A Comparative Analysis of the Legal Obstacles to Institutional Investor Activism in Europe and in the US P. Santella, E. Baffi, C. Drago, D. Lattuca Shareholder Rights, Shareholder Voting and Corporate Performance University of Cagliari, Sardinia, Italy Cagliari March 2008 The paper is available free of charge on Repec on SSRN

2 Multilateral level: encouragement for institutional investor activism… OECD Principles of CG 2004: -“The exercise of ownership rights by all shareholders, including institutional investors, should be facilitated.” -“"shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to prevent abuse".

3 …and for disclosure of voting policies OECD Principles: "Institutional investors acting in a fiduciary capacity should disclose their overall corporate governance and voting policies with respect to their investments, including the procedures that they have in place for deciding on the use of their voting rights." European Commission Action Plan of 2003: institutional investors should be obliged, among other things, to disclose their policy with respect to the exercise of voting rights in companies in which they invest.

4 Disclosure of voting record: the rising tide SEC 2003: institutional investors required to disclose voting record ↓ Best practice spreading to the EU: NBIM, Hermes, Fidelity, Provident, Morley, Standard Life…

5 Purpose of our paper: -Examine the legal and economic obstacles to institutional investors’ activism in the EU and US; -Verify what institutional investors’ voting record can tell us about such obstacles.

6 Institutional investors as shareholders

7 Institutional investors’ voting

8 Possible reasons for higher voting turnout in the US In the EU: -Cost of proxy voting (particularly significant for foreign inst. Inv.); -Rational apathy of institutional investors; - conflicts of interest (Italy). In the US: - brokers allowed to vote when beneficial owners inactive; -Pressure on institutional investors to vote (SEC requires voting disclosure since 2003; gvt pressure on pension funds to vote)

9 In the EU increasing voting turnout (now and in the close future) - Institutional pressure to vote (UK); - Internationalisation of investors’ share portfolios a vehicle of spreading best practices; - Shareholders rights Directive adopted by the EU in 2007 will reduce the cost of proxy voting

10 Voting costs charged to investors by voting intermediaries Costs for investors Estimates range from a minimum to a maximum value % Understanding the framework - Costs due to lack of harmonisation (E) 11.1 Voting platform (F) 1.8 Powers of attorney (E) 1 Re-registration of shares (E) 4.5 Share-blocking (E) 58.9 Voting in remote areas (E) 0.3 Lack of voting in absentia facilities (E) 0.2 Voting recommendations (F) 9.8 Lack of timely/exhaustive information on agenda items (E) 12.4 Total100 *) "F" stands for fixed costs, due to setting up a global voting system. "E" stands for ad hoc costs due to voting in European countries. Source: Hermes.

11 US specificites -Shareholders allowed to vote on a more restricted set of circumstances than the EU; -director election has central role in shareholder voting rights -SEC prudent stance in allowing shareholders access to issuer proxy statements to nominate alternative lists of directors -SEC justification is that US shareholder base has a “very large retail component” -However, this seems to be less and less the case:

12 Percentage ownership of institutional investors in US stock markets Source: Gillan and Starks (2007)

13 Institutional investors voting record -Voting record from 76 institutional investors in the US from 2003 to institutional investors in the EU

14 Shareholder rights a substitute for regulation? (Transatlantic cg conference ECGI 2007) institutional investors in the US seem to have a significantly more adversarial voting pattern vis-à-vis company managements than in the UK

15 Voting record in Europe: what’s wrong with France? institutional investors seem to be very dissatisfied with French listed companies' governance, and to a much lesser extent, Greece, Belgium and Sweden. From ISS et al. (2007) France is also the first EU country by incidence of control-enhancing mechanism. Belgium and Sweden follow.

16 …and some unexpected good guys Perhaps surprisingly, institutional investors seem to be much less adversarial in such countries as Italy and Germany which have frequently been denounced for their recourse respectively to company pyramids and cross-shareholdings. For Italy the surprise is even more important if we consider that it has been considered as one of the worst cases in the world for expropriation of minority shareholders