5.1 Introduction

In April 2009, the European Commission launched a much-anticipated consultation on the issue of cross-border securities holding.1 With respect to a number of issues, such as securities transfer, the consultation may well result in legal reforms significantly contributing to the creation of a single European capital market. With respect to the issue of cross-border shareholder voting, however, there are signs that the consultation will only result in modest reform whereas drastic reform may be needed.2

Shareholder voting plays a pivotal role in the corporate governance of European public firms.3 At the same time, cross-border share ownership of European public firms has increased dramatically over the recent years. Taken together, these circumstances underscore the need for a system that facilitates cross-border voting. European policymakers recognize this, as evidenced by the European Commission's observation that while institutional investors have an important role in the governance of companies in which they invest, they can only fulfill this role once the problems related to cross-border voting have been solved.4 In spite of this recognition, however, policymakers seem reluctant to push through the reforms necessary to put a system in place that facilitates cross-border voting. As a result, the status quo has prevailed so far. How can we explain this paradox? This Chapter offers an analysis of the legislative process surrounding recent European legislation aimed at facilitating cross-border voting, and suggests that the explanation lies in the European political economy.

The Chapter is divided into four parts. Section 5.2 outlines the case for legal reform. This section describes the current barriers to cross-border voting, and explains why removal of these barriers can be expected to increase voting turnouts. It then briefly describes the legal reforms that have taken place so far, and explains why these have failed to remove the barriers to cross-border voting and have thus sustained the status quo. To be clear, the purpose of this Chapter is not to argue that policymakers should break the status quo; there may well be reasons why they should not.5 Rather, this Chapter seeks, by analyzing the legislative process, to understand why the status quo has prevailed so far.

Section 5.3 analyzes the legislative process. This section first sets the stage by briefly discussing the wider European legislative process and the role of interest groups, and explaining the methodology used to analyze the legislative process. Next, this section distinguishes and analyzes seven key stages of the legislative process. The analysis shows, first, that policymakers' positions at the various stages of the process often appear to have been based on reports prepared by market practitioners and public consultations. Next, it shows that the conclusions emerging from those reports and consultations generally tend to refiect the interests of the groups of market practitioners (such as financial intermediaries) that are relatively strongly represented among the authors of the reports or the respondents to the consultations. Financial intermediaries, who generally have an interest in maintaining the status quo, appear to have had a particularly strong voice throughout the legislative process. Together, these findings may go some way in explaining why the status quo has prevailed so far.

Section 5.4 seeks an explanation for why financial intermediaries appear to have had a strong voice throughout the legislative process compared to other relevant interest groups. Accordingly, this section compares the incentives of financial intermediaries to lobby against legal reform to the incentives of issuers and institutional investors to lobby for legal reform. On the one hand, institutional investors have an interest in legal reform because it would facilitate exercise of their voting rights across borders. However, their incentives to lobby for legal reform may be diminished due to the fact that they can only capture a part of the benefits such reform would yield, while another part of the benefits accrues to retail investors, i.e., individual investors who hold securities for their own account. Issuers, too, in principle have an interest in legal reform because it would increase the voting turnut and provide clarity on who gets to vote. Indeed, as the analysis will show, issuers have generally spoken out in favor of legal reform. Yet their incentives to lobby for legal reform may also be diminished due to the fact that facilitating cross-border voting would submit them to stricter control by foreign institutional investors, or because they have outsourced the voting process to voting services providers and hence remain unaware of some of the difficulties surrounding cross-border voting.

Financial intermediaries, on the other hand, have an interest in maintaining the status quo, because the status quo enables them to charge high fees for voting services or, where they currently do not generate such fees, the status quo saves them from having to provide these services at all. This gives them a powerful incentive to lobby against legal reform. Taken together, these observations may explain why financial intermediaries appear to have had a particularly strong voice throughout the legislative process.

Finally, section 5.5 discusses policy implications. While the involvement of market practitioners certainly has benefits, such as providing policymakers with useful information, policymakers should not rely on expert groups and public consultations to represent the interests of stakeholders in a proportional way, much less to devise optimal solutions. As far as cross-border voting is concerned, the European legislature will need to make its own independent judgment on how to increase social welfare, regardless of the outcome of the recent public consultation.