Prof. Dr. Michael Beurskens (University of Bonn)
Prof. Dr. Ulrich Noack (University of Düsseldorf)
Shareholder’s meeting – From Personal Get-Together to Dynamic Decision-Making
1. Information – Discussion- Decision (by Vote)
In the early 20th century it was self-evident and universally acknowledged that a face-to-face meet-ing was the essential basis for any reasonable decision. Responsible shareholders were dependent on sufficient information, competent discussion to achieve the necessary mutual understanding of a company’s goals. However, shareholder-activism in this traditional sense is also related to geo-graphic proximity: Having the factories‘ chimneys in view certainly induces an investor to get per-sonally involved. The stockholders involved in such traditional corporations were therefore neither widespread nor disinterested – instead, highly involved professional entrepreneurs were informed about and voted on the future of their major investments. The legal framework in most member states, especially in Germany, is still based on this original understanding.
The shareholders‘ meeting derived from the aforementioned principles is based on three funda-mental, interconnected pillars: First of all the corporate agents must provide shareholders with sufficient information to understand the issues faced by the company and review the manage-ment’s performance. Secondly the shareholders must be able to communicate with each other to coordinate their interests and express their opinions directly towards corporate management. Fi-nally (and most importantly) shareholders get to decide on important questions by majority vote and elect their agents. Therefore the shareholders‘ meeting merges three separate steps into a single event: Information – Discussion and Decision (by Vote).
The responsibility vested in corporate meetings should neither be underestimated nor can it be considered wasteful. As recital 3 of Directive 2007/36/EC summarizes „effective shareholder control is a prerequisite to sound corporate governance”. Who but the people, whose investment (and potential revenue) is at stake should be able evaluate the performance of their elected agents? Who but them should decide on changes to corporate structure or finances or even mergers, divi-sions, movements of seat or a change of legal form? A corporation without a shareholders meeting might not be completely unimaginable, but it would be a completely different entity.
2. The modern shareholder and the annual meeting
The traditional understanding of a shareholder „meeting” is not a fundamental rule built to last for-ever. The shift to diverse and dispersed investment caused by opened capital markets as well as cross-border investment nurtured a new kind of shareholder, for whom participation in a corpora-tion was only a side-effect to a certain type of investment. These shareholder-investors are likely to seek a reduction in costs as a means to optimize their individual gains. Travelling across Europe (or the world) is not worth the time and money spent, unless they have a significant individual in-terest and/or relevant power in decision making. The incentive to visit a distant town (maybe in another country) might be interesting to pensioners (who will use participation in the meeting as an excuse for tourism), but not to busy investors who diversified their risk and are involved in a signifi-cant number of relevant enterprises.
Modern legislation tried to reduce the individual costs involved with participating in a shareholder’s meeting, by lessening the formalities imposed on the corporations: Nowadays companies must accept proxies (Art. 10 Directive 2007/36/EC) and are able to allow for electronic participation (Art. 8 Directive 2007/36/EC Directive 2007/36/EC) and voting in advance of the meeting („by correspond-ence”, Art. 12 Directive 2007/36/EC). However, this is only a partial remedy. Annual meetings are still cumbersome to organize (for the corporation) as well as to attend (for the shareholders) and therefore highly inefficient means to supervise the activities of corporate agents.
With regards to information, the organization of the general meeting as a „final show-down” be-tween investors and their agents might have been reasonable when annual reporting was suffi-cient. However, modern capital markets rely on constant input. To fulfill that need, the European Union has created a detailed framework of largely mandatory rules. In addition, analyst confer-ences and other non formalized public information fills significant gaps. Insofar the annual meeting has become less relevant for listed corporations regarding information. Indeed, due to their im-portance for the general economy and potential investors, limiting relevant information to the cur-rent shareholders would be highly detrimental to the capital market.
The continuing need for a meeting regarding information is therefore limited to the shareholders right to ask questions and potentially force the board to answer them as harmonized by Article 9 of Directive 2007/36/EC. Yet the directive itself mentions the potential problems with regards to „the good order of general meetings and their preparation” and therefore grants member states broad powers to take measures or allow corporations to take such measures: In meetings limited by time and space it would be unreasonable to allow for unlimited and/or unrelated questions. Further-more the directive stays silent on the consequences of wrongfully rejected or even false answers. In fact, the board might be unable to provide answers to any potentially relevant questions in time –significant effort is spent in creating expansive back-offices to ensure competent answers.
In a similar vein, communication in a meeting is not what it used to be. By granting corporations the right to allow votes by correspondence (Art. 12 Directive 2007/36/EC) the debate taking place in the meeting room might not have any effect on the eventual decision process. Similar arguments might be raised with regards to decision making by proxies in light of surprising new revelations and ar-guments made in the debate. Furthermore, the limits in time and space as well as in participant structure limit the usefulness of debate: Granting every shareholder (without regards to amount of shares held) identical rights to present their opinions and arguments creates significant costs for those required to spend their time listening.
Finally, decision making by vote is not limited to the meeting as such. Even though European law does not allow for a written vote in lieu of a meeting, the mandatory right to appoint a proxy holder (Art. 10 Directive 2007/36/EC) effectively separates the right to vote from both debate and infor-mation given solely at the meeting itself.
In sum, while shareholders as an institution or as part of the corporate structure are important, a physical meeting is a wasteful means to make use of that resource. In the long run shareholder involvement is likely to decrease further, thereby putting the value of the shareholder’s voice in question and possibly limiting shareholder rights to „significant” or „professional” participants and thereby reducing the potential for supervision by a diverse gremium.
3. The future: From event to process
The current system of the shareholders meeting a single „jour fixe” where managers and investors meet is neither a necessary nor an efficient means to ensure shareholder activism and good corpo-rate governance. Indeed the term „meeting” itself might be overestimated in light of the traditional understanding.
The road must eventually lead to a more dynamic process. Information on the corporation and statements by corporate officers can (and in many cases must) already be published online. Article 9, paragraph 2 subparagraph 2 of Directive 2007/36/EC allows member states to deem an answer to be given if the relevant information is available on the company’s Internet site. In fact, to ensure good corporate governance, that rule should be made mandatory. Insofar, a meeting would not be the only opportunity to ask questions; instead a longer, appropriate timeframe in advance of the meeting (which would only be a „deadline” or „target-date”) might be set by the board or the cor-porate charter. Thus, information would be detached from the meeting altogether; a repetition in oral form is both unnecessary and ineffective (due to the need for translation in other languages and possible accessibility to disabled shareholders) in the 21st century.
Voting is already possible by electronic means under Art. 8 Directive 2007/36/EC (security concerns not withstanding). The main reason corporations make no or little use of that option are the costs involved and the risk of voidability, liability or other negative consequences. Furthermore there is sort of a chicken-egg-situation with regards to shareholder interest: Major shareholders currently appoint proxies and therefore have no need for voting in advance or participating by electronic means. Since meetings take several hours, the costs of participating are externalized. If a meeting went faster and was more flexible, proxies might be replaced by direct electronic participation. Nevertheless, voting is already not limited to a specific meeting date, if voting by correspondence (Art. 12 Directive) is allowed for.
What is currently missing is a means to communicate among shareholders beyond the meeting itself or at least coordinate to make use of their minority rights. One potential means was request-ing access to the list of shareholders (at least when the corporation issued registered shares). However, such a request inevitably raises data protection (or privacy) issues. Thus, German law prohibits shareholders from enquiring about their co-investors. While the draft for an amendment to Directive 2007/36/EC provides management with means to determine at least non-insignificant shareholders and creates a two-way road for contact between corporation and shareholder, hori-zontal communication was not an issue. The German solution of a central, publicly operated online register for shareholder cooperation („Aktionärsforum”) was and is a failure in practice. Neverthe-less, online media seem to be the solution to the conflict between privacy and interest in bilateral communication. However, the corporate internet site might be a preferable resource. However, the company itself has a significant advantage due to the option to directly „push” information to its shareholders, whereas the shareholders require their co-investors to actively do research and thereby „pull” one anothers‘ opinions.
These means (questions answered in advance, voting by correspondence and a new means for coordination and communication) can be combined and thus replace the „event” of a single jour fixe (limited in time and space) by a fluid process covering a timespan and thus allowing for signifi-cant flexibility. Examining the competences of the shareholders‘ meeting, these rules would bene-fit most decisions and significantly lower costs for both the corporations as well as for investors. The main hindrances are legal uncertainty, potential costs and lack of interest by both corporations and current major investors.
In the long run one must ask, whether the meeting itself is still a necessity. Certainly a deadline is inevitable for any decision – but is there a need for a „get-together”? Seeing managers face-to-face is already all but impossible in huge assemblies of hundreds of people; a view on a display or pro-jection screen is all most investors get. Even now, German law allows supervisory board members to be only available by video conference. Finally: The risk of obstruction by minority shareholders (and the opportunity to at least create a negative impact in the press) is significantly higher when all stakes rest in a specific, severely limited get-together. By spreading the risk over a longer term, this risk can be significantly reduced.