Disadvantage question remains how the (alleged) short-termism of

Disadvantage of Shareholder EngagementInvestors may not choose to intervene because in doing sothey will breach the legal rules. An example would be diversificationrequirements for mutual funds or pension funds might not allow investors totake a stake that is sufficiently large to incentivize engagement. Rules on”acting in concert” can also discourage engagement because they imply a legalrisk to investors coordinating engagement.1Finally, disclosure regulations (e.g.

, “Regulation Fair Disclosure” in theUnited States) might discourage investors or managers from engagement.2 Increasedregulation could reduce quality of engagement. Risk that further regulation inthe governance arena would be counterproductive, leading to more box tickingand boilerplate reporting rather than more effective engagement.3However, that institutional investor activism most of thetimes takes place behind the scenes4,which makes it very hard to detect. Subsequently, further research in this areais of utmost importance. Moreover, do shareholder activism and shareholderengagement have positive effects? Several academics believe in an overallbenign effect of shareholders’ activism5.

The evidence remains limited, however. Academic research also pointed toevidence on a more long-term oriented shareholder engagement by hedge funds6, butthe question remains how the (alleged) short-termism of shareholder engagementcould be dealt with, if at all. Moreover, recent theoretical models even show amore beneficial result of activism through exit than activism through voice.

There is a huge range of investment managers. In 2001, PaulMyners, who was just concluding a term as chairman of the board of pension fundmanager Gartmore, issued a government commissioned report on institutionalinvestment in which he expressed concern about the reluctance of fund managersto engage actively with companies in which they had holdings.7Hedge funds do not give a damn they just want to know aboutshort-term share price moves at the opposite end of the spectrum are theactivist firms they are in the minority but noisy.

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8Likewise, the fund managers who invest on behalf of institutional investors aregeared up to focus on trading decisions and thus are neither incentivised norresourced to act as an ‘owner’.9 Moreover,institutional investors, as custodians of others’ funds, typically prefer notto be ‘locked in’ by a policy of intervention and instead want there to beample scope to off-load underperforming assets when appropriate.10Governance remains important to the majority of equityinvestment firms although only a few cited it as an important part of theirinvestment process and there is concern about the lack of interest fromclients.11They feel that their clients have little interest in their governanceengagement work the vast bulk of shareholders are not very interested ingovernance.

The disadvantage of shareholder engagement is that majorityof them will lack information of the company’s managers and another source ofdoubt is that of the level of experience of the institutional investors.12 Oneof the arguments is that shareholders have an informational disadvantagecompared to the management because of the lack of inside information, and that’shareholders lack sufficient incentives to obtain and assess all of the publicinformation.13 Concernsabout insufficient expertise provide one obstacle, with many shareholdersbelieving that it is unrealistic for the as opposed to the board of directors toascertain if a company is losing its way and generate well-informed solutions.14Some commentators argue that institutional investor activism can encounter themonitoring and incentive problem, whilst their counterparts contend theseinvestors lack the skills, knowledge, time and interest to monitor the firm’smanagement.

15Winternotes: “The knowledge andexpertise institutional investors need… is mainly related to the market andonly to a limited extent to individual companies and their long term prospects…There is usually no in-depth insight into the prospects and risks of individualcompanies, nor a real interest in the governance of those companies”.16Bebchuk argues that even if management has sometimes moreand better information, this does not entail that they will make the rightdecisions.17 However,it is perhaps no bad thing that managers and directors should have to meet anychallenge to their conduct and persuade shareholders to vote with them.18 Inaccordance with the Directive, some forms of electronic participation should bemandatory, such as proxy voting19 andelectronic proxy voting20.The rationale behind these rules and behind the Directive is in the recitals:”Shareholders shall be able to cast informed votes at, or inadvance of the general meeting, no matter where they reside”21.By facilitating cross-border voting, shareholders can beinclined to cast their votes at the general meeting more frequently, which canenhance their engagement with the company22.

As already mentioned, shareholder engagement seems to play a pivotal role in aneffective corporate governance framework.23Companies typically engage with shareholders only duringscheduled shareholder events, such as the annual shareholder meeting, analystcalls, or public announcements. These engagements tend to be mere formality andof little value, as they do not translate into positive votes at the annualmeeting.24  Outside of these traditional forms ofcommunication, communication with shareholders is, more or less, limited totimes of crisis or when performance issues arise.

25Showing that shareholders can have private interests that do not fullyharmonize the general interests of all shareholders.26The Association of British Insurers, in its 2009 submission to the TreasuryCommittee investigation of the banking crisis, expressed doubts thatcollaboration was likely to occur, saying it:”Believed other shareholders ‘were less concerned aboutgovernance’ than insurance companies, meaning in turn it was ‘easier forcompanies to override efforts by concerned shareholders to achieve change”.27Intervention can further be impeded because of the structure of the investmentmanagement industry. Fund managers might not engage if their own investors donot sufficiently reward activism or if the investment process is outsourced toother asset managers.28LordMyners, then Financial Services Secretary to the Treasury, characterised theinstitutional investors who currently dominate share ownership in publiclyquoted UK companies as ‘absentee landlords’.29The distribution of benefits from successful shareholderinterventions compounds matters, in that shareholders who remain passive getthe same upside as the institutional shareholders who took the initiative. Asthe Walker Report observed, ‘Shareholders who do not exercise such governanceoversight are effectively free-riding on the governance efforts of those thatdo.30Mostimportant, the costs associated with shareholder engagement can cause adeterrent effect on institutional shareholders.

31However, they state, “even the most sophisticated investors seem to findengagement in a company’s decision-making process daunting, since it concernscostly and time-consuming discussions.32Winter contends that his findings indicate that institutional investors wouldonly be willing to pay for the expensive engagement efforts if they believe tofind additional value in it.33Winter recognizes three levels of shareholder engagement:compliance, intervention and stewardship, with an increasing degree ofinvolvement.34 Levelof engagement these investors are interested in varies fromcompliance-engagement to sometimes intervention-engagement, while continuousability to trade, portfolio diversification and measuring relative performanceremain the basics of institutional investment practice.35These findings urge winter to conclude that meaningful engagement seems anillusion for the mainstream institutional investor.36     1 JosephA.

McCahery, Zacharias Sautner, Laura T. Starks, ‘Behind the Scenes: TheCorporate Governance Preferences of Institutional Investors’ para (47) 10November 2016 accessed26 December 2017.2 JosephA.

McCahery, Zacharias Sautner, Laura T. Starks, ‘Behind the Scenes: TheCorporate Governance Preferences of Institutional Investors’ para (47) 10November 2016

com/doi/10.1111/jofi.12393/full>accessed 26December 2017.3 JanHall, Thomas O’Malley, ‘A Study of Investors Company and Adviser PerspectivesConducted by the JCA Group for the Financial reporting Council’ (JCA) Section2, page 3

/corporate-governance-shareholder-engagement.pdf>accessed16 December 2017.4 JosephA. McCahery, Zacharias Sautner, Laura T.

Starks, ‘Behind the Scenes: TheCorporate Governance Preferences of Institutional Investors’ 15 March 2010available at:.

From VanCampe Frederic, ‘Corporate Governance in a Post Crisis Era: Is ShareholderEngagement the Answer? A Critical Assessment’ page 17, Master’s Thesis 2011-2012

cgi?fid=129235>accessed 28 December 2017.5 GaetaneSchaeken Willemaers, ‘The European Call for More Shareholders’ Engagement: Stateof Play and Way Forward’ 25 January 2012 available at: .From Van Campe Frederic, ‘Corporate Governance in a Post Crisis Era: IsShareholder Engagement the Answer? A Critical Assessment’ page 16, Master’sThesis 2011-2012

cgi?fid=129235>accessed 28December 2017.6 WilliamW. Bratton, ‘Hedge Funds and Governance Targets’ (2007) 95 Georgetown LawJournal 80 available at: . From Van CampeFrederic, ‘Corporate Governance in a Post Crisis Era: Is Shareholder Engagementthe Answer? A Critical Assessment’ page 16, Master’s Thesis 2011-2012

nl/show.cgi?fid=129235>accessed 28 December 2017. 7 P.

Myners, Institutional Investment in the UK: a Review (London: HM Treasury,2001) 89-91. From Brian R. Cheffins, ‘The Stewardship Code’s Achilles’ Heel:Legislation and Reports’ (2010) 73(6) MLR 1009.8 JanHall, Thomas O’Malley, ‘A Study of Investors Company and Adviser PerspectivesConducted by the JCA Group for the Financial reporting Council’ (JCA) Section2, page 7

../corporate-governance-shareholder-engagement.pdf>accessed16 December 2017.9 P.

Skypala, ‘Expert in How to be a Good Owner Looks Forward to New UK Codes’ Fin.Times, 7 June 2010, FT fm, 4. From Brian R. Cheffins, ‘The Stewardship Code’sAchilles’ Heel: Legislation and Reports’ (2010) 73(6) MLR 1015.10A. Hill, ‘Preacher Myners is Right to Raise Hell with Investors’ Fin. Times, 22April 2009, 18.

From Brian R. Cheffins, ‘The Stewardship Code’s Achilles’ Heel:Legislation and Reports’ (2010) 73(6) MLR 1015.11 JanHall, Thomas O’Malley, ‘A Study of Investors Company and Adviser PerspectivesConducted by the JCA Group for the Financial reporting Council’ (JCA) Section2, page 3

../corporate-governance-shareholder-engagement.pdf>accessed16 December 2017.

12 ProfessorsGordon and Gilson, ‘Shareholder Engagement: Finding the Right Balance’1 March2012 available at: .From Van Campe Frederic, ‘Corporate Governance in a Post Crisis Era: IsShareholder Engagement the Answer? A Critical Assessment’ page 29, Master’sThesis 2011-2012

cgi?fid=129235>accessed 30December 2017.13 LucianA. Bebchuk, ‘The Case for Increasing Shareholder Power’ 118 Harvard Law Review3 available at:. From VanCampe Frederic, ‘Corporate Governance in a Post Crisis Era: Is ShareholderEngagement the Answer? A Critical Assessment’ page 46, Master’s Thesis2011-2012

uvt.nl/show.cgi?fid=129235>accessed 1 January2018.14P. Skypala, ‘Heads Lock on Shareholder Oversight’ Fin. Times, 12 March 2009,FT, fm, 6.

From Brian R. Cheffins, ‘The Stewardship Code’s Achilles’ Heel:Legislation and Reports’ (2010) 73(6) MLR 1014-1015.15 MarcoBecht, Julian Franks, Colin Mayer, Stefano Rossi, ‘Returns to ShareholderActivism: Evidence from a Clinical Study of the Hermes UK Focus Fund’ (2008) 22The Review of Financial Studies 8 (3093-3129) available at: .

From Van CampeFrederic, ‘Corporate Governance in a Post Crisis Era: Is Shareholder Engagementthe Answer? A Critical Assessment’ page 5, Master’s Thesis 2011-2012accessed 28 December 2017.

16 JaapW. Winter, ‘Shareholder Engagement and Stewardship: The Realities and Illusionsof Institutional Share Ownership’ page 5, 20 June 2011 available at:

com/sol3/papers.cfm?abstract_id=1867564>.From 23escommercial, ‘Is Shareholder Engagement a Good Thing? Para (6), 2012accessed27 December 2017.17 LucianA. Bebchuk, ‘The Case for Increasing Shareholder Power’ 118 Harvard Law Review3 available at:

ssrn.com/sol3/papers.cfm?abstract_id=387940>. From VanCampe Frederic, ‘Corporate Governance in a Post Crisis Era: Is ShareholderEngagement the Answer? A Critical Assessment’ page 46, Master’s Thesis2011-2012

cgi?fid=129235>accessed 1 January2018.18 23escommercial,’Is Shareholder Engagement a Good Thing? Para (6), 2012accessed27 December 2017.19 Article10(1) of Directive 2007/36/EC.20 Article11(1) of Directive 2007/36/EC.

21 Recital6 of Directive 2007/36/EC.22 ChristophVan der Elst, Erik P. M. Vermeulen, ‘Europe’s Corporate Governance Green Paper:Do Institutional Investors Matter?’ Tilburg Law School Research Paper No.014/2011 9 June 2011 available at:

cfm?abstract_id=1860144>. From Van CampeFrederic, ‘Corporate Governance in a Post Crisis Era: Is Shareholder Engagementthe Answer? A Critical Assessment’ page 31, Master’s Thesis 2011-2012accessed 30 December 201723 ChristophVan der Elst, Erik P. M. Vermeulen, ‘Europe’s Corporate Governance Green Paper:Do Institutional Investors Matter?’ Tilburg Law School Research Paper No.014/2011 9 June 2011 available at:

ssrn.com/sol3/papers.cfm?abstract_id=1860144>. From VanCampe Frederic, ‘Corporate Governance in a Post Crisis Era: Is ShareholderEngagement the Answer? A Critical Assessment’ page 31, Master’s Thesis2011-2012

uvt.nl/show.cgi?fid=129235>accessed 31 December2017.24 TarunMehta, Advisor, ISS Corporate Services ‘Shareholder Engagement: Maximizing theShareholder Relationship’ (2013) Exec Comp 13.3 at 1.25 TarunMehta, Advisor, ISS Corporate Services ‘Shareholder Engagement: Maximizing theShareholder Relationship’ (2013) Exec Comp 13.3 at 1.26 ImanAnabtawi, ‘Some Skepticism about Increasing Shareholder Power’ UCLA School ofLaw, Law-Econ Research Paper No.

05-16 15 August 2005 available at: .From Van Campe Frederic, ‘Corporate Governance in a Post Crisis Era: Is ShareholderEngagement the Answer? A Critical Assessment’ page 46, Master’s Thesis2011-2012

uvt.nl/show.cgi?fid=129235>accessed 1 January2018.27 FromBrian R. Cheffins, ‘The Stewardship Code’s Achilles’ Heel: Legislation andReports’ (2010) 73(6) MLR 1022-1023.

28 JosephA. McCahery, Zacharias Sautner, Laura T. Starks, ‘Behind the Scenes: TheCorporate Governance Preferences of Institutional Investors’ para (48) 10November 2016

1111/jofi.12393/full>accessed 26December 2017.29 LordMyners, ‘Association of Investment Companies’ (speech by the Financial ServicesSecretary) (21 April 2009) available at:

hm-treasury.gov.uk/speech_fsst_210409.htmBrian>.From R. Cheffins, ‘The Stewardship Code’s Achilles ‘heel: Legislation and Reports'(2010) 73(6) MLR 1006.30Walker Report.

From R. Sullivan, ‘Collective Engagement Picking up Steam’ Fin.Times, 9 November 2009, FT fm, 3. .From Brian R.

Cheffins, ‘The StewardshipCode’s Achilles’ Heel: Legislation and Reports’ (2010) 73(6) MLR 1015.31  Lynne Dallas, ‘Short-Termism, the FinancialCrisis, and Corporate Governance’ (2011) 37 Journal of Corporation Law 12available at: < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2006556>.From Van Campe Frederic, ‘Corporate Governance in a Post Crisis Era: IsShareholder Engagement the Answer? A Critical Assessment’ page 29, Master’sThesis 2011-2012

uvt.nl/show.cgi?fid=129235>accessed 30December 2017.32 ChristophVan der Elst, Erik P. M. Vermeulen, ‘Europe’s Corporate Governance Green Paper:Do Institutional Investors Matter?’ Tilburg Law School Research Paper No.014/2011 9 June 2011 available at:

ssrn.com/sol3/papers.cfm?abstract_id=1860144>.From Van Campe Frederic, ‘Corporate Governance in a Post Crisis Era: IsShareholder Engagement the Answer? A Critical Assessment’ page 31, Master’sThesis 2011-2012

uvt.nl/show.cgi?fid=129235>accessed 31December 2017.33 JaapW. Winter, ‘Shareholder Engagement and Stewardship: The Realities and Illusionsof Institutional Share Ownership’ 20 June 2011 available at:

com/sol3/papers.cfm?abstract_id=1867564>. From VanCampe Frederic, ‘Corporate Governance in a Post Crisis Era: Is ShareholderEngagement the Answer? A Critical Assessment’ page 48, Master’s Thesis2011-2012 accessed 1 January2018.34 JaapW.

Winter, ‘Shareholder Engagement and Stewardship: The Realities and Illusionsof Institutional Share Ownership’ 20 June 2011 available at: .From Van Campe Frederic, ‘Corporate Governance in a Post Crisis Era: IsShareholder Engagement the Answer? A Critical Assessment’ page 47-48, Master’sThesis 2011-2012

cgi?fid=129235>accessed 1January 2018.35 JaapW. Winter, ‘Shareholder Engagement and Stewardship: The Realities and Illusionsof Institutional Share Ownership’ 20 June 2011 available at:

ssrn.com/sol3/papers.cfm?abstract_id=1867564>. From VanCampe Frederic, ‘Corporate Governance in a Post Crisis Era: Is ShareholderEngagement the Answer? A Critical Assessment’ page 48, Master’s Thesis 2011-2012

uvt.nl/show.cgi?fid=129235>accessed 1 January 2018.36 JaapW.

Winter, ‘Shareholder Engagement and Stewardship: The Realities and Illusionsof Institutional Share Ownership’ 20 June 2011 available at:

cfm?abstract_id=1867564>. From VanCampe Frederic, ‘Corporate Governance in a Post Crisis Era: Is ShareholderEngagement the Answer? A Critical Assessment’ page 48, Master’s Thesis2011-2012 accessed 1 January2018.