5.4 Understanding the Influence of Intermediaries

Why do financial intermediaries appear to have had a particularly strong voice in the legislative process compared to institutional investors? A possible explanation is offered by a recent study by Lucian Bebchuk and Zvika Neeman, who model the competition among interest groups for influence over policymakers setting the level of investor protection. In their model, Bebchuk and Neeman find that a low level of investor protection enables firrn insiders to extract rents (in the form of private benefits of control), which gives them a powerful incentive to lobby against legal reforms enhancing investor protection.1 In our case, the absence of rules facilitating voting by ultimate investors arguably enables intermediaries to extract rents (in the form of high fees for voting services), which gives them a powerful incentive to lobby against legal reform.

By contrast, institutional investors, according to Bebchuk and Neeman, can be expected to invest less in lobbying against weak investor protection than would be optimal for the class of investors as a whole, because while "institutional investors must themselves bear the cost of lobbying, they capture only part of the benefits to outside investors resulting from improved investor protection."2 This too may be true in our case, since part of the benefits of rules facilitating voting by ultimate investors would accrue to retail investors. In Bebchuk and Neeman's model, this is one of the factors that push investor protection below its efficient level.3 By analogy, it may push the regulation of cross-border voting below its efficient level.

Of course, this need not be the outcome if retail investors were to lobby on their own behalf, but, as noted earlier, retail investors are dispersed and face collective action problems.4 Indeed, the analysis has shown that their participation in the legislative process has been marginal, something that appears to be symptomatic of the wider E.U. legislative process.5

Similarly, the lobbying efforts of institutional investors could be complemented by lobbying on behalf of issuers, who generally have an interest in high voting turnut and clarity regarding who gets to vote. Indeed, the analysis has shown that issuers have generally spoken out in favor of legal reform. The analysis, however, has focused only on expert groups and public consultations, and the full extent of the lobbying efforts of issuers—indeed, of all interest groups—remains unknown. It has been suggested that issuers are not truly interested in high voting turnouts, because it would only subject them to stricter control by foreign institutional investors.6 This would imply that issuers' incentives to lobby for legal reform might not be as strong as we would otherwise expect. Also, issuers' incentives to lobby for legal reform might be reduced because they have outsourced the voting process to voting services providers and hence remain unaware of some of the difficulties surrounding cross-border voting.

Alternative explanations for why institutional investors may invest relatively linie in lobbying for legal reform are that some institutional investors, contrary to what has been suggested earlier, may simply not be interested in cross-border voting regardless of procedural costs, and those who are interested may be able to contract efficiently with financial intermediaries after 01.7 Again, while this Chapter has outlined the arguments for legal reform, it does not exclude the possibility that there are valid reasons why the status quo should prevail.