Regulatory trends and corporate governance

realistic alternative to intensive regulation and litigation, and the globalisation of US institutional portfolios has meant that large US issuers are competing for institutional capital with European (and other international) issuers.

There is also another factor that might limit widespread board entrenchment in the US: the possibility to use the internet more extensively in the proxy process. In January 2007, the SEC released new rules allowing issuers and other persons to furnish proxy materials to shareholders by posting them on an internet website and providing shareholders with notice of the availability of the proxy materials.45 This rule may drastically cut the costs of proxy challenges and render the plurality system more palatable to investors.

Concluding remarks

The preceding pages of this chapter have told a story of a remarkable change that has been taking place in the corporate governance regulatory arena during the first few years of the twenty-first century: the EU regulatory environment for the capital markets is outperforming that of the US. In this, it is largely inspired by the UK’s philosophy of principles-based regulation and transparent choice – as opposed to detailed, prescribed behaviour for market participants. In contrast, US regulation, which has been perceived as the gold standard since the 1930s, has fallen victim to a knee-jerk legislative reaction to the wellknown corporate scandals in the wake of the tech bubble. Most importantly, US regulators seem to be still in thrall to the twentieth-century paradigms of widely dispersed ownership and the ‘Wall Street walk’; the latter being essentially the only way shareholders may hold companies accountable. Policy seems to be in denial of the growing preponderance of large institutional owners and the omnipresence of active investors with a very loud voice to match their walking prowess.

The significance of this change has been reflected in the vast relative increase of international capital market activity in Europe as compared to the US; in the growing internationalisation of US institutional portfolios; and, arguably, in the recent drive by US exchanges to expose themselves to non-US capital market issuance and trading.

European regulatory upgrading also translates into increased transparency and accountability for corporate Europe. With this comes a newfound vulnerability to outside forces, activist investors of every sort and private equity ‘locusts’. As outsiders arm themselves with vast amounts of newly available information, the long-standing friendliness of European company law towards shareholders is coming into play. Corporate elites and national champions are seeing the ground shift under their feet. Policy makers should rejoice in this challenge: European economies and consumers may only gain from increases

45 Securities and Exchange Commission, Rule 34–55146, January 2007.

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in productivity and allocative efficiency, as corporate giants come under the acid test of shareholder value.

But it is too early for self-congratulation. The risk of political backlash driven by economic nationalism and the fear of loss of power from well-entrenched elites is very real. The EU reformers may face a big challenge in the next phase of company law and governance reform: allowing European companies to transfer their corporate seat by choosing the jurisdiction that provides them with the most efficient, adequately implemented set of rules, as constitutional arrangements have allowed Delaware to become the corporate capital of the US. Local stakeholders (for example, German trade unions that appoint half of large company boards) will fight tooth and nail to maintain the status quo. Another risk is that the openness of the European approach, based on transparency and comply-or-explain corporate governance, might be undermined by an illconsidered flexibility towards emerging market foreign issuers with much lower governance standards. In the UK, the FSA is debating the adequate minimum level of corporate governance that such issuers should commit to when coming to the London market.

If the US model drove international regulatory trends and convergence up until the 1990s, it is the UK/EU model that is gaining the intellectual upper hand in the early twenty-first century: the long-term development and prosperity of companies should rely less on overpowerful Chief Executives, omnipresent regulators and trigger-happy plaintiffs; and more on accountable boards and informed shareholders for their long-term direction and prosperity. That is, after all, the message not only of Europe but of some of the most admired contemporary US business icons, like Stephen Schwartzman of Blackstone and Warren Buffet of Berkshire Hathaway.

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