One Share and … How Many Votes in Europe? Weighing the Impact of Extra Voting Rights for Long-Term Shareholders

Much has been made in the press about some of the initiatives purported to be in the long-awaited legacy Green Paper on Long-Term Financing by European Commissioner Barnier. Following years of regulatory drives aimed at stemming the financial crisis and returning the European ecosystem to stability, the focus is now switching to long-term sustainable growth. Institutional investors in particular are expected to play a large part in this turnaround initiative, being deemed suitable providers of long-term finance and representing an attractive potential investment pool estimated at EUR14 trillion in 2011 across the European Union.

However, given the desire to tap into this investment pool it is somewhat surprising that the same paper apparently proposes the following additional steps:

• Assessing the way asset managers’ incentives are structured
• Requiring further disclosures from asset managers on the fulfillment of fiduciary duties
• Providing multiple voting rights to long-term investors and linking dividend payments to the holding period of shares

These are not moves that would prove to be that popular with the asset management community at large, or so one would have thought.

It is the multiple voting rights issue, in particular, that has caught the interest of the press and the asset management community. Their interest has been piqued given that the “one share, one vote” principal has been unsuccessfully challenged before, by Barnier’s predecessor, Charlie McCreevy. In December 2007, the European Commission published an impact assessment on the question of proportionality between capital and control in listed companies. The document presented the pros and cons of possible policy actions, as well as an evaluation of the consequences of not undertaking any regulatory action in this field.

So what has changed? Multiple voting structures have been on a declining trend in most European countries although it is still a popular phenomenon in France and Sweden. Conversely the U.K., with its strong preference for “one share, one vote”, has witnessed more activity in terms of shareholder activism and engagement in the recent past than any other European country. It is precisely this holding to account of company management teams by their shareholders that the European Commission is trying to promote in its Corporate Governance Action Plan released in December of last year. Indeed, the 2012 shareholder spring would not have been so effective in the U.K. at ousting underperforming management were it not for the fact that each share carries the same voting power.

So one has to ask — will the introduction of multiple voting rights for long-term shareholders provide the right incentives to encourage long-term investing behaviours? And if this idea is pursued, how do policy makers avoid any unintended consequences?

The Harvard Business Review makes some sensible recommendations — perhaps the Commission will have time to read it.