways for the Future

All discussants agreed that there has to be a significant reduction of complexity in compensation reports, as well as more standardization of compensation reports. However, the different jurisdictions represent a big challenge to standardization.

Claw backs

The discussants highlighted the legal issues to recoup payments in practice. To be convincing, the contracts should incorporate claw back clauses that impact long-term compensation.


Participants agreed on three key issues of executive compensation: (i) the proper alignment of performance with pay, (i) the reduction of complexity, (iii) compensation schemes that reward only true long-term (out-) performance with sensible claw backs and higher comparability.

Session 3: Shareholder Identification and Voting Issues (Proxy)

Session Moderator and Session Briefing: Prof. Dr. Dirk Andreas Zetzsche, Universities of Düsseldorf and Luxembourg


Shareholder voting is—again—on the legislative agenda. This short discussion key note highlights some of the most pressing issues regarding shareholder voting and links them to the advent of Blockchain technology.

It focuses on three issues which together explain why shareholder voting is far less efficient than desirable. The first major issue around the globe discussed in Part II. is to identify the person or persons entitled to vote. The second questions discussed in Part III. concerns how to ensure that the voting by institutional investors and their service providers reflects the beneficiary’s interests. The third question highlighted in Part IV. concerns how to streamline and enhance efficiency of the voting procedure itself. All of these three perspectives on shareholder voting change are currently in flux: First, the Shareholder Rights Directive II imposes additional obligations on investors, issuers and custodians; the additional costs may prompt new investments into voting technology. Second, if change is imminent it may rely on new technologies. Here Blockchain—already widely discussed as game changer in the field of clearing & settlement—comes into play. A short perspective summarizing the two factors may thus be justified.

Shareholder Identification

1. The corporate dimension: Know your shareholder / Shareholder Identification

The issuers’ board has an interest to know their shareholder, for instance to ensure a high voting turnout at the shareholder meeting, for investor relation purposes and for maintaining good relations with their shareholders. The European Shareholder Rights Directive (SRD) II acknowledges this interest by granting issuers a right to know your shareholder. However, SRD II is silent on who the shareholder is. This shall be determined by the laws of EU Member States where, of course, we find different approaches.

Some corporate laws define as shareholder the person registered in the share registry. Those corporate laws confer rights on the direct, record owners of shares. But in most cases nominees rather than investors are registered. When investors “own” securities indirectly, what they own is not legally a security but instead is a pro rata share of fungible “security entitlements”, a kind of contractual or trust-based claim against a bank. To our knowledge, in none of the jurisdiction share registers administered by the issuers are complete, in the sense that all beneficial owners are registered in the share register. Other jurisdictions define as shareholder the first non-intermediary client who holds shares in a deposit offered by a licensed custodian which is the last link in a chain of intermediaries leading from that custodian up to the issuer.

A number of questions are connected to the Know Your Customer (KYC) right under Art. 3a SRD II. In particular, which shareholder definition is preferable under the KYS scheme? Does the chain of custodians function well enough to ensure that beneficial owners can vote with as little effort as possible? Will a KYS right function across the EU border? And what about Third Countries: In particular in light of Brexit will the UK custodians and institutional clients respect KYS requests issued by EU issuers?

2. Outlook: Blockchain & beyond

Around the globe intermediaries seek to drive efficiency in the settlement chain through Blockchain technology. One prominent example focusing on shareholder voting is the Delaware Blockchain Initiative (DBI). Under the DBI, Delaware legislators expressly authorized tracking of share issuances and transfers on a distributed ledger. While still work in progress, the announced DBI scheme will enable distributed ledger shares.

The expectations regarding distributed ledger shares are high. According to the DBI’s Director “[i]f shares are registered on a distributed ledger, investors and issuers would be able to interact directly. Property rights would be crystal clear. … Proxy voting would be transparent and always accurate. … Securities lending records would always be accurate, so accidental over-issue of securities would never happen.” The telling statement is that “None of the above is necessarily true of the status quo.” [1]

Is a Blockchain-based integrated voting register desirable? Will it have the expected effects? What are the hurdles? Who shall have the right to amend the register (for instance, the client’s custodian) and on what grounds, and with which type of documentation? Finally, how do the requirements under Article 3b, 3c SRD II fit into the new technology environment?

Proposed Policy Action: Ensure …

  • further technical integration of the custodian chain to facilitate flow-through of information.
  • the laws’ openness to innovation (e.g. avoid specifications how information must flow from issuer via custodians to beneficial owners and vice versa).
  • incentives for custodians to invest in shareholder identification technology (e.g. avoid monopoly structures, assign costs to issuers rather than shareholders etc.).

Reflecting the Beneficiaries’ Interests

Many institutional investors avoid the costs of voting, or where voting is incentivized or required by law, vote with as little effort and investment as possible. This has prompted the discussion as to how to ensure that beneficiaries’ interests are reflected in the institutional investors’ and asset managers voting decision.

1. The shareholder dimension: assigning voting authority

The question of who holds voting authority is important since multiple intermediaries are involved in what laypeople refer to as “institutional investor.” For instance, voting authority can be assigned to the 1) asset manager, 2) fund management company / administrator, 3) depositary (who holds assets on behalf of the fund), 4) board of the pension fund, 5) governance overly providers, 6) governance committees which oversee all or some of the former, or a combination of the former. Questions connected to the voting authority is who among the former shall be granted the authority to vote? In which way can the voting authority be disclosed to the issuer under the KYS scheme discussed above?

Further, the SRD II asks asset managers (including fund management companies) and institutional investors (the SRD II means life insurance companies and pension funds) to disclose how their voting behavior supports the long-term interests of their clients (or abstain from disclosure by opting into explain). In light of the SRD’s comply or explain approach what type of disclosures could be expected? Is such disclosure helpful (because it raises awareness) or harmful (because it raises the costs of voting and thus erects new barriers to cross-border voting)?

2. Voting Advice

Following an ESMA initiative, a number of proxy providers active in Europe have drawn up a Code of Conduct, to ensure high quality of voting advice in the interests of the client and clarify to what extent and in which way proxy advisors are open to a dialogue with issuers. The SRD II has taken up this initiative and mandates proxy advisers to subscribe to a Code of Conduct, or explain why they do not do it.

Did ESMA’s Code initiative have some effect on the market from the perspective of institutional investors and or issuers? Did institutional investors take a greater degree of ownership in the voting decision than prior to the code initiative? Are the Best Practice Principles for Shareholder Voting Research and Analysis providers respected in practice, and read and considered by the issuers?

3. Investors’ Acting in concert and bundled voting

Investor collaboration was, for some time, threatened by acting in concert rules. While statements on the European level have clarified that normal exchange of opinions and coordinated voting does not qualify as acting in concert for the purpose of the Transparency Directive and the Takeover Directive, the questions remains as to 1) whether shareholder collaboration is desirable, 2) whether it takes place, and 3) what the law can do to further shareholder collaboration among long-term oriented, sustainable institutional investors.

Proposed Policy Action: Ensure …

  • transparency on who holds the voting authority.
  • the institutional investors’ legal and substantial ownership regarding the decision to vote.
  • awareness of issuers that proxy advisors are decision takers, not makers. If there is reason to complain about service providers intensify dialogue with investors. With KYS in place, it is possible.

Procedural Voting Efficiency

Procedural efficiency concerns the question how the shareholder’s votes find their way to the company. Procedural efficiency matters since procedures are a key determinant of the costs of voting. Further, procedures must ensure the accuracy of voting, i.e. both the numbers of votes and the way how votes are counted must be correct even when multiple parties (issuers/tabulators, registrars, chain of intermediaries) are involved in channeling the shareholder votes from the originator to the issuer.

1. Direct / online voting vs Proxy chain

For the most part, while direct online voting is available under most advanced company laws, very few shareholders vote directly. Direct voting, as meant here, refers to the use of the online voting system provided by the issuer. Note that direct voting can take place long before the general meeting.

2. Ensure confidentiality of voting? Knowledge as power

Investors complain that votes channeled through the chain of intermediaries are not treated confidentially, but as proprietary knowledge which can be sold to issuers and/or activist investors. Such a conduct raises multiple issues from breach of contract and data protection to market abuse and governance concerns.

Is there (anecdotal) evidence for information leaks in the chain of intermediaries? How can we fix it? Would, for instance, bypassing the custodian chain and direct interaction with issuers impro ve the matter? If Blockchain-based identification systems are used (see above) all the more data will be stored on multiple bank servers in a distributed manners. How do we ensure the integrity of the voting process under that circumstances?

And what about the issuers? When do they have access to pre-voting results, and do they make use of their knowledge to influence the final results to their advantage?

3. Vote Confirmation

More and more jurisdictions require institutional investors to disclose their voting behavior. So does the SRD II. However, institutional investors had good reasons in the past to resist such disclosures given that they did not know how their votes ended up in the custodian chain where sometimes it was revealed that more votes were executed than voting shares issued. The SRD II seeks to fix that issue by requiring issuers to submit a vote confirmation to investors.

How shall the vote confirmation be transmitted to investors? Who shall pay the costs for the vote confirmation?

Proposed Policy Action: Ensure …

  • confidentiality of the voting chain through technical means (e.g. encryption etc.).
  • that as little data as possible circulate, and facilitate direct interaction between investors and issuers to the extent possible
  • incentive-based cost allocation by enabling that investors or their service providers can “pull” the voting confirmation from the issuers’ voting systems, by connecting directly to those systems, rather than sending the vote confirmation through the chain of custodians.


After two decades of permanent fixes the efficiency of shareholder voting has made little progress. Technicalities of the voting chain are not the fancy grand questions of corporate governance with which politicians, regulators and academics can get applause by the peers and the public. But those details matter. The sorry state of the shareholder voting chain of today is the result of legacy systems paired with legislative neglect or ignorance and constant underinvestment in voting systems on the side of custodians, investors and issuers alike.

The efficiency of the shareholder voting chain, however, is at a turning point. The latest push to improve the shareholder voting system initiated on the one hand by legislators (such as the SRD II), and on the other hand by technology (in particular, the Blockchain hype) could free the management attention on the side of the three constituencies, as well as the financial resources to leapfrog over barriers many of which have been cited by the first and second Giovannini report already in 1999 and 2001.

This is not because Blockchain is the solution to everything—quite the opposite, reliance on Blockchain technology comes along with many new questions for all parties involved. However, Blockchain features one characteristic which the nicky-picky details of shareholder voting entirely lacks: Blockchain inspires excitement necessary to generate both money and management attention. So if we want to enhance voting efficiency linking legal and technological change could provide the game changer all (?) hope for.

Discussion Results

Identification of the persons properly entitled to vote

As the regulatory environment prescribes increasingly visible investor engagement, companies have to know their important shareholders to engage with them also in advance of important AGM votes (like executive remuneration or capital increases).

The investor representatives argued that the shareholder to be identified should be the one who makes the investment decision and is entitled to vote, thus maximizing the incentives to vote and to let asset managers pursue the most promising investment possibilities. The SRD II provides companies with the right to identify the ultimate beneficial shareholder, but is silent on who the shareholder is. As this is put into law by the EU Member States, national implementations should lead to the investment decision and the voting right not being separated.

Ensuring that the voting by investors and service providers truly reflects the beneficiary ’s interests

As voting is seen as the key instrument to influence management, passive investors that do not have the decision power to sell shares, have voting and engagement as their only opportunities to express their discontent with the company resp. its board. Asset owners should therefore insist that their asset managers are held accountable (regardless of active or passive funds) to fulfil their fiduciary duties, also by the authorities.

Proxy advisors

Although some argue that proxy advisors have become too powerful and capable of swinging the AGM vote, most participants felt that this suggested domination is rather a myth: all large institutional investors use ISS to produce their individualized voting configurations. They then make their own voting decisions, at least in critical cases (“redflag events”) that matter for corporate governance.

To limit the proxy advisors’ influence further, it could be considered to have them give analysis only without specific voting recommendations. This could increase asset managers’ accountability and reinforce proxy advisors’ role as decision-takers, not decision-makers. However, to the same extent the costs of voting for small and medium asset managers will increase, and so will passivity among SME asset managers.

Streamlining and enhancing efficiency of the voting procedure itself

Participants agreed that the voting chain is too long, with too many intermediaries making voting an ineffective, intransparent and expensive undertaking. The voting chain seems to suffer from custodians (less the companies) often setting too early deadlines for voting, leaving little or no time to asset managers to study proxy solicitation materials and do the necessary research for informed voting decisions. Companies on the other hand would prefer to receive votes early to talk to major shareholders in advance of AGMs. The current voting chain system seems to work especially in the interest of the intermediaries, who have substantial incentives not to change it.

Many of the participants argued that market-based solutions did not fix the problem in the past. Custodians should therefore be required to better meet issuers’ and investors’ expectations, e.g. through mandatory prescriptions for shareholder identification and how information has to flow down the chain.

Others argued in favor of sufficient openness to innovation and new technologies, such as Blockchain, that could result in the disintermediation of the custodian chain for voting purposes; an overly rigid set of rules could block technical progress for years.

The investor representatives remarked that in too many cases votes cast did not reach the company, or have not been properly counted and do not get accurate voting confirmations. As more and more jurisdictions require institutional investors to disclose their voting behaviour (so does the SRD II), the missing confirmation prompts the question of the asset managers’ accountability towards the ultimate owners. Asset managers could have valid reasons to resist disclosures given that they do not know how their votes end up in the custodian chain. Voting procedures should ensure confidentiality; a “level playing field” between issuers and investors is only ensured if issuers know the investors’ voting directions only very shortly (one day) prior to the AGM; the alternative (all voting directions are disclosed to the public prior to the meeting) is at the moment too costly and too rigid to implement.

Ways for the Future

Given the decade-old insufficiency of the present custodian based system, blockchain or similar technology should be rapidly installed to avoid the problems of too long voting chains, shareholder identification and information distribution. The regulators that wish to see investors to fulfil their (fiduciary) voting duty, should also insist on technological improvements that enable inexpensive, efficient voting procedures.


1Cf. Delaware Blockchain Initiative: Transforming the Foundational Infrastructure of Corporate Finance, discussed on the Forum here, (last accessed 18 Oct 2017). See further on the functioning of DLS: “When a company chooses to incorporate in Delaware using distributed ledger shares, the Division of Corporations could validate and file the incorporation plus transfer the authorized shares to the new company. Only shares that are cryptographically ‘signed’ and transferred by the Division of Corporations, in that genesis transaction for the new company, would be considered validly-authorized distributed ledger shares (and a similar procedure would apply to converted corporations). By doing this, the Division of Corporations establishes a perfect record of authorized shares, and the distributed ledger can then track shares that are issued and outstanding.”(go back)

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