European attempts to foster long-term thinking among investors must not rely on “flawed” proposals for differential voting rights, a leading governance association has insisted.
Ahead of next week’s European Parliament vote on the Shareholder Rights Directive, the International Corporate Governance Network (ICGN) warned against creating systems that would reward long-term shareholders with higher dividend payments or additional voting rights.
The organisation said that, even if the motivation for introducing such a two-tier structure were a worthy one, it should be discouraged, as it could have a detrimental impact on minority shareholders and the long-term performance of companies.
Kerrie Waring, the ICGN’s managing director, said: “This is an issue of global resonance, and our Global Governance Principles call for any divergence from a one-share, one-vote standard that gives certain shareholders power that is disproportionate to their economic interest to be disclosed and explained.”
ICGN policy director George Dallas added that the approach was “flawed”.
He said investment management agreements could instead be amended to enshrine the long-term goals of asset owners into contracts with asset managers.
In its policy paper, the ICGN noted that it had opposed differential voting rights proposed in Italy – an idea eventually abandoned by the government – and that it had already voiced its opposition to the double voting rights proposed by MEP Sergio Gaetano Cofferati, rapporteur for the Shareholder Rights Directive.
It suggested that, rather than introduce separate voting rights for long-term investors, greater attention should be paid to the development of stewardship codes similar to the ones in place in the UK and Japan.
The paper added that there was no silver bullet to encouraging long-term investment behaviour, and that differential voting rights and loyalty shares risked doing further damage.
“Ultimately, there is scope for building trust among both companies and investors,” the paper concluded.
“Investors need to gain the trust of companies by demonstrating their overarching concern is long-term commercial success for companies, not simply short term.
“At the same time, companies need to build trust, particularly amongst their minority investor base, that the rights of all shareholders are respected and that controlling shareholders do not exercise a disproportionate or undue influence in ways that might work against the interests of minority shareholders or the long-term success of the company.”
A leading civil servant at the European Commission previously said it hoped the legislation would pass the Parliament by early summer.