Any choral singer will be familiar with the concept: a choir singing an acapella section will often naturally go ‘flat and lose pitch’, only to have to painfully re-adjust pitch when the orchestra joins in. Conversely, if the orchestra were to be playing in the wrong key (as a violinist and singer, a cruel but amusing trick), the choir will automatically re-adjust to the pitch at which the orchestra plays. The logic is simple: The orchestra is loudest, so the choir sings to the orchestral pitch.

In a recent academic article posted last week, (The Political Economy of Cross-Border Voting in Europe) Michael C Schouten of the University of Amsterdam has identified the ‘orchestra’ accompanying the efforts of the European Commission to reform and improve the cross-border shareholder voting landscape in Europe. The Commission has at various stages used open consultation and groups of market experts with which to formulate policy. In both cases, Schouten shows that it is the voice of financial intermediaries (i.e. custodian and depositary banks) which has been loudest by citing specific responses from intermediaries and correlating those preferences with consultation response syntheses and subsequent policy re-formulation and proposal.

This shows why the status quo, with which investors and issuers are clearly unhappy, has been so difficult to break through. Despite the Commission being initially concerned with enabling ultimate investors to vote, the policy making process seems to have deflected attention from this goal. Why is this? Having demonstrated the high level of involvement by financial intermediaries in both the expert groups and the consultation responses, Schouten cites Dirk A Zetsche’s observation that “Custodians and depositories typically do not generate income by issuing voting entitlements … nominees and custodians along the chain typically do not have an economic stake in the shares. Consequently, these intermediaries show no propensity to support the exercise of their customers’ voting rights“ (Shareholder Passivity, Cross-Border Voting and the Shareholder Rights Directive).

This blog site is littered with observations and anecdotes about the administrative blockages caused by intermediaries in the voting chain. It is these same intermediaries who are now also blocking the reform process. The solution? Schouten suggests that “policy makers should not rely on expert groups and consultations to represent the interests of stakeholders in a balanced way, much less to devise solutions that are socially most beneficial”. Instead the Commission should have the courage of its convictions to go with the solution which “increases the social welfare”.

The irony of the Shareholder Rights Directive policy process is that the loudest and most numerous voices have been those whose systems and process mute those of others at Corporate Assemblies. It has been an exercise of which the script writers of ‘Yes, Prime Minister’ would have been justifiably proud. This particular academic exhortation to put the social good above the market responses is also one which, equally ironically, would have Sir Humphrey chuckling contentedly into his brandy glass.

Last Updated: 23 July 2009