Compared to institutional investors, retail investors seem to be bound to remain minor actors on the corporate governance scene, even if Shareholders Rights Directive (SRD I) put forward shareholder empowerment. For instance, many years now from enactment of the SRD I and completion of its transposition into national law, voting turnout at general meetings in Europe remains low. While rational apathy is crucial in explaining retail investors’ largely passive behavior—especially within contexts of concentrated ownership which are typical for many European countries—its persistence notwithstanding the SRD I raises the question as to whether, and to what extent, it might also be rooted in some regulatory shortcoming.
A growing body of research considers a more active role of retail investors to be beneficial in several respects. First, incentivizing retail share ownership of listed companies by enhancing the governance role of retail investors can increase equity markets efficiency. Second, given that significant retail share ownership characterizes some major European issuers, and even more so smaller listed companies, retail shareholder passivity means losing a non-trivial proportion of the votes cast at shareholder meetings and supports the view that the board, or the controlling shareholders, might be subject to suboptimal monitoring. Enhanced institutional investor participation at shareholders’ meetings renders voting outcomes less easily predictable; as the likelihood increases that voting outcomes cannot ex ante be taken for granted, situations may occur in which retail votes might make the difference in either supporting, or contrasting, the board, controlling shareholders, major ‘traditional’ institutional shareholders, or aggressive activists. Third, and more generally, unless retail investors are denied direct access to the equity markets, which is far from being the case either in Europe or the U.S., the issue of retail shareholders’ factual under-representation within issuers’ governance mechanisms should not be disregarded out of hand by the assertion that any retail shareholder simply has no interest in shares but to be paid dividends.
Against this backdrop, in a recent paper I argue that the role of retail shareholders may deserve reconsideration and analyze how possibly to activate retail shareholder votes at general meetings.
First, also due to the non-binding SRD I regime for remote participation to the voting process, retail investors are rarely offered the opportunity to participate in the meeting and vote the shares at a distance via electronic means. In contrast, technology arguably ranks amongst the most promising tools for engaging retail shareholders, suggesting that the voting process should evolve towards digitization. The revised Shareholders’ Right Directive (SRD II) can help individual companies develop more targeted communication programs and might even encourage voluntary adoption of electronic means for participating in the voting process, since it sets forth a more efficient regime for shareholder identification and for communicating with the shareholder base, including retail investors. However, beyond the level of individual companies, the issue of activating retail shareholders should be carefully considered when transposing SRD II into national law, and Member States would be wise to shape national provisions accordingly. Where a case is made for enhancing retail shareholder participation, the right to initiate the identification process should not be restricted to the company alone, but be granted to the shareholders and shareholder associations as well. That would facilitate shareholder engagement as a monitoring tool, particularly where the costs related to the process are borne by the company, or at least shared to some degree between the company and the shareholders. Moreover, restricting identification to shareholders whose holdings reach a minimum threshold might prevent initiating parties from reaching out to a significant part of a company’s retail shareholder base; identification should therefore preferably be constrained only upon objection from individual shareholders.
Secondly, some potential regulatory strategies aimed at promoting retail investors’ enhanced participation in the shareholder voting process could be considered. In this respect, the current U.S. debate on how possibly to mobilize retail investor votes in a feasible manner can provide a blueprint for framing similar patterns for Europe.
In order to lessen the disincentives impairing retail shareholders’ willingness to participate in the voting process and reduce decision-making costs, inspiration from voting patterns usually followed by institutional investors can be helpful. Allowing retail shareholders to rely on better informed, more expert and robustly equipped, both educationally and organizationally, third-party voting preferences may be a possible way out of decision-making cost-driven apathy. As has been suggested for the U.S., retail investors in Europe should also be allowed to submit standing voting instructions in the proxy process. Arguably, the small individual investor may be willing to frame her own voting guidelines following the lead set by major institutional investor’s voting policies, commercial proxy advisors’ proprietary voting guidelines or those prepared by shareholder associations (which are usually available on the internet). The shareholder’s voting preferences would be automatically applied by the proxy holder any and each time an item will appear on the agenda, unless the shareholder directs otherwise. In this respect, the SRD I seems to take an enabling stance, since the provisions on proxy voting do not assume that voting instructions must be separately submitted every time an item is on the agenda of an upcoming meeting. However, Member State national regimes appear to be anything but uniform, with some European jurisdictions constraining a retail shareholder’s ability to submit standing voting instructions. In line with the European policy goal to support shareholder engagement, the Member States concerned should consider amending national provisions in a way more favorable to retail shareholders.
One further way to encourage retail investor voting leverages the role of private shareholder associations. As the German experience shows, shareholder associations can play an enhanced role in advising retail shareholders on how to vote their shares. Practical experience with shareholder associations largely diverges across Europe, but the SRD II encourages associations to take on such a role, given that transparency requirements imposed upon commercial proxy advisors do not apply. Importantly, investor associations represent the interests of private retail investors and—unlike major proxy advisory firms—are not subject to biased judgement due to conflicting interests.
Finally, as the prospectus-summary model suggests, mandating a summarized version of the information due prior to an upcoming shareholder meeting might also help facilitate retail investors’ voting decisions. One way to provide the retail shareholder with an incentive to keep pace with relevant information and avoid information overload is to offer a shortened, simplified version of that information. Summarized information for each upcoming meeting would help the shareholder make her own voting decisions, or maintain control over the proxy process, making it less unlikely that she might check for any new information that could lead her to deviate from her previous instructions and direct her proxy holder to vote otherwise. This would be especially helpful where important and contested issues are to be voted at the shareholder meeting.
Gaia Balp is Assistant Professor of Business Law at Bocconi University, Milan.