Introduction

The global integration of securities markets has brought about significant changes to our economy over the recent decades. Lawmakers are faced with the challenge of adequately responding to these changes. Where they respond by introducing new laws, financial innovation enables market participants to circumvent such laws, undercutting their effectiveness. Financial innovation also continuously raises new issues that warrant regulatory attention. Thus, when it comes to corporate and securities law, the relation between law and the markets is highly dynamic.1

This thesis focuses on how market developments have affected a core principle in corporate law and securities law, which is that when shareholders in public companies exercise voting rights attached to shares, they have a corresponding financial interest in these shares. Until recently, it was assumed that shareholders who exercise voting rights necessarily have a corresponding financial interest. In their seminal paper on corporate voting, Frank Easterbrook and Daniel Fischel wrote that "[i]t is not possible to separate the voting right from the equity interest. Someone who wants to buy a vote must buy the stock too."2 Yet, due to market developments, this claim no longer holds true. By borrowing shares, for example, the borrower becomes eligible to vote. The market for share lending is large, as institutional investors are eager to boost returns by lending shares for a fee. Although shares are typically borrowed by short sellers, they may also be borrowed by persons who are solely interested in being able to vote at the shareholders' meeting. Given that the shares will be returned to the lender after the meeting, the borrower is not exposed to the consequences of his vote for the value of the shares. The borrower thus has voting ownership, but lacks economic ownership.

Voting and economic ownership can also be decoupled through the use of equity derivatives. Persons who are solely interested in obtaining voting power may buy shares and subsequently hedge their exposure to movements in the share price by entering into a derivate contract. Pursuant to such contract, the counterparty, typically a bank, assumes the risk of movements in the share price in exchange for a fixed fee. This is referred to as a "contract for difference" or "equity swap," and again results in the shareholder being able to vote without being exposed to the consequences.

Still other market developments have resulted in different, more subtle ways of decoupling voting and economie ownership. The purpose of this thesis is to identify these market developments, to analyze their costs and benefits and to offer suggestions as to how lawmakers may respond. Each chapter of the thesis is devoted to a particular development, and this Introduction provides an overview of the various chapters. Before doing so, it is useful to take a step back and briefly address three preliminary questions regarding shareholder voting in public companies. Why do shareholders have voting rights? How is voting related to the corporate objective? And how are voting rights distributed among shareholders?

A descriptive answer to this question involves an inquiry into the reasons for why shareholders in public companies have historically been granted voting rights. As Section A below shows, such an inquiry points to the desire to enable investors to hold management accountable. Next, section B addresses the question of whether the allocation of voting rights to shareholders is also desirable from a societal perspective, and accordingly considers the normative claim that voting rights should be allocated to shareholders because they are the `residual claimants' of the firm.

A useful starting point for a descriptive answer to the question why shareholders in public companies have voting rights is the early 17th century, when the first joint stock companies were incorporated in the UK and in the Netherlands. The British East India Company (the EIC) and the Dutch East India Company (the VOC) both acted as capital raising devices to finance expensive trade ventures to the East Indies.3 Significant amounts of capital were invested by outside investors primarily interested in getting a return on their investment, and not being directly involved with the enterprise. Instead, the enterprise was managed by entrepreneurs, whose interests were not perfectly aligned with those of outside investors. In this setting, a question arose that to date is still viewed as a core question in corporate governance: how do suppliers offinance to corporations assure themselves of getting a return on their investment?4

Investors in the VOC initially had few means to safeguard their investment. Their greatest protection was arguably afforded by the possibility to exit from the corporation prematurely by selling shares in the secondary market.5 At one point, when returns were lagging and executives refused to release financial accounts, investors started to protest, demanding control rights. They partially succeeded: major investors were granted a seat on a newly established corporate body that appears to have been a precursor of the supervisory board in a twotier system. As a result, they would obtain the right to, among other things, issue prior advice with respect to major decisions contemplated by the executives.6 Importantly, shareholders were also granted the power to nominate, albeit indirectly, candidates for appointment to the executive body.

The EIC, by contrast, awarded its investors control rights from its inception. Among the explanations for this difference is the fact that the EIC evolved from the regulated corporation, whereas the VOC evolved from the limited partnership.7 It has also been observed that the EIC depended more strongly than the VOC on outside equity investment because it had limited access to debt financing.8 This dependence created a need to accommodate investors by ensuring them they would have means to hold executives accountable.9 Thus, EIC shareholders were entitled, among other things, to elect executives on a yearly basis.

More than two centuries after the EIC and the VOC, corporations would gain significance in the US, with the public promotions of railroad companies.10 Again, a driving force behind this was the need to raise capital.11 The desire to protect suppliers of such capital appears to have been the key rationale for granting shareholders in public companies voting rights over time. When, at the beginring of the 21s^t century, shareholders in Dutch public companies were granted a veto right over major transactions contemplated by the board, the explanation offered was that suppliers of capital should be protected against actions by the board that would fundamentally alter the nature of their investment.12 Similarly, recent changes in US law that have made it easier for shareholders to nominate candidates for the board, and that have granted shareholders say on pay, were aimed at preventing reoccurrence of the recent financial crisis and the resulting investor losses by enabling shareholders to keep a check on management.13 So as a positive matter, shareholders in public companies appear to have voting rights primarily to enable them to secure a return on their investment by holding management accountable. The more intriguing question, perhaps, is whether the fact that shareholders — and only shareholders — have voting rights is desirable from a normative point of view, a question we turn to now.

The potential divergence between the interests of management and shareholders, which had already caused Adam Smith to express scepticism about the corporation,14 gained significant scholarly attention following Berle and Means' 1933 study that showed the dispersion of share ownership of US corporations.15 Berle and Means concluded that, with shareholders having become mere capital suppliers or `passive agents', corporations were now de facto controlled by managers. They considered this problematic because they viewed the corporation as the shareholders' property, and their concept of property implied that beneficial ownership and control go hand in hand.16 In 1960, Milton Friedman, too, famously characterized shareholders as `owners' of the firm.17 Yet the theory that underpins much of corporate legal scholarship today is a theory that is based on the premise that shareholders are the residual claimants of the corporation. This theory was presented in 1983 by Frank Easterbrook and Daniel Fischel and built on the work of economists such as Coase, Alchian and Demsetz, and Jensen and Meckling, who had reconceptualized the firm as a `nexus of contracts'.18 The laffer characterized the relationship between shareholders and managers as a 'pure agency relationship' in which shareholders are the principals and managers the agents. Thus, an agency conflict arises between the manager and outside investors as a result of the manager's tendency to appropriate perquisites out of the firm's resources for his own consumption, or his weakened incentive due to having only a fractional claim on the firm's income.19

The view of the firm as a nexus of contracts raised an important issue: contracts are inherently incomplete. According to Easterbrook and Fischel, voting exists in corporations "because someone must have the residual power to act (or delegate) when contracts are not complete."20 The reason why shareholders are the ones to whom the voting right should be allocated, they argued, is that while bondholders and employees have fixed claims, shareholders are the residual claimants to the firm's income; shareholders thus receive most of the marginal gains and incur most of the marginal costs, and therefore have the right incentives to exercise discretion.21

The notion that shareholders are the sole residual claimants has been subject to the criticism that arguably, there are multiple residual claimants, including employees, creditors, suppliers, the government and so on, undermining the strength of the contractarian argument for why shareholders (and only shareholders) have voting rights.22 In this thesis, the focus is not so much on the issue that other stakeholders, too, may qualify as residual claimants but rather that shareholders themselves sometimes may not qualify as residual claimants. For example, when shares are borrowed, voted and returned, the person voting the shares does not receive most of the marginal gains, nor does he incur most of the marginal costs. As a result, he does not, at least not necessarily, have the right incentives to monitor management.

The adverse effect on incentives to monitor if the monitor does not reap the benefits of his monitoring activity has become strikingly apparent during the recent financial crisis. In the years preceding the crisis, originators of mortgage securitizations systematically transferred credit risk to third parties. As a result, originators lacked the incentive to verify that borrowers would be able to repay their loans, to the detriment of investors in asset backed securities and, as the crisis has demonstrated, society as a whole.23 In response, policymakers on both sides of the Atlantic have proposed that originators be required to retain an economic interest in a material portion of the credit risk of securitized credit exposures — an interest that they will not be allowed to hedge.

There is a clear analogy with the situation in which shareholders lack a corresponding financial interest, for example because they have hedged their exposure (meaning they have transferred the risk to a third party). So-called `empty voters' lack an incentive to exercise their voting right in a way that they believe maximizes shareholder value, to the detriment of other shareholders. As this thesis is careful to point out, though, this is solely the case when the empty voter has a negative net economic interest. As long as the empty voter has a positive net economic interest, the fact that his economic interest does not perfectly correspond with his voting power need not be problematic and may indeed be beneficial.

The notion that shareholders are the residual claimants and should therefore have the power to replace managers goes hand in hand with the notion that managers should run the business with a view to maximizing shareholder value, the dominant paradigm in law and economics scholarship.24 This notion is based on the argument that since other stakeholders have a fixed claim, maximizing shareholders' residual claim means maximizing the size of the economic pie.25 This argument is subject to the same criticism as referred to earlier, that other stakeholders too could be characterized as residual claimants; to the extent shareholder value maximization implies a wealth transfer from other stakeholders to shareholders, the size of the economic pie is not maximized. A corporate law that would nevertheless impose such a norm would fail to serve its objective, which ultimately is to advance social welfare.26

A related argument for why the business should be managed with a view to maximizing shareholder value is that such norm provides management with a single metric to focus on, and a basis on which managers can be held accountable. Fear of unaccountability appears to have been the primary reason for why Berle resisted a broader norm that would instruct managers to take into account the interests of other stakeholders.27 The same concern led Michael Jensen to oppose so-called stakeholder theory, which he suggests directs corporate managers to serve many masters, and "when there are many masters, all end up being shortchanged."28 Instead, he argues that managers should focus on long-term value maximization, where value is defined as the sum of the market values of the equity, debt and any other contingent claims out-standing on the firm.29 Maximizing total firm value means maximizing social welfare, a notion that Jensen famously argued is supported by "200 years worth of work in economics and finance."30 At the same time, he recognizes that there are circumstances where the value-maximization criterion does not maximize social welfare, in particular where there are externalities. As the recent financial crisis has demonstrated, regulation may be warranted to internalize such externalities.31

Jensen's theory, which he has dubbed `enlightened value maximization,' is appealing because it provides management with a criterion for choosing among partially competing interests. At the same time, proponents of stakeholder theory have questioned whether this criterion actually provides better guidance to managers faced with complex business decisions. Perhaps the most encouraging development in this complex, ongoing debate is that the different views appear to converge, as illustrated by Jensen's acknowledgement that creating long-term value requires correct treatment of stakeholders and that value creation does not constitute a strategy as such.32

Moving away from the classic theoretical debate and into the boardroom, it appears that the interests of shareholders and other stakeholders are considered to be even more closely related.33 We can therefore expect new theories to emerge that cut across the classic divide between stakeholder and shareholder interests.34 One such unified theory has recently been developed by Michael Porter and Mark Kramer, who have introduced the concept of `shared value'.35 This concept is defined as policies and operating practices that enhance the competiteveness of a company while simultaneously advancing the economie and social conditions in the communities in which it operates. The concept of shared value, they suggest, offers a new paradigm through which to look at the relation between shareholders and other stakeholders. Further developing the theory and thinking through its implications for corporate governance arguably is one of the great challenges legal scholars and economists will be facing in the years ahead. In particular, a response needs to be developed to the criticism that Porter and Kramer persistently play down the difficult trade-offs that businesses often have to make.36 Absent clear guidelines in this respect, the outcome of such trade-offs risks being arbitrary. Consider the case of Unilever, the consumer goods producer considered a pioneer in the area of shared value creation. In its recent Sustainable Living Plan, the company sets admirable targets ranging from reducing green house gas emissions from transport to reducing calories per portion of ice cream.37 The company has stated that it does not believe that there is a conflict between sustainability and profitable growth, and indeed, at least some representatives of the shareholder community have responded positively to the Plan.38 Still, the company is noticeably vague about how the pursuit of these objectives will affect its bottom line, even in the long term.39 This suggests there is no precise estimation of the costs and benefits involved, which makes it difficult to assess the likelihood that company will succeed in creating truly shared value.

In his fascinating account of the East India Company, Ron Harris writes that at the time it was taken for granted "that each adventurer would have one vote in the [shareholders' meeting], irrespective of the amount subscribed for." Similarly, in the US railroad corporations incorporated in the mid-19^th century, each shareholder was entitled to one vote only.40 By contrast, in today's public companies one share-one vote is generally the tule, and as a result shareholders can obtain greater voting power by acquiring additional shares. Colleen Dunlavy, who has studied the history of voting rights, has implicitly argued that one man-one vote is a more democratie distribution of voting rights among shareholders than one share-one vote.41 Yet this argument fails to take into account important differences between states and corporations. One such a difference is the fact that shareholders in public firms have the option to exit whereas citizens, as a practical matter, do not.42 Indeed, the corporations Dunlavy focuses on resembled public utilities: they were incorporated, for example, to construct a turnpike. Shareholders of such corporations would be merchants located near the turnpike, and therefore had a personal interest in the business.43 From this perspective, one man-one vote may appear appropriate. But when it comes to modern day public companies, shareholders do not necessarily have a personal interest in the business and indeed they are unlikely to. As investors, they seek return on investment. When returns are lagging, they can exit by selling their shares and invest their money in a different company. In this light, it is not obvious why one man-one vote is preferable over one shareone vote. From a fairness perspective as well as a from an efficiency perspective, one would rather expect shareholders' power to influence corporate decision-making to be proportional to the amount of capital they supply, at least as a starting point.

While one share-one vote is indeed generally considered to be the default, deviations occur frequently. Firms may, for example, have two classes of shares, one of which confers more voting rights per share than the other; Google is a well-known example of a company with such a capital structure. Academies have long tried to estimate the costs and benefits associated with these types of deviations. As is explained in Chapter 1 of this thesis, the basic tradeoff is between empowering large shareholders to actively monitor management (which benefits minority shareholders) and increasing the risk that such shareholders abuse their voting power to extract private benefits (to the detriment of minority shareholders). Because of this risk, the issue of proportionality between voting and economie ownership has received considerable attention from EU policymakers and advisory bodies over the recent years. The European Corporate Govemance Forum, for instance, has observed that nonproportional systems raise concerns in relation to board entrenchment, extraction of private benefits by the controlling shareholder and ineffectiveness of corporate governance codes based on the "comply or explain" approach, and has proposed several policy measures.44 Similarly, Charlie McCreevy, the previous EU Interhal Market Commissioner, in 2005 announced his intention to get the one-share, one-vote principle accepted across the EU, citing concerns about protectionism.45 McCreevy would ultimately abandon his plans due to a lack of evidence that deviations from one share-one vote have systematic negative effects.

In this Introduction, it suffices to note that empty voting involves a deviation from the one share-one vote principle, but not one that is achieved through institutional instruments such as the company's articles of association. Instead, the decoupling of financial interest and voting rights is achieved through market instruments, such as derivative contracts or securities lending. The basic trade off nevertheless remains the same, which suggests that in analyzing the costs and benefits of empty voting we should focus on the incentives of the person exercising the voting right. Chapter 3 does precisely this and suggests that as long as the empty voter has a positive net economie interest, the potential benefits of increased monitoring may well outweigh the costs associated with an increased risk of private benefit extraction. Of course, when this risk does materialize and shareholders fall victim to private benefit extraction by an empty voter, the question crises how this should be remedied. This question is addressed in the final chapter of the thesis.

As stated earlier, the purpose of this thesis is to identify market developments that undermine the assumption that shareholders who exercise their voting rights necessarily have a corresponding financial interest, to analyze the costs and benefits of these developments, and to offer suggestions as to how lawmakers may respond. This section provides an overview of the market developments addressed in the six chapters of the thesis, and briefly describes each chapter.

Securities laws have long required major shareholders in listed firms to disclose their stake, assuming that those who hold shares have a corresponding financial interest. Two recent developments have undermined this assumption. First, as noted earlier, shareholders may hedge their position through the use of equity derivatives, or simply borrow their shares. In both cases, while they can exercise the voting right, they do not have a corresponding financial interest, enabling them to engage in empty voting. Empty voters may be required to disclose the number of shares held by them, but it will often go unnoticed that they do not have a corresponding financial interest in these shares.

Second, equity derivatives can also be used to conceal a financial interest in shares. This is referred to as `hidden ownership.' The easiest way to see how this can be done is by considering that when shareholders hedge their position through the use of equity derivatives, someone else must assume the fmancial risk. That someone is the counterparty to the derivate transaction. In many jurisdictions, such counterparty might not be required to make a public disclosure, even if he has a financial interest in the shares and even if he has potential access to the voting rights attached to these shares.

Should we worry about this? Judging by the stir that hidden ownership and empty voting have caused, we should. Both market participants and commentators have called for expansion of share ownership disclosure rules, and policymakers on both sides of the Atlantic are contemplating how to respond. Yet in order to design appropriate responses, it is key to understand why we have ownership disclosure rules in the first place. This understanding currently appears to be lacking, which may explain why we observe divergent approaches between countries. The case for mandatory ownership disclosure has also received remarkably little attention in the academie literature, which has focused almost exclusively on mandatory issuer disclosure.46 Perhaps this is because most people assume that share ownership disclosure is a good thing. But why is such information important, and to whom?

Chapter 1 aims to answer these fundamental questions, using the European disclosure regime as an example.47 First, the chapter identifies two main objectives of ownership disclosure: improving market efficiency and corporate govemance. Next, the chapter explores the various mechanisms through which ownership disclosure performs these tasks. This sets the stage for an analysis of hidden ownership and empty voting that demonstrates exactly why these phenomena are so problematic. The chapter concludes with a discussion of policy implications.

Chapter 2 also looks at ownership disclosure rules, this time from an empirical perspective.48 A unique dataset comprising data from 25 countries over 11 years is used to study the evolution of ownership disclosure rules across countries. The analysis demonstrates, first, that ownership disclosure roles have become more stringent over time, in the sense that disclosure thresholds have been lowered, and second, that there has been convergence between countries. A breakdown of the results suggests that the degree of countries' economic development is a relevant factor in explaining the differences between countries. The analysis also suggests a positive correlation between ownership disclosure and several other legal and economic variables. Various possible explanations for these results are offered, using the insights from Chapter 1.

The insights from Chapter 1 are also used in Chapter 2 to predict how ownership disclosure mies may evolve going forward. While it appears unlikely that disclosure thresholds will be lowered much further, ownership disclosure roles can be expected to continue to evolve in other dimensions. First, regulators are likely to broaden the definition of the stake that triggers disclosure, so as to ensure that the ultimate (i.e., the beneficial) owner is reached. Second, regulators may require more information to be disclosed when the notification is made, so as to enable other investors and issuers to adequately assess the implications of major share ownership. In countries such as the UK and, more recently, the Netherlands, these measures have already been taken.49 The European Commission has recently proposed to amend the Transparency Directive along the same lines.50 And in the U.S., the Securities Exchange Commission (SEC) has launched a consultation on the impact of bidden ownership and empty voting, and may well expand the scope of the US ownership disclosure roles soon.51

Whereas the first two Chapters focus on the effects of hidden ownership and empty voting on the efficiency of ownership disclosure roles, Chapter 3 goes to the heart of the matter by focusing on the effect of empty voting on the efficiency of shareholder voting.52 Again, the Chapter begins by taking a step back to address the basic question of what the determinants of voting efficiency are. This is a timely question, given that in the wake of the financial crisis, shareholders are increasingly relied upon to monitor directors. Yet while much has been written about directors' flawed judgments, remarkably little is known about shareholders' ability to make accurate judgments. What determines whether shareholders make the right decision when asked to vote on, say, a merger? Chapter 3 takes a novel approach to this question by drawing an analogy between corporate voting and another system to aggregate information on estimated values: stock trading.

Using insights on stock market efficiency, the Chapter makes three contributions to our understanding of voting efficiency. First, the Chapter identifies four key mechanisms of voting efficiency: (1) informed voting, which implies that shareholders have some information to base their voting decision on; (2) rational voting, which implies that such information is processed in a rational, unbiased way; (3) independent voting, which implies that each shareholder arrives at a judgment by making use of her personal cognitive skilis, and (4) sincere voting, which implies that shareholders vote with a view to furthering the common shareholder interest rather than their own private interest. The Chapter explores the operation of each mechanism, and demonstrates that the mechanisms interact in unexpected ways.

Second, the Chapter shows that share trading, proxy solicitation and vote buying can usefully be viewed as arbitrage techniques that reallocate voting power in the hands of shareholders with superior information and processing skilis, and with appropriate incentives. By reducing information asymmetry, arbitrage techniques potentially play an important role in improving voting efficiency. In practice, however, they are subject to cost as well as legal constraints. The limits of voting arbitrage are significant, and affect voting efficiency much in the same way as limits of securities arbitrage affect market efficiency.

Third and finally, Chapter 3 analyzes empty voting as well as another phenomenon that involves the decoupling of voting power and financial interest: the rise of proxy advisers, commercial agencies who provide voting advice and whose role can be loosely compared to that of credit rating agencies. By showing that these phenomena each involve a trade off between the various mechanisms of voting efficiency described earlier in the Chapter, their costs and benefits are brought into sharper focus. Several policy options are then presented to mitigate the costs while fostering the benefits.

Chapter 4 examines the role of proxy advisers in further detail. This examination is warranted in light of increasing evidence that proxy advisors have significant influence on voting outcomes, even though they lack a fmancial interest in the outcome of the vote and their voting recommendations may not always be accurate. Indeed, company managers and policymakers have expressed concern that institutional investors follow voting recommendations blindly, without verifying their accuracy at all. But reality is likely to be more subtle than that. Accordingly, Chapter 4 hypothesizes that institutional investors allocate the limited resources available for verifying the accuracy of voting recommendations to voting decisions that are likely to have the greatest impact on portfolio performance.

To test this hypothesis, the chapter analyzes proprietary data from four large fund managers, using the funds' marginal propensity to deviate from voting recommendations as a proxy for resources devoted to verifying their accuracy. Consistent with the hypothesis, it is found that funds tend to deviate from voting recommendations more often when they hold a large stake in the portfolio firm, when the firm performs relatively poorly and when the proposal has potentially significant value implications. This suggests that the funds in our sample make deliberate choices about the resources they devote to different types of voting decisions, choices that presumably they believe to be in the interest of their beneficiaries. Unless this belief is misguided, for example because the funds systematically underestimate the benefits of active monitoring, requiring funds to devote more resources may effectively result in a wealth transfer from the funds' beneficiaries to free-riding minority shareholders in portfolio companies. This cautions against policy measures that reach further than merely encouraging, as the NYSE Commission on Corporate Governance and the Dutch Monitoring Committee on Corporate Governance have done, institutional investors to exercise their votes only after the exercise of thoughtful judgment, even if they retain proxy advice.

Over recent years, there has been a dramatic increase in cross-border share ownership, and in many countries a majority of shares in public firms are now held by foreign investors. Chapter 5 addresses the issue that as a practical matter, shareholders often find it more difficult to vote the shares they hold in foreign portfolio firms than to vote their shares in domestic firms.53 By way of example, a Dutch investor may find it easier to vote the shares he holds in, say, Amsterdam-based Philips than to vote the shares he holds in, say, Paris-based L' Oréal.

Why do shareholders find it more difficult to vote their shares in foreign firms? The short answer is that shares in listed companies are typically held through a chain of intermediaries, a chain that typically becomes longer in case of cross-border investment. This raises two issues, a legal issue and a practical issue. The legal issue is that pursuant to applicable law, an intermediary may formally qualify as shareholder and may consequently be entitled to vote, instead of the ultimate investor. The practical issue is that longer the chain of intermediaries, the more difficult it becomes to ensure that voting instructions from the ultimate investor are passed along the chain to the issuer, or, alternatively, that a power of attorney is granted to the ultimate investor. Both issues decrease the probability that foreign shareholders will vote their shares. Thus, two links with the central theme of this thesis emerge:

First, intermediaries may be able to vote even if they lack an economic interest. Discretionary voting by intermediaries does not appear to be standard practice in Europe, although until recently, German banks used to vote on behalf of their accountholders and accordingly were able to exercise significant influence in listed companies. Discretionary voting by intermediaries however still occurs in the US, where broker voting is commonplace when it comes to routine matters.

Second, when some shareholders are discouraged from voting their shares and as a result do not vote, the voting power of shareholders who do vote becomes disproportionally large. In the hypothetical event that the 21% of outstanding L'Oréal shares held by foreign shareholders would not be voted, the founding family, which holds 31% of the shares, would control no less than 39% of the remaining votes that could still be cast at the shareholders' meeting.54 Thus, the family's voting ownership would significantly exceed its economic ownership.

In examining this issue, Chapter 5 does not focus on whether the difficulty shareholders are having to vote across borders is problematic from a social welfare perspective; it is assumed that it is.55 Rather, the Chapter focuses on the remarkable fact that although European policymakers acknowledge the importance of a system that facilitates cross-border voting, they seem reluctant to adopt legislation necessary to put such system in place. As a result, the status quo has prevailed. Chapter 5 hypothesizes that this paradox is due to the political economy, which can be expected to be a major factor in European corporate law making just as it has been shown to be a major factor in US corporate law making.56 To test this hypothesis, the Chapter analyzes the legislative process. The analysis suggests that financial intermediaries, who generally have an interest in maintaining the status quo, have had a relatively strong voice throughout the legislative process. This conclusion is based on evidence of their active participation in expert groups and public consultations, and may go some way in explaining the status quo.

Chapter 5 also offers an explanation for why financial intermediaries have had a relatively strong voice throughout the legislative process, using insights from a theoretical model recently developed by Lucian Bebchuk and Zvika Neeman.57 Accordingly, this Chapter responds to recent calls for corporate governance research to study how corporate governance arrangements are influenced by interest group politics and how such politics can impede governance reforms.58

The policy implication of Chapter 5 is that even though the involvement of market practitioners in the legislative process certainly has benefits, 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 ultimately needs to make its own independent judgment on how to increase social welfare. In this respect, it is worthwhile noting that there have been interesting developments since 2009, when the analysis of Chapter 5 was conducted. Late 2010, the European Commission proposed that national laws should require that the account provider of the ultimate account holder is bound to facilitate the exercise of voting rights by the ultimate account holder vis-à-vis the issuer.59 As a result, the ultimate account holder would no longer depend on intermediaries further up the chain to grant a power of attorney or to accept voting instructions. While there are a number of issues that remain to be dealt with, such a system holds significant potential, in particular if the Commission would simultaneously adopt its proposal to prevent account providers from charging higher fees for services in respect of cross-border holdings than for services in respect of domestic holdings.

An analysis of shareholders' use of the voting right would not be complete without taking into account the alternative, which is to sell shares (exit) instead of exercising influence through voting (voice). There is an emerging body of literature addressing the dynamic between the exit option and the voice option.60 Chapter 6, the final chapter of this thesis, contributes to this literature through a study of governance in mutual funds, who held over USD 24bn in assets in 2010 and are among the largest shareholders of listed companies.61

Particularly in the US, there is concern that fund managers may be awarding themselves excessive fees at the expense of fund investors. In theory, there are three forces that could keep fund managers in check: market competition, fee litigation and fund governance. Indeed, shareholders in US mutual funds get to vote on fee increases and also on the composition of the fund's board of directors, which in turn has the power, at least formally, to replace the portfolio manager if the fees charged are excessive. There appears to be a growing consensus though that fund governance is unlikely to be effective. The use of voice by fund investors is commonly said to be hampered by collective action and free rider problems caused by the fact that fund investors are typically household investors.62 More recently, it has also been argued that the use of voice is hampered by the easy availability of exit.63 Yet while the easy availability of exit may discourage the use of voice, the easy availability of exit may also encourage voice. Chapter 6 explains how the easy availability of exit from mutual funds encourages shareholder voice, at least in theory: easy availability of exit makes it more likely that shareholders' concerns, when voiced, will be taken seriously by fund managers, because the threat of exit in case such concerns are ignored is highly credible.64

Chapter 6 also explains why mutual fund governance might work in practice, thanks not to fund investors but to so called 401(k) plan fiduciaries. A 401(k) plan is an employer-sponsored plan that enables employees of US firms to invest part of their pre-taxable income to save for retirement. By 2009, no less than 68 percent of US mutual fund investors owned funds inside such an employer-sponsored plan. The employer typically appoints a fiduciary who has a duty to "prudently select and monitor" investment options that participants in the plan can choose from. As Chapter 6 explains, plan fiduciaries could play a significant role in mutual fund governance, given that the significant threat of removing the fund from the plan's menu of investment options should cause fund managers to take any concerns about fees voiced by plan fiduciaries' seriously.

While Chapter 6 focuses on governance of US mutual funds, the analysis has clear relevance to the EU including the Netherlands, where fees charged by mutual funds are substantially higher than fees charged by index trackers due in part to kickback fees paid by mutual funds to distributors.65 The Dutch financial regulator AFM is therefore advocating a shift from covert distribution fees to transparent advisory fees, a shift that will soon be made in the UK.66 Also, fee structures often fail to align the interests of fund managers with the interests of investors. For example, some funds may award performance fees to fund managers even if they underperform in relation to the benchmark index.67 Thus, the issue of fund fees is relevant across countries, as is the broader question of how funds should be governed so as to manage potential conflicts of interest.

The thesis concludes with a chapter in which we return to the issue that has generated such controversy, the issue of empty voting. As noted, empty voting need not be used for abusive purposes and may be used for beneficial purposes. In particular, Chapter 3 explains that the use of equity derivatives and share borrowing may enable shareholders with superior information to obtain greater voting power, and thereby increase the probability that a majority of the shares is voted in favor of the correct option. It therefore generally makes sense to battle abusive empty voting through narrow ex post rules rather than through broad ex ante prohibitions of empty voting. The concluding chapter of this thesis extends the analysis by exploring, from a Dutch law perspective, what such a rule could look like. Accordingly, the chapter identifies the circumstances under which empty voting should be considered a breach of the statutory obligation for shareholders to act in accordance with standards of reasonableness and fairness. This extended analysis should hopefully be of use to policymakers considering how to deal with the phenomenon of empty voting, and to courts confronted with actual instances of empty voting.