Euro blow to shareholder democracy

The announcement yesterday from Charlie McCreevy, the European Union's internal market commissioner, that the European Commission was scrapping plans for voting reforms is another blow for shareholder democracy.

Karina Litvack, Head of Governance and Sustainable Investment for F&C, said: "It is a disappointing move backwards following the positive steps taken with the adoption of the Shareholder Rights Directive earlier in the year. We stand by our view that efficient capital markets require empowered shareholders and effective systems for management accountability - so anything that insulates management from shareholder scrutiny is not a good thing.

"Although family-controlled businesses have, in practice, often been found to take a long-term view in the interest of shareholders, control-enhancing mechanisms that protect family interests are not the right way to bring about this state of affairs. By stripping minority shareholders of their ability to hold management to account, they are effectively preventing them from challenging management on occasions when these virtuous conditions break down."

F&C also questions the conclusions of the EU-commissioned study that led Commissioner McGreevy to reverse his position, as it appears not to have considered the impact on the cost of capital that issuing shares with impaired voting rights is likely to have.

"Ultimately, one-share-one vote is much like ordinary democracy," said Litvack. "It's far from perfect, but it's better than the alternative. A system that entrenches management just because they may take a longer-term view than the market is like betting on a benign dictator. It works as long as the guys in power are doing the right thing. But when things head south, isn't it better to have an orderly way to address it than to have to start a shareholder revolt to get them out?"

F&C is realistic in recognising that different European markets have developed different business cultures over decades and that radical reform is on the back burner for now. However, Litvack voiced support for an enhanced transparency regime so that investors are at least better placed to evaluate the effectiveness of different capital structures.