Coversheet This is the accepted manuscript (post-print version) of the article. Contentwise, the post-print version is identical to the final published version, but there may be differences in typography and layout. How to cite this publication Please cite the final published version: Birkmose, H. S. (2018). Forcing Shareholder Engagement: Theoretical Underpinning and Political Ambitions. European Business Law Review, 29(4), 613-642. Publication metadata Title: Forcing Shareholder Engagement: Theoretical Underpinning and Political Ambitions Author(s): Birkmose, H. S. Journal: European Business Law Review, 29(4), 613-642 DOI/Link: http://www.kluwerlawonline.com/abstract.php?area=Journal s&id=EULR2018024 Document version: Accepted manuscript (post-print) General Rights Copyright and moral rights for the publications made accessible in the public portal are retained by the authors and/or other copyright owners and it is a condition of accessing publications that users recognize and abide by the legal requirements associated with these rights. • Users may download and print one copy of any publication from the public portal for the purpose of private study or research. • You may not further distribute the material or use it for any profit-making activity or commercial gain • You may freely distribute the URL identifying the publication in the public portal If you believe that this document breaches copyright please contact us providing details, and we will remove access to the work immediately and investigate your claim. This coversheet template is made available by AU Library Version 1.0, October 2016 Forcing Shareholder Engagement – Theoretical Underpinning and Political Ambitions1 Hanne S. Birkmose* Abstract This paper explores the post-crisis debate on shareholder engagement and argues that the debate and subsequent legislative initiatives aimed at increasing shareholder engagement and accountability seem to be moving away from the traditional corporate governance basis. While corporate governance theory may explain the need for shareholders to balance management powers, it does not support that shareholders have an obligation to engage in investee companies. Neither do we find that the ownership rhetoric supports any duties for shareholders. Finally, we examine elements of stakeholder theory and public policy theory. While these theories emphasise that companies should include other interests than shareholders’ financial interests, they do not support a stronger shareholder role in that respect. Thus, the paper concludes that the post-crisis debate on shareholder engagement should be seen as the result of a strong political agenda and that the theoretical basis for pushing shareholder engagement further is weak. I. Introduction 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.2 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.3 1 This work was initiated during a research visit to the Institute of Advanced Legal Studies, London, which was made possible by Carlsbergfondet, Julie von Müllen’s Fond and Axel H’s Rejselegat. The work was carried out as part of the research project on ‘Shareholders’ Duties’, which has received financial support from the Danish Council for Independent Research. The author would like to thank all the above for their financial support. The work is also carried out as part of the research project ‘Social interest and Corporate Governance balance: shareholders' duties and managers' duties’, which is supported by the Spanish Ministry of Economy, Industry and Competitiveness. The author would like to thank Professor Mathias Siems, Durham University, Senior Lecturer Konstantinos Sergakis, University of Glasgow, Professor Alfonso Martínez-Echevarría, University CEU San Pablo, Madrid, and my colleagues Professor Mette Neville, Professor Karsten Engsig Sørensen, and Professor Emeritus Paul Krüger Andersen, Aarhus University, for their valuable input. * Professor, Department of Law, Aarhus BSS, Aarhus University. 2 Peter Butler & Simon Wong, Recent Trends in Institutional Investor Responsibilities and Stewardship 16 (2) Pensions: An international Journal 80 (2011). 3 The EU Commission set out a number of initiatives in its ‘2012 Action Plan’; see Action Plan: European Company Law and Corporate Governance - A modern legal framework for more engaged shareholders and sustainable companies, sections 2.4 and 3 (COM(2012) 740 final). Most recently the Shareholder Rights Directive was amended; see Directive (EU) 2017/828 of the European Parliament and of the Council of 17 May 2017 amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement (hereinafter SRD II). In the UK the Stewardship Code has been introduced to enhance the quality of engagement between institutional investors and companies; see http://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Stewardship-Code- These initiatives to promote shareholder engagement are at the core of contemporary corporate governance theory, where shareholders are relied on to monitor and control the boards of the companies they invest in. While shareholder engagement is still considered a cornerstone in European corporate governance, the post-crisis critique of shareholder passivity has introduced new aspects to the discussion of how to ensure good governance. First, a general feature seems to be that shareholders are often referred to as being ‘owners’ or as having a certain responsibility to engage with their investee companies seemingly based on the concept of ownership. Second, references to sustainable engagement and the long-term viability of companies may suggest that shareholder engagement is not only about the shareholders’ private interests, but engagement rests on the premise that shareholders should include public interests and public accountability.4 The discussion on shareholder engagement and shareholder accountability is undoubtedly highly political, as national and supranational regulators are under pressure to react to the financial markets’ collapse during the financial crisis and the malpractices of market participants including the shareholders. Therefore, it is to be expected that criticisms of shareholder passivity will result in more national and supranational legal activism. However, it is important that legislators should consider the theoretical basis for shareholder engagement, first to ensure the legitimacy of such legislation and second to understand the mechanisms of engagement. If the rhetoric and the conceptual understanding of the role of shareholders are flawed, there will be a risk that the regulatory response will be based on mistaken premises and the resulting legislation will be equally flawed. 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.5 The starting point of this paper is the traditional argument for shareholder engagement in corporate governance theory. The corporate governance argument presents a dilemma though. On the one hand, the EU Commission sees shareholder engagement as a cornerstone of the corporate governance model for listed companies.6 It has said that the European corporate governance framework ‘is built on the assumption that shareholders engage with companies and hold the management to account for its performance.’7 On the other hand, this trust in shareholders was shaken during the financial crisis and the Commission stated that the passivity of shareholders September-2012.aspx. A stewardship code has also been published in Denmark; see https://corporategovernance.dk/sites/default/files/erst_247_opsaetning_af_anbefalinger_for_aktivt_ejerskab_uk_2k8.pd f. 4 Such references are found at both EU level and Member State level; see SRD II, preamble 16. In relation to the UK stewardship discussion, see Iris Chiu, Turning Institutional Investors into “Stewards”: Exploring the Meaning and Objectives of “Stewardship” 66 Current Legal Problems 3 (2013). 5 Institutional Investors’ fiduciary duties to their beneficiaries could possibly be a credible argument as well. This may also explain why the regulatory initiatives tend to focus on institutional investors. 6 The 2012 Action Plan, section 3. 7 The EU Corporate Governance Framework, Green Paper, (COM(2011) 164 final), introductory remarks, (hereinafter, the ‘2011 Green Paper’). raised ‘questions about the effectiveness of corporate governance rules based on the presumption of effective control by shareholders.’8 Still, despite the criticism of the reliance on shareholders, the adoption of the SRD II shows that the Commission continues to see shareholders as a key to promote good corporate governance. Moreover, not only does the Commission continue to rely on the same corporate governance