Sunday, April 01, 2007


Annual General Meeting Season….

The claim for efficient control mechanisms that help shareholders to ‘get their money back’ from opportunistic and self-interested managers is at the heart of the corporate governance debate...but what if shareholders don’t care about these rights?

In recent years, in virtually all countries around the world the level of minority shareholder protection (MSP) in law and in corporate practice has significantly increased: transparency and accounting rules have become stricter, legal venues for shareholders to challenge management and/or board decisions are more numerous, the liability of board members has increased. Shareholders have hence more control instruments available to them then say twenty years ago.

However, despite the increasing possibilities for shareholders to effectively control management, a trend is perceptible which shows that shareholders tend paradoxically to become increasingly unconcerned. One indicator of this trend can be seen in the shareholder behaviour during the Annual General Meetings (AGM). In Switzerland, four signs exist which clearly show that shareholders are not very keen on exercising their control rights.

Firstly, many shareholders who buy registered shares of Swiss companies do not bother to ask the company to be registered in the stock ledger – which is necessary in order for them being able to exercise their voting rights (Boemle 2003). Thus, for up to 40% of the shares issued by Swiss companies, the company does not know who the shareholder is since she does not announce herself to the company (one speaks of Dispo-Aktien).

Secondly, those shareholders who do ask to be registered do not usually attend the AGM and do not bother to send their voting instructions to the company or their bank – which both are legally enabled to exercise the proxy right – either (Boemle 2003). The proportions of represented shares are hence very low. As an example, in 2003 of the CS Group’s 797 million exercisable votes, only 316’000 were represented during the AGM (Boemle 2003)!

Thirdly, those shareholders who do not wish to attend the AGM, but do send back the proxy card to the company so that their votes are represented send them often back without any voting instructions. For these proxies, the board of directors (BoD) can exercise the votes in their own interest (NZZ May 03, 2003).

Finally, the reform of the Stock Corporation Law of 1991 has introduced the institution of “independent representative” which is a person that the company must appoint before the AGM in order to allow shareholders to have their voting rights exercised by an independent person rather than the company’s organs (i.e. a member of the BoD) themselves. However, most shareholders chose to send their proxy to the company directly rather than to the independent voting rights representative as is shown by different studies (cf. study von der Crone in NZZ Mai 03, 2003, Boemle 2003).

Overall it appears hence that a very small proportion of shareholders take the trouble to go physically to the AGM and exercise their control rights, and even the proxy option is only to a very limited extent used in order to control the management. Besides, the main reason for those shareholders that do go to the AGM seems to be linked to sociability rather than any wish to have their say in the company’s affairs. One telling anecdote is reported by Finanz und Wirtschaft, a Swiss financial news paper which published in 1993 an article entitled “No Snack, no Candies, no Interest”. In fact, when Merkur AG (a company specialist in chocolate and candies production) announced in the invitation to the 1993 AGM that due to a share split the previous year, the number of shareholders had considerably increased and that it would therefore not be possible anymore to offer snacks after the meeting and to give a chocolate box to every shareholder, the attendance decreased from 1624 shareholders in 1992 to 703 in 1993.

So, what is all the ‘shareholder-need-more-control-fuzz’ about if they seem to be perfectly happy without these rights? Well, for one thing, one could argue that if shareholders do not use their control rights in an actively, i.e. through ‘voice’, they might just use another strategy i.e. ‘exit’. In other words, if shareholders don’t bother going to the AGM, it may be that they follow the Wall Street rule and ‘sell out if they dislike management’. The question remains, however, if this type of control over management is really efficient enough to avoid managers’ opportunistic behaviour and especially outright fraud and mismanagement.

It should be noted however that exceptions exist from the rule that shareholders are passive in Switzerland. One example is the Ethos foundation – a foundation managing the money of several pension funds – which has started to oppose actively the proposals of that the BoD submits to the AGM if they are not happy with them. As an example, the proposal of Novartis CEO Daniel Vasella to renew his double-mandate during the AGM of March 7, 2007 as well as the amount of his compensation have been fiercely contested by Ethos…without success however.

Be that as it may, it is somewhat ironic to see that all the efforts to revive the so-called “shareholder democracy” which has been debated in politics at regular intervals since at least the 1970s have not yielded fruit. Especially, one argument to explain the notorious passivity of Swiss shareholders that came up in all debates about shareholder democracy was that due to the proxy votes represented by banks – which were as a rule exercised in favour of the BoD’s proposals – it was impossible for minority groups to influence the decisions of the AGM. The absence of active shareholders was hence attributed to a feeling of powerlessness by the shareholders. At the beginning of the 21st century, proxy voting by banks has become virtually inexistent; however, the shareholders’ behaviour did not change. Obviously this argument neglected the fact that shares have become more and more a means to increase one’s personal wealth, losing more and more their concrete signification, i.e. to be a security giving right to a part of the control over the company. This is what Schumpeter meant by saying that property which is detached from the person and from matter does not generate any sentiment of loyalty. As long as the company – or rather the share price – is performing reasonably well, there is not much reason for a minority shareholder to care about the company of which she is – theoretically – a co-owner…

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