1. The financial crisis has resulted in a stockpile of reports addressing the question what went wrong, and what should be done about it. As far as the role of shareholders is concerned, there’s a striking difference between the recommendations of the UK’s Turner Review and the Advisory Committee on the Future of Banks in the Netherlands (the so called Maas Committee, see post No. 60). Although the Turner Review focuses on issues at macroeconomic level rather than at firm level (firm level issues will be addressed in the Walker Review), it suggests that there may “be potential to achieve more effective institutional shareholder influence over corporate strategies.” (Enhancement of shareholder influence, of course, is also the aim of the draft US Shareholder Bill of Rights Act, see post No. 46).
2. By contrast, the Maas Committee, by suggesting that banks issue depository receipts, appears to recommend limitation of shareholder influence rather than enhancement. True, the Maas Committee also suggests that "stable" bank shareholders should receive extra rewards, such as increased voting rights. But the limiting effect of depository receipts on the influence of investors (who suddenly find themselves confronted with a powerful trust office that votes on behalf of absent investors) is well known.
3. The diverging recommendations can be traced back to what the respective experts believe to be the underlying causes of the financial crisis. Both the Turner Review and the Maas Committee agree that excessive risk-taking has been one of the causes. But they seem to have different views on the relation between shareholder influence and excessive risk-taking. According to the Turner Review, there were many cases where “boards failed adequately to identify and constrain excessive risk taking,” while “shareholder influence seems to have been relatively ineffective in the past in constraining risky strategies.” (In similar vein, the introduction of the US Shareholder Bill of Rights Act states that boards have failed "to appropriately analyze and oversee enterprise risk" and that "a key contributing factor to such failure was the lack of accountability of boards to their ultimate owners, the shareholders.") From this point of view, shareholder influence is a solution to the problem.
4. By contrast, according to the Maas Committee, a
From this point of view, shareholder influence is the problem.
5. Not everyone agrees with the Maas Committee’s analysis. Jean Frijns, former asset manager at pension fund APB and a prominent figure in the Dutch corporate governance landscape, has strongly opposed the notion that shareholder influence is the problem. But Wouter Bos, the Dutch Minister of Finance, seems to endorse the suggestion that banks issue depository receipts in order to avoid disproportionate influence of certain shareholders (hedge funds?) This means we may even see it reflected in the code for sound banking practices that is currently being drafted and that may receive quasi-legal status.
6. As one observer reminds us, it is not so long ago that depository receipts were largely abandoned to get rid of the infamous ‘Dutch Discount’ – Unilever, perhaps the most prominent among the few companies that haven’t abandoned them, recently announced it intends do so. Time will tell whether investors should once again draw their calculators to calculate the appropriate discount.
Comments