In the 2017 Shareholder Rights Directive, the European Commission emphasizes the importance and role of shareholder engagement and, stresses the case of institutional investors and asset managers’ exercise of voting rights. More specifically, institutional investors and asset managers are required to develop an engagement policy and to make sure that it is implemented. They must explain in their policy how they exercise their voting rights and how they cooperate with other shareholders.
It is common for institutional investors to delegate their investment choices to asset managers. The asset managers in turn develop standard policies on how to vote and send their instructions to a proxy advisory firm which in turn facilitates the remote voting process. However, there is hardly any evidence available how common institutional investors make use of this remote voting tool. Neither is known if and how other types of shareholders make use of this voting ‘in absentia’ mechanism.
In addition, in cases where shareholders vote remotely and do not attend the meeting, the general meeting of shareholders shall no longer to be considered as a shareholder engagement platform for discussion and debating corporate issues with the board of directors.
In a recent paper, I examined the impact that the use of different voting techniques might have. I hand-collected all documents relating to the annual general meetings of companies that are part of the French SBF-120 index of Euronext. One third of these companies not only provided the voting results of all AGM agenda items, but also identified how shareholders participated in the voting process: for each of the voting methods, the number of shareholders that made use of a particular voting technique, as well as the number of shares and votes it involved, were disclosed. These companies identified the total number of shareholders who attended the meeting and the total number of voting rights these shareholders voted during this meeting in ‘personam’. Further the companies also disclosed the number of shareholders that provided in a proxy to the chairman of the general meeting or a proxy to a third party. Third the companies reported the number of shareholders and their voting rights for which these shareholders who made use of a remote voting tool. Further I collected also the total number of shares the companies issued and the total number of voting rights attached to the shares. It is common that shares have double voting rights in French companies. The number of participating shareholders in each class as well as their voting rights are measured as percent of the overall number of participating shareholders and voting rights. Also for each class of shareholders, the median and average voting block was determined.
This investigation provided evidence that remote voting became the most commonly used technique for voting. In particular many, and in some cases, all significant, non-controlling block holders made use of this voting technique. Based on evolutionary data for these French companies, I found that gradually more and more shareholders, and not only institutional shareholders, voted in absentia. By contrast, a large majority of controlling shareholders took the decision to participate and vote in the general meeting in personam. Overall, the proportion of the voting rights of shareholders attending the meeting in person is decreasing steadily. Besides, almost all other shareholders that participated and voted in personam, as well as those that provided in a proxy to the chairman or to a third party, had on average only very small stakes in the company.
As remote voting by shareholders that do not gather together in a meeting became the standard technique for voting, it follows that the ‘general meeting of shareholders’ is no longer the primary place where shareholder engagement with the board of directors and cooperation with other shareholders is taking place. Consequently, the classical functions of the general meeting, and in particular the former ‘forum function’ of this ‘physical’ general meeting of shareholders as the place where presentations by the board are followed by a fruitful debate and discussion with the shareholders help to further form their opinion before issuing an informed vote, is eroded. It raises questions as to which instruments the shareholders, and in particular the institutional investors and asset managers will make use of to comply with the new requirements in the Shareholder Rights Directive.
Thereto, new technological developments should be considered for shareholder engagement. Distributed ledger technology, like blockchain, is certainly one avenue that deserves further study to serve as an alternative tool for the development of the voting and communication process in an accessible, open and transparent way. In a private blockchain, managed by the company or another ‘administrator’ and only accessible for shareholders, the company and shareholders that hold sufficient shares can place proposals and all shareholders can communicate and cooperate with each other. It can adequately replace many functions of the current general meetings of shareholders.
Christoph Van der Elst is professor of Business Law and Economics at Tilburg University and at Ghent University.