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The European Commission could pull the plug on shareholder engagement unless owners step up
EC Green Paper is sceptical about shareholder oversight to prevent another financial crisis.
You could be forgiven, on the basis of recent developments, for thinking that we are about to enter a new era of shareholder engagement. The UK’s decision to press ahead with the introduction of a Stewardship Code for institutional investors, to mirror the Corporate Governance Code for public companies, does seem to enshrine the shareholder-oversight approach to governance. Meanwhile the Financial Services Authority is currently consulting on how to require asset managers to disclose the nature of their commitment, or otherwise, to the Stewardship Code, which will give the initiative a little regulatory bite. Finally, it seems, the need for shareholders to act like owners is given some official backing. However, it doesn’t look like everyone agrees that this is the right approach to take to reform in the wake of the financial crisis. One document in particular is causing a few waves in the governance community – the European Commission’s Green Paper on corporate governance in financial institutions. On the face of it, the EC Green Paper covers similar territory to the UK’s Walker Review, although it doesn’t include the same kind of analysis of governance failures that Sir David’s review contained. The subject areas on which views are sought
are very familiar – board structure, risk management, audit, remuneration, shareholder engagement and so on. The key difference is the emphasis within the consultation document on the future direction of travel.
Put simply, there is clear scepticism about shareholder oversight as a model for mitigating future governance failures. For example, the paper states that: “The financial crisis has shown that confidence in the model of the shareholder-owner who contributes to the company’s long-term viability has been severely shaken, to say the least.” One of the consultation questions specifically asks whether respondents consider that “shareholder control of financial institutions is still realistic”. The Commission also states that it is considering whether financial institutions need to take better account of other stakeholders’ interests, in addition to those of shareholders. And, digging into the detail a little, the Commission seeks views on whether employees and their representatives could have a stronger role in remuneration policy. It’s hardly a revolutionary manifesto, and some will no doubt interpret the language in the Green Paper as a return to old attitudes about the Anglo-Saxon model of capitalism. But it is important to
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