1 A Comparative Analysis of the Legal Obstacles to Institutional Investor Activism in Europe and in the US P. Santella, E. Baffi, C. Drago, D. Lattuca Shareholder Rights, Shareholder Voting and Corporate Performance Workshop I-Com Istituto per la Competitività Roma 5 July 2008 The paper is available free of charge Repec: SSRN:

2 Multilateral level: encouragement for institutional investor activism… OECD Principles of CG 2004: -“The exercise of ownership rights by all shareholders, including institutional investors, should be facilitated.” -“"shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to prevent abuse".

3 …and for disclosure of voting policies OECD Principles: "Institutional investors acting in a fiduciary capacity should disclose their overall corporate governance and voting policies with respect to their investments, including the procedures that they have in place for deciding on the use of their voting rights." European Commission Action Plan of 2003: institutional investors should be obliged, among other things, to disclose their policy with respect to the exercise of voting rights in companies in which they invest.

4 Disclosure of voting record: the rising tide SEC 2003: institutional investors required to disclose voting record ↓ Best practice spreading to the EU: NBIM, Hermes, Fidelity, Provident, Morley, Standard Life…

5 Purpose of our paper -Examine the legal and economic obstacles to institutional investors’ activism in the EU and US; -Verify what institutional investors’ voting record can tell us about such obstacles.

6 Institutional investors: an increasingly important lot… - We start observing that institutional investors in the EU are today one of the main categories of shareholders; - they vary from about 25% in Italy to about 80% in the NED and in the UK (see next slide):

77 Institutional investors as shareholders The column “Foreign investors” is made mostly of foreign institutional investors and the column “Collective investment” is made mostly of resident institutional investors.

8 …but they do not seem to make themselves heard much -Voting turnout across the EU is much lower than the US -In the UK recent increase of voting turnout due to institutional moral suasion (Myners Report 2007) -In continental Europe the lowest percentages of voting turnout (see next slide):

99 Low voting turnout in the EU…

10 …also considering that in continental Europe much of the voting turnout is probably made of controlling shareholders

11 Possible reasons for the higher voting turnout in the US In the EU: -Cost of proxy voting (particularly significant for foreign inst. Inv.); -Rational apathy of institutional investors; - conflicts of interest (Italy). In the US: - brokers allowed to vote when beneficial owners inactive; -Pressure on institutional investors to vote (SEC requires voting disclosure since 2003; gvt pressure on pension funds to vote)

12 However, in the EU increasing voting turnout (now and in the close future) - Institutional pressure to vote (UK); - Internationalisation of investors’ share portfolios a vehicle of spreading best practices; - Shareholders rights Directive adopted by the EU in 2007 will reduce the cost of proxy voting

13 Two main types of obstacles to Institutional Investors’ voting in the EU (i)Legal -Proxy voting -National provisions (“put up or shut up” in FRA; acting in concert in GER…) -Deviations from the “one share one vote” principle (ii) Investor-related: -Conflicts of interest -“rational apathy” (investors having too small a stake in each of their portfolio companies to justify voting.

14 The point of view of institutional investors from their voting record: Data Voting records in the EU (Fidelity, Hermes, Morley, NBIM, Provident, Standard Life, T Rowe Price) Voting records in the US (Hermes, Proxydemocracy.com, T Rowe Price) We compute each voting record by each fund separately We obtain country rankings according to the degree of adversariality of investors’ vote… …and then we move on to compare the country rankings (tables of the paper) Time span considered

15 Measures of adversariality We compute various indicators: 1) votes in favour, against management, and abstain votes 2) Number of meetings where all resolutions are voted in favour of management 3) Votes by proposal and by fund typology (comparing socially-oriented funds with mainstream funds)

16 The point of view of institutional investors from their voting record: results -institutional investors in the US seem to have a more adversarial voting pattern vis-à-vis company managements than in the UK; this might be due to the fewer voting rights given to shareholders by the US regulatory framework. -institutional investors' voting pattern in the EU is by far the most adversarial in France, where there is a high incidence of control-enhancing mechanisms.

17 Other voting patterns in the EU -Institutional investors seem to have an adversarial voting stance also in Greece, Belgium and Sweden, where control-enhancing mechanisms are also present, while in Italy they tend to have a low voting turnout. -More in general, investors' voting pattern in the EU seems to be sensitive to the presence of control-enhancing mechanisms, ownership concentration, and to the origin of the national legal system.

18 Voting record in the US by types of proposals: glossary

19 Voting record in the US by types of proposals: results

20 Voting records in US: socially-engaged funds

21 Voting record in Europe: country rankings by vote adversariality (i)

22 Voting record in Europe: country rankings by vote adversariality (ii)

23 In the EU the strength of minority investors is already important… - high percentages of total voting shares held by institutional investors in the EU (from 25% to 80%)… - …coupled with more shareholder power attached to shareholder votes than in the US

24 …if only they cared (could) vote: obstacles to Institutional Investors’ voting in the EU: regulatory answers (i)Legal -Proxy voting : Directive 2007/39/CE (to be adopted by EU Member States by July 2009); -National provisions (“put up or shut up” in FRA; acting in concert in GER…): self-restraint at national level? National legislation should guarantee shareholders’ rights to coordinate their voting policies. -Deviations from the “one share one vote” principle: The European Commission recently announced it would adopt no initiative; the ECJ (WV ruling) seems to have outruled “extreme” forms of deviations from the 1s1v principle. (ii) Investor-related: -Conflicts of interest: separating fund managers from other interests in the portfolio companies. No current initiative at EU level; moral suasion under way in Italy according to the press; -“rational apathy” : in the UK moral suasion at institutional level raised investors’ presence at company meetings; Directive 2007/39 should reduce voting costs thereby increasing propensity to vote.