The AGM in Europe: an Important Governance Tool or Dull Ritual?

Dr. A.J.F. Lafarre is an Assistant Professor at Tilburg University, with specific expertise in Corporate Governance and law and economics. In this latest Real World Impact blog, she discusses the actual role of AGMs in Europe and how her research plays a key part in demonstrating its importance.

Listed companies have a large impact on our society and play a large role in achieving sustainable societal goals. This makes the direction and control of these large companies by corporate directors, shareholders and (other) stakeholders of utmost importance. Shareholders can exert large influence on these listed companies with their control rights, which are mainly exercised in Annual General Meetings (AGMs). However, despite their important function in corporate law, AGMs are generally considered dull mandatory yearly rituals that provide entertainment to some small shareholders, but, above all, cause many business lawyers and executive officers a headache.

In my book ‘The AGM in Europe’ empirical, legal and economic research is combined to study the actual role of AGMs in Europe in seven EU Member States (Austria, Belgium, Germany, France, Ireland, the Netherlands, and the UK). Hereby I focus on one under-studied subject in particular: the determinants of (small) shareholder participation in AGMs.

Old-fashioned AGMs

The AGM has three functions to shareholders in corporate law theory: shareholders are informed (information function), they are offered a venue to discuss and ask questions (forum function), and they make decisions (decision-making function). Despite its theoretically important role in corporate law, the AGM is subject to fierce criticism by scholars. High transaction costs and low attendance rates, especially on the part of small shareholders, side-stepping behavior of large shareholders and free-rider problems are often mentioned as points of criticism, resulting in referring to AGMs as ‘dull rituals’ that are ‘obsolete’.

Moreover, the classical outline of the AGM remained unchanged for centuries. In contrast, corporate life has moved on and pays only lip service to the old-fashioned legal requirements of AGMs. While some scholars advocate board primacy, other scholars see room for revival of the AGM with modern technologies or advocate enhanced shareholder rights. The European legislator clearly agrees with the latter scholars, with the recent adoption of a new Shareholder Rights Directive (Directive (EU) 2017/828), providing shareholders with far-reaching decision-making rights such as say-on-pay rights. These conflicting viewpoints raise extremely important but unanswered questions. Extensive research to (small) shareholder participation was lacking so far.

Unravelling the AGM’s functioning

The book makes use of shareholder activism data available because of European disclosure requirements to unravel the actual functioning of AGMs and (small) shareholder participation in seven European member states. It rests on an in-depth comparative legal analysis of AGMs including shareholder procedural rights, information rights, forum rights and decision-making rights in listed companies. After establishing a sound categorization framework for these shareholder rights, the dataset is used to investigate which factors contribute to (small) shareholder turnout at the AGMs of listed companies in the seven EU Member States. Also the impact of the first Shareholder Rights Directive (2007/36/EC) on shareholder behaviour is assessed and the use of shareholder discussion and question rights in practice. Lastly, a theoretical model provides insights in the participation decision of small shareholders focusing on the shareholder free-rider problem in concentrated ownership structures.

Not obsolete, but enhance classical outline with modern technologies

The main conclusion of this book is straightforward: the AGM is definitely not obsolete, but its functioning can be enhanced by policy initiatives. For instance, the book provides evidence that the shareholder turnout decision is affected by certain legal rules, which means that shareholder participation can be further stimulated by policy makers. Shareholder rights that contribute to shareholder participation can be enhanced. Also a decrease in shareholder transaction costs increases the relevance of AGMs. In particular, blockchain technology offers scope for the modernization of the AGM, by lowering shareholder voting transaction costs substantially and making the AGM a fast and lean corporate organ as is shown by Lafarre & Van der Elst (2018).

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