1.6 Conclusion

This Chapter has explored the fundamental question of why we have ownership disclosure rules. Using the European ownership disclosure regime as an example, the Chapter has first identified two main objectives of ownership disclosure rules: improving market efficiency and corporate governance. Next, it has analyzed how ownership disclosure performs these tasks.

The analysis has shown that ownership disclosure can improve market efficiency through various mechanisme. By creating transparency of the voting structure and of changes in the voting structure, ownership disclosure enables investors to anticipate agency costs and to assess the implications for the value of a firm's share. This way, ownership disclosure informs share prices. Other ways through which ownership disclosure informs share prices is by creating transparency of economic interests of shareholders, of trading interest and of the size of the free float.

The analysis has also shown that ownership disclosure can improve corporate governance through various mechanisms. First, ownership disclosure enables enforcement. In firms with concentrated ownership, it does so by facilitating monitoring of the controlling shareholder, thus preventing extraction of private benefits. In firms with dispersed ownership, it does so by facilitating the market for corporate control, the mechanism through which management is disciplined by takeovers and the threat thereof. Second, ownership disclosure facilitates communication among shareholders and between companies and their shareholders.

The Chapter has further shown that the use of equity derivatives to exert undisclosed influence on issuers or to facilitate creeping acquisitions ("hidden ownership") severely undermines the mechanisms through which ownership disclosure improves market efficiency and corporate governance. The same is true for the use of equity derivatives, securities lending or short selling to hedge economic exposure while retaining full voting rights ("empty voting"). Although more than ten years have passed since the seminal study of ownership disclosure in Europe, the key question raised in that study remains the same: is the definition of control sufficiently narrow to pin down the ultimate controlling agent?1 This Chapter has argued that financial innovation causes the answer to be negative, which suggests that expansion of the rules is warranted.

Three issues are not addressed in this Chapter, but merit careful consideration. First, while the Chapter has identified benefits as well as costs of disclosure, it does not offer an exhaustive cost-benefit analysis.2 Indeed, by complicating the taxonomy the Chapter may have presented policymakers with more questions than answers. But at least this should enable an evaluation of the disclosure regime that takes into account all relevant aspects.

Second, the Chapter has largely assumed that the voting structure determines who controls the company. But this assumption is a simplification of reality. Shareholders and other stakeholders can exert influence over issuers in a variety of ways, which explains why accounting and antitrust provisions typically use broader, more substantive concepts of control. This nuance has gained significant weight as governments have responded to the recent financial crisis by injecting huge amounts of capital in troubled financial institutions. In late 2008, for example, the Dutch State injected EUR 10 billion in ING, one of Europe's largest financial institutions.3 It did so through the purchase of nonvoting core Tier-1 securities. As part of the deal, the State obtained the right to nominate two members for ING's supervisory board with special approval rights. In some respects, the State can now exert more influence over ING than any shareholder can. Yet it does not hold a single share, and its influence remains invisible if we focus only on voting rights. This shows the limitations of using voting power as a proxy for control and represents an interesting avenue for further research.

Third and finally, while the Chapter suggests that legislative action could be conducive to realizing the objectives of the European ownership disclosure regime — improving market efficiency and corporate governance — it does not address the question of whether action should be taken at the European level or whether this should be lelt to individual European countries. The fact that the regime provides for so-called minimum harmonization raises the question of whether it would be socially more beneficial to rely on regulatory competition between countries. The swiftness with which the UK has expanded its disclosure rules suggests that fostering regulatory competition might be a fruitful approach. Indeed, its rapid response may be seen as an example of what Simon Deakin refers to as "efficient evolutionary adaptation of systems to changing environmental conditions," facilitated by a directive that provides the conditions for local diversity and thus enables search and learning processes.4

While it goes beyond the scope of this Chapter to address this question, two preliminary remarks can be made, taking into account the ambition of creating a single European market that inspired the European Commission to establish the disclosure regime. First, minimum harmonization presupposes that mere implementation at national level of the European rules creates sufficient transparency. Yet this Chapter has shown the Hoor is currently set too low, which may deter cross-border investment.5 Second, the current level of divergence may deter cross-border investment by institutional investors, who are faced with no less than 27 different ownership disclosure regimes they potentially have to comply with.6 This raises concerns the Commission should duly take into account when determining its future policy on ownership disclosure.