The Annual General Meeting:function, praxis, legality

Therese Strand

THERESE STRAND, Ph.D. Fellow

Center for Corporate Governance (CCG),Copenhagen Business School

1

THERESE STRAND, Ph.D. FellowCenter for Corporate Governance (CCG), CBSEmail: ts.int@cbs.dk

BACKGROUND

08 - Ph.D. Fellow,Center for Corp. Governance,Copenhagen (DK)

10 Visiting lecturer,Thammasat University,Bangkok (TH)

09 Visiting researcher,Harvard Law School,Boston (US)

08 Visiting lecturer,University of Iceland,Reykjavik (IS)

05-08 Affiliated researcher,Center for Business and PolicyStudies, Stockholm (SE)

05-08 Doctoral Candidate,Stockholm University,Stockholm (SE)

PROJECTS and PUBLICATIONS

10- Voting Power / Owner Coalitions

09- Foreign Investors in Scandinavia

08-10 The Function of General Meetings

05-07 Institutional Activism: RationalDecisions or 15 Minutes of Fame?

OWNERSHIP OF LARGE LISTED FIRMS• annual general / investor meetings• institutional investors / owner identities• shareholder activism• proxy voting rec. / intermediaries

2

Shareholder Activism AmongPortfolio Managers: RationalDecisions or 15 Minutes ofFame?

Investigates: underlying objectives ofinstitutional activism at AGMs.

Findings: institutional activismoccurs primarily in firms that arelarge and appear often in mass media,while corporate performance andstock price development seemsirrelevant.

Conclusion: institutional actionsinclude a search for recognition

(published 2008 and 2009)

AGMs in Practice: aComparison Between Denmarkand Sweden

Investigates: content, structure andactivism + legality prerequisites.

Findings: Swedish AGMs function asshareholder meetings with the boardas guests, while Danish AGMsfunction as board meetings with theshareholders as guests. Prerequisitesfor activism are larger in Sweden.

Conclusion: tentatively that legaldifferences might be one cause.

(published 2009)

PROJECT PARTS 1 AND 2

3

Voting Power and ShareholderActivism

Investigates: shareholder activismbased on relative voting power.

Findings: firms’ amenability to smallshareholder influence leads to moreproposals by large shareholders, butfewer proposals by othershareholders.

Conclusion: local mechanisms whichallow shareholders to form coalitionsmight function as a vehicle forsuccessful coalition building.

(published 2010 + Best PaperNomination)

The Function of ShareholderMeetings

Investigates: what type of activismshareholders employ given thepower balance between the boardand the shareholder collective.

Findings: to be announced

Conclusion: to be announced

(unpublished)

PROJECT PARTS 3 AND 4

4

Institutional Investors andActive Ownership: WhatExplains the Differencesbetween Denmark and Sweden?

Investigates: institutional votingpolicies and activism. Comparativeperspective: Denmark and Sweden.

Links to legal divergences.

(fortcoming 2011)

American Activism Abroad:How Foreign InvestorsInfluence Scandinavia

Investigates: American (and alsoUK, Australian, French) institutionalinvestors rapid expansion outsidetheir domestic habitat.

How much power lies within votingagencies?

Background in a number ofcontroversial cases in Sweden, wereAmerican institutions have voteddown board proposals with strongdomestic shareholder support.

(planned upstart 2011)

PROJECT PARTS 5 AND 6

5

FUNCTION OF ANNUAL GENERAL MEETINGS (AGMs) PROJECT

Purposes• Define the core elements required for AGMs to be meaningful• Examine the legal prerequisites of AGMs across jurisdictions• Investigate content and conduct of AGMs in different countries• Explore shareholder activism at AGMs

Conclusions• Under what conditions AGMs are meaningful mechanisms of the CG system• How the shareholders’ legal prerequisites influence activism at the AGM• How the shareholders’ power position influence activism at the AGM• What the underlying rationales of institutional activism at the AGM are• What lessons countries can learn from one another (law / local traditions)

Conduct• Participant observation at approximately 200 AGMs in DK, SE, US (04-09)• Gathering of agendas and minutes from approximately 1000 AGMs• Interviews with approximately 30 major institutional activists

6

BACKGROUND OF AGMs

Highest decision making organ in the firm

High legal importance

Ongoing discussions on the function/purpose

How make shareholders exercise voting rights

Electronic general meetings

Empirical research is scarce

Strong notions about AGMs mostlybenefitting catering firms (Aggarwal, 2001,Nilsson and Hassel, 2004; Saxon, 1966,Shilling, 2001)

7

Basic Corporate Governance Structure

GENERALMEETING

BOARD OFDIRECTORS

LAW

MANAGEMENT

AUDITOR

Control mechanismintended to solve agencyproblems (potentialmismanagement)

Based on the idea thatshareholders are ableand willing to monitorboard and management

8

Better Corporate Governance?

GENERALMEETING

BOARD OFDIRECTORS

LAWCG-CODES

INCENTIVES

OWNERS

AUDITOR NOMINATIONCOMMITTEE

AUDITCOMMITTEE

COMPENSATIONCOMMITTEE

MANAGEMENT

CG-CODES

9

Purpose and functions of AGMs

= CREATE A POWER BALANCE!

• Decision Making▫ Necessary to limit managerial power

• Information▫ Necessary for shareholders to make proposals,

exercise voting rights, make decisions etc…

• Discussion▫ Necessary for shareholders to overcome collective

action problems and free rider problems

10

Functions function in accordance withtheir prerequisites

DECISION MAKING

Dual-Class shares

Proxy voting

Making proposals

Calling x-tra meetings

Majority requirements

Etc…

INFORMATION

Financial reports

Proposal rules

Call for meeting/agenda

Presentations

Auditors

Etc…

DISCUSSION

Transparency onownership structure

Discussion rules / Q&Asession

Shareholder coalitions

Etc…

11

The decision making function

• Important that board and management needshareholders’ approval for decisions outsidetheir discretion – limits the board’s space to takeaction not in the shareholders’ best interest

• Legal settings must ensure that shareholdershave prerequisites to make decisions and thatshareholder power cannot be undermined by theboard (proxy voting rules)

12

The information function

• Important because shareholders cannot makeproper decisions without correct information

• Legal settings must encourage board andmanagement to hand over information toshareholders

13

The discussion function

• Important to overcome shareholder dilemmas:

▫ collective action = difficulties to make joint decisionswhen a larger number of people are involved

▫ free rider = no individual owner has an incentive tocarry expenses for activism as they only receive afraction of the potential benefits

• Legal settings should be designed so as toaccommodate shareholders with prerequisites andincentives to discuss and cooperate (transparencyon ownership structure, shareholder basednomination committees, Q&A restrictions)

14

Shareholder activism

• Shareholders with prerequisites can exercisemonitoring in a multitude of ways:▫ Making proposals

▫ Voting

▫ Form nomination committees in advance of AGM

▫ Form coalitions at the AGM

▫ Voice Questions

Opinions

15

Experience from Denmark

• Denmark has more board-friendly laws

- Information flow is smaller

- Critic on lack of information more common

- Board sometimes holds majority of votesbecause of proxy rules

- Board makes most proposals (and all proposalsthat are adopted)

- shareholders post more opinions

16

Experience from Sweden

• Sweden has more shareholder friendly laws- information flow is larger- less critic concerning lack of information- board holds less power- EGMs not needed- shareholders are formally cooperating- shareholders make more proposals- shareholders post more questions- shareholders express less opinions

17

Experiences from United States

• Extremely formal and well prepared• Extremely powerful board▫ Limits on shareholders who wish to speak (one

question/person, one minute/person)

• Shareholder proposals most often fromideological organizations

• Shareholder proposals that succeed have oftenbeen issued for several years in a row

• Small and powerless shareholders protestthrough voice

18

Implications

Sweden: shareholder meeting with board asguests

Denmark and United States: board meetingwith shareholders as guests

19

Does it matter?

• As long as boards and managers are working inthe best interest of the firm and the owners(which is the majority of cases): NO

• But it matters in the exceptional cases (or ratherto prevent exceptional cases)

20

Conclusions

• Shareholder friendly legal setting increase thechance of AGMs working as intended.

• General meetings fulfill their intended purpose onlyif all three underlying functions are workingproperly

- No information = decisions cannot be made

- No decisions = power ends up in the board

- No discussion = collective action problems

• Legal setting needs to be designed accordingly

21

“General meetings are parties like most, exceptthat the guest is also the host”

Thank you!

22