The corporate governance framework should protect and facilitate the exercise of shareholders’ rights and ensure the equitable treatment of all shareholders, including minority and foreign shareholders.
All shareholders should have the opportunity to obtain effective redress for violation of their rights at a reasonable cost and without excessive delay.
Equity investors have certain property rights. For example, an equity share in a publicly traded company can be bought, sold, or transferred. An equity share also entitles the investor to participate in the profits of the corporation, with liability limited to the amount of the investment. In addition, ownership of an equity share provides a right to information about the corporation and a right to influence the corporation, primarily by participating and voting in general shareholder meetings.
As a practical matter, however, the corporation cannot be managed by shareholder referendum. The shareholding body is made up of individuals and institutions whose interests, goals, investment horizons and capabilities vary. Moreover, the corporation’s management must be able to take business decisions rapidly. In light of these realities and the complexity of managing the corporation’s affairs in fast moving and ever changing markets, shareholders are not expected to assume responsibility for managing corporate activities. The responsibility for corporate strategy and operations is typically placed in the hands of the board and a management team that is selected, motivated and, when necessary, replaced by the board.
Shareholders’ rights to influence the corporation centre on certain fundamental issues, such as the election of board members, or other means of influencing the composition of the board, amendments to the company’s organic documents, approval of extraordinary transactions, and other basic issues as specified in company law and internal company statutes. These are the most basic rights of shareholders and they are recognised by law in most jurisdictions. Additional rights have also been established in various jurisdictions, such as direct nomination of individual board members or board member slates; the ability to pledge shares; the approval of distributions of profits; shareholder ability to vote on board member and/or key executive remuneration; approval of material related party transactions; and others.
Investors’ confidence that the capital they provide will be protected from misuse or misappropriation by corporate managers, board members or controlling shareholders is an important factor in the development and proper functioning of capital markets. On the contrary, an inefficient corporate governance mechanism may allow corporate boards, managers and controlling shareholders the opportunity to engage in activities that advance their own interests at the expense of non-controlling shareholders. In providing protection to investors, a distinction can usefully be made between ex ante and ex post shareholder rights. Ex ante rights are, for example, pre-emptive rights and qualified majorities for certain decisions. Ex post rights allow the seeking of redress once rights have been violated. In jurisdictions where the enforcement of the legal and regulatory framework is weak, it can be desirable to strengthen the ex ante rights of shareholders such as through low share ownership thresholds for placing items on the agenda of the shareholders meeting or by requiring a supermajority of shareholders for certain important decisions. The Principles support equal treatment of foreign and domestic shareholders in corporate governance. They do not address government policies to regulate foreign direct investment.
One of the ways in which shareholders can enforce their rights is to be able to initiate legal and administrative proceedings against management and board members. Experience has shown that an important determinant of the degree to which shareholders’ rights are protected is whether effective methods exist to obtain redress for grievances at a reasonable cost and without excessive delay. The confidence of minority investors is enhanced when the legal system provides mechanisms for minority shareholders to bring lawsuits when they have reasonable grounds to believe that their rights have been violated. Some countries have found that derivative lawsuits filed by minority shareholders on behalf of the company serve as an efficient additional tool for enforcing directors’ fiduciary duties, if the distribution of litigation costs is adequately set. The provision of such enforcement mechanisms is a key responsibility of legislators and regulators, and the capacity and quality of courts also play an important role.
There is some risk that a legal system that enables any investor to challenge corporate activity in the courts can become prone to excessive litigation. Thus, many legal systems have introduced provisions to protect management and board members against litigation abuse in the form of screening mechanisms, such as a pre-trial procedure to evaluate whether the claim is non-meritorious, and safe harbours for management and board member actions (such as the business judgement rule) as well as safe harbours for the disclosure of information. In the end, a balance must be struck between allowing investors to seek remedies for infringement of ownership rights and avoiding excessive litigation.
Many jurisdictions have found that alternative adjudication procedures, such as administrative hearings or arbitration procedures organised by the securities regulators or other bodies, are an efficient method to protect shareholder rights, at least at the first instance level. Specialised court procedures can also be a practical instrument to obtain timely injunctions and to gather evidence on an alleged infringement, ultimately facilitating the effective redress for violations of shareholders’ rights.
II.A. Basic shareholder rights should include the right to: 1) secure methods of ownership registration; 2) convey or transfer shares; 3) obtain relevant and material information on the corporation on a timely and regular basis; 4) participate and vote in general shareholder meetings; 5) elect and remove members of the board; 6) share in the profits of the corporation; and 7) elect, appoint or approve the external auditor.
II.B. Shareholders should be sufficiently informed about, and have the right to approve or participate in decisions concerning fundamental corporate changes such as: 1) amendments to the statutes, articles of incorporation or similar governing documents of the company; 2) the authorisation of additional shares; and 3) extraordinary transactions, including the transfer of corporate assets that in effect result in the sale of the company.
The ability of companies to form partnerships and related companies, and to transfer operational assets, cash flow rights and other rights and obligations to them, is important for business flexibility and for delegating authority in complex organisations. It also allows a company to divest itself of operational assets and to become only a holding company. However, without appropriate checks and balances, such possibilities may also be abused.
II.C. Shareholders should have the opportunity to participate effectively and vote in general shareholder meetings, and should be informed of the rules, including voting procedures, that govern general shareholder meetings.
II.C.1. Shareholders should be furnished with sufficient and timely information concerning the date, format, location and agenda of general meetings, as well as fully detailed and timely information regarding the issues to be decided at the meeting.
II.C.2. Processes, format and procedures for general shareholder meetings should allow for equitable treatment of all shareholders. Company procedures should not make it unduly difficult or expensive to cast votes.
The right to participate in general shareholder meetings is a fundamental shareholder right. Management and controlling investors have at times sought to discourage non-controlling or foreign investors from trying to influence the direction of the company. Some companies have charged fees for voting. Other potential impediments include prohibitions on proxy voting, requiring personal attendance at general shareholder meetings to vote, bundling of unrelated resolutions, holding the meeting in a remote location, and allowing voting by show of hands only. Still other procedures may make it practically impossible to exercise ownership rights. Voting materials may be sent too close to the time of general shareholder meetings to allow investors adequate time for reflection and consultation. Many companies are seeking to develop better channels of communication and decision-making with shareholders. Efforts by companies to remove artificial barriers to participation in general meetings are encouraged and the corporate governance framework should facilitate the use of electronic voting in absentia, including the electronic distribution of proxy materials and reliable vote confirmation systems. In jurisdictions where private enforcement is weak, regulators should be in a position to curb unfair voting practices.
II.C.3. General shareholder meetings allowing for remote shareholder participation should be permitted by jurisdictions as a means to facilitate and reduce the costs to shareholders of participation and engagement. Such meetings should be conducted in a manner that ensures equal access to information and opportunities for participation of all shareholders.
Virtual or hybrid (where certain shareholders attend the meeting physically and others virtually) general shareholder meetings can help improve shareholder engagement by reducing their time and costs of participating. By using virtual platform providers, companies may incur additional costs but also streamline shareholders’ access to agendas and related information, and provide a secure infrastructure and more efficient means for considering and addressing shareholder comments and questions. However, due care is required to ensure that remote meetings do not decrease the possibility for shareholders to engage with and ask questions to boards and management in comparison to physical meetings. Some jurisdictions have issued guidance to facilitate the conduct of remote meetings, including for handling shareholder questions, responses and their disclosure, with the objective of ensuring transparent consideration of questions by boards and management, including how questions are collected, combined, answered and disclosed. Such guidance may also address how to deal with technological disruptions that may impede virtual access to meetings.
Many companies rely on technology vendors to manage remote participation. When choosing service providers, it is important to consider that they have the appropriate professionalism as well as data handling and digital security capacity to support the conduct of fair and transparent shareholder meetings, with technical and organisational security measures in place for each of the processing operations carried out by virtue of their service, especially concerning personal data, which require stricter security measures. Such processes should allow for the verification of shareholders’ identity through secured authentication of attendees and ensure equal participation as well as the confidentiality and security of votes cast prior to the meeting.
II.C.4. Shareholders should have the opportunity to ask questions to the board, including on the annual external audit, to place items on the agenda of general meetings, and to propose resolutions, subject to reasonable limitations.
In order to encourage shareholder participation in general meetings, many jurisdictions have improved the ability of shareholders to place items on the agenda through a simple and clear process of filing amendments and resolutions, and to submit questions in advance of the general meeting and to obtain appropriate replies from management and board members in a manner that ensures their transparency. Shareholders should also be able to ask questions relating to the external audit report. Companies are justified in assuring that abuses of such opportunities do not occur. It is reasonable, for example, to require that in order for shareholder resolutions to be placed on the agenda, they need to be supported by shareholders holding a specified market value or percentage of shares or voting rights. This threshold should be determined taking into account the degree of ownership concentration, in order to ensure that minority shareholders are not effectively prevented from putting any items on the agenda. Shareholder resolutions that are approved and fall within the competence of the shareholder meeting should be addressed by the board.
II.C.5. Effective shareholder participation in key corporate governance decisions, such as the nomination and election of board members, should be facilitated. Shareholders should be able to make their views known, including through votes at shareholder meetings, on the remuneration of board members and/or key executives, as applicable. The equity component of compensation schemes for board members and employees should be subject to shareholder approval.
Electing the members of the board is a basic shareholder right. For the election process to be effective, shareholders should be able to participate in the nomination of board members and vote on individual nominees or on different lists of nominees. To this end, shareholders have access in a number of jurisdictions to the company’s voting materials which are made available to shareholders, subject to conditions to prevent abuse. With respect to nomination of candidates, boards in many companies have established nomination committees to ensure proper compliance and transparency with established nomination procedures and to facilitate and co-ordinate the search for a balanced, diverse and qualified board. It is regarded as good practice for independent board members to have a key role on this committee. To further improve the selection process, the Principles also call for full and timely disclosure of the experience and background of candidates for the board and the nomination process, which will allow an informed assessment of the abilities and suitability of each candidate. It is required or considered good practice in some jurisdictions to also disclose information about any other board positions or committee memberships that nominees hold, and in some jurisdictions also positions that they are nominated for.
The Principles call for the disclosure of remuneration of board members and key executives. In particular, it is important for shareholders to know the remuneration policy, as well as the total value and structure of remuneration arrangements made pursuant to this policy. Shareholders also have an interest in how remuneration and company performance are linked when they assess the capability of the board and the qualities they should seek in nominees for the board. The different forms of say-on-pay (binding or advisory vote, ex ante and/or ex post, board members and/or key executives covered, individual and/or aggregate compensation, remuneration policy and/or actual remuneration) play an important role in conveying the strength and tone of shareholder sentiment to the board. In the case of equity-based schemes, their potential to dilute shareholders’ capital and to powerfully determine managerial incentives means that they should be approved by shareholders, either for individuals or for the policy of the scheme as a whole. Shareholder approval should also be required for any material changes to existing schemes.
II.C.6. Shareholders should be able to vote in person or in absentia, and equal effect should be given to votes whether cast in person or in absentia.
The objective of facilitating shareholder identification and participation suggests that jurisdictions and/or companies promote the enlarged use of information technology in voting, including secure electronic voting in all publicly traded companies for both remote and in person meetings. The Principles recommend that voting by proxy be generally accepted. Indeed, it is important for the promotion and protection of shareholder rights that investors can rely on directed proxy voting. The corporate governance framework should ensure that proxies are voted in accordance with the direction of the proxy holder. In those jurisdictions where companies are allowed to obtain proxies, it is important to disclose how the chair of the meeting (as the usual recipient of shareholder proxies obtained by the company) will exercise the voting rights attached to undirected proxies. Where proxies are held by the board or management for company pension funds and for employee stock ownership plans, the directions for voting should be disclosed. It is required or considered good practice in many jurisdictions that treasury shares and shares of the company held by subsidiaries should not be allowed to vote, nor be counted for quorum purposes.
II.C.7. Impediments to cross-border voting should be eliminated.
Foreign investors often hold their shares through chains of intermediaries. Shares are typically held in accounts with securities intermediaries who in turn hold accounts with other intermediaries and central securities depositories in other jurisdictions, while the publicly traded company resides in a third jurisdiction. Such cross-border chains cause special challenges with respect to determining the entitlement of foreign investors to use their voting rights, and the process of communicating with such investors. In combination with business practices which provide only a very short notice period, shareholders are often left with only very limited time to react to a convening notice by the company and to make informed decisions concerning items for decision. This makes cross-border voting difficult. The legal and regulatory framework should clarify who is entitled to control the voting rights in cross-border situations and where necessary to simplify the depository chain. Moreover, notice periods should ensure that foreign investors in effect have the same opportunities to exercise their ownership functions as domestic investors. To further facilitate voting by foreign investors, laws, regulations and corporate practices should allow participation through electronic means in a non-discriminatory way.
II.D. Shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the Principles, subject to exceptions to prevent abuse.
It has long been recognised that in companies with dispersed ownership, individual shareholders might have too small a stake in the company to warrant the cost of taking action or for making an investment in monitoring performance. Moreover, if small shareholders did invest resources in such activities, others would also gain without having contributed (i.e. they are “free riders”). In many instances institutional investors limit their ownership stake in individual companies because it is beyond their capacity or would require investing more of their assets in one company than may be prudent or permitted. To overcome this asymmetry which favours diversification, they should be allowed, and even encouraged, to co-operate and co-ordinate their actions in nominating and electing board members, placing proposals on the agenda, and holding discussions directly with a company in order to improve its corporate governance, subject to shareholders’ compliance with applicable law, including, for example, beneficial ownership reporting requirements. Some major institutional investors have established initiatives to facilitate the co-ordination of their engagement, for example to address climate-related concerns. When publicly traded companies have controlling shareholders, these actions also safeguard the interests of minority shareholders while increasing their voice in company matters. More generally, shareholders should be allowed to communicate with each other without having to comply with the formalities of proxy solicitation.
It must be recognised, however, that co-operation among investors could also be used to manipulate markets and to obtain control over a company, with a view to bypass takeover or disclosure regulations which may otherwise apply. Moreover, co-operation might also be for the purpose of circumventing competition law. Safeguards may be needed to prevent anticompetitive behaviour and abusive actions, particularly in jurisdictions where institutional investors are significant owners in publicly traded companies and their co- ordinated actions could have stronger influence on companies’ decisions. Disclosure of the co ordination policy could provide clarity to the market on the scope of such actions. However, if co-operation does not clearly involve issues of corporate control, or conflict with concerns about market efficiency and fairness, the benefits of more effective ownership may still be obtained. To provide clarity and certainty among shareholders, regulators may issue guidance on forms of co-ordination and agreements that do or do not constitute such acting in concert in the context of takeover, competition and other rules.
II.E. All shareholders of the same series of a class should be treated equally. All investors should be able to obtain information about the rights attached to all series and classes of shares before they purchase. Any changes in economic or voting rights should be subject to approval by those classes of shares which are negatively affected.
The optimal capital structure of the company is best decided by the management and the board, subject to the approval of the shareholders. Some companies issue preferred (or preference) shares which have a preference in respect of receipt of the profits of the company but which normally have limited or no voting rights. Companies may also issue participation certificates or shares with limited or no voting rights, which would presumably trade at different prices than shares with full voting rights. All of these structures may be effective in distributing risk and reward in ways that are thought to be in the best interests of the company and to cost-efficient financing.
Within any series of a class, all shares should carry the same rights. Investors can expect to be informed regarding their voting rights before they invest. Once they have invested, their rights should not be changed unless those holding voting shares have had the opportunity to participate in the decision. Proposals to change the voting rights of different series and classes of shares should be submitted for approval at general shareholder meetings by a specified (normally higher) majority of voting shares in the affected categories.
II.F. Related party transactions should be approved and conducted in a manner that ensures proper management of conflicts of interest and protects the interests of the company and its shareholders.
II.F.1. Conflicts of interest inherent in related party transactions should be addressed.
The potential abuse of related party transactions is an important policy issue in all markets, but particularly in those where corporate ownership is concentrated and corporate groups prevail. Banning these transactions is normally not a solution as there is nothing wrong per se with entering into transactions with related parties, provided that the conflicts of interest inherent in those transactions are adequately addressed, including through proper monitoring and disclosure. This is all the more important where significant portions of income and/or costs arise from transactions with related parties.
Jurisdictions should put in place an effective framework for clearly flagging these transactions. They should include broad but precise definitions of what is understood to be a related party. They should also include rules to disregard some of these transactions when they are not material because they do not exceed ex ante thresholds, can be regarded as recurrent and taking place at verifiable market terms, or take place with subsidiaries where no specific interest of a related party is present. Once the related party transactions have been identified, jurisdictions set procedures for approving them in a manner that minimises their negative potential. In many jurisdictions, great emphasis is placed on board approval supported by the audit committee review, often with a prominent role for independent members. Jurisdictions may also require the board to justify the interest of the transaction for the company and the fairness of its terms. Many jurisdictions require or recommend as good practice for interested board members to abstain from board decisions on related party transactions.
As an alternative or complement to board approval, shareholders may be given a say in approving certain transactions, which in some jurisdictions requires the approval of non-interested shareholders. This may include, in particular, large or non-routine transactions or those in which board members have an interest. Some jurisdictions also require an opinion or evaluation on the fairness of the transaction’s proposed price or value by an external auditor or independent outside specialist, in some cases as a precondition for shareholder approval.
II.F.2. Members of the board and key executives should be required to disclose to the board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the corporation.
Members of the board, key executives and, in some jurisdictions, controlling shareholders have an obligation to inform the board where they have a business, family or other special relationship outside of the company that could affect their judgement with respect to a particular transaction or matter affecting the company. Such special relationships include situations where executives and board members have a relationship with the company via their association with a shareholder who is in a position to exercise control. Where a material interest has been declared, many jurisdictions require or recommend as good practice for that person not to be involved in any decision involving the transaction or matter and for the decision of the board to be specifically motivated against the presence of such interest and/or to justify the interest of the transaction for the company, notably by mentioning the terms of the transaction.
II.G. Minority shareholders should be protected from abusive actions by, or in the interest of, controlling shareholders acting either directly or indirectly, and should have effective means of redress. Abusive self-dealing should be prohibited.
Many publicly traded companies have controlling shareholders. While the presence of controlling shareholders can reduce the agency problem through closer monitoring of management, weaknesses in the legal and regulatory framework may lead to the abuse of other shareholders in the company. Abusive self- dealing occurs when persons having close relationships to the company, including controlling shareholders, exploit those relationships to the detriment of the company and investors.
The potential for abuse is marked where the legal system allows, and the market accepts, controlling shareholders to exercise a level of control that does not correspond to the level of risk that they assume as owners by exploiting legal devices to separate ownership from control. Such abuse may be carried out in various ways, including the extraction of direct private benefits via high pay and bonuses for employed family members and associates, inappropriate related party transactions, systematic bias in business decisions and changes in the capital structure through special issuance of shares favouring the controlling shareholder. In addition to disclosure, a key mechanism for addressing such potential for abuse is the existence of a clearly articulated duty of loyalty by board members to the company and to all shareholders. Indeed, abuse of minority shareholders is most pronounced in those jurisdictions where the legal and regulatory framework is weak in this regard. A particular issue arises in some jurisdictions where groups of companies are prevalent and where the duty of loyalty of a board member might be ambiguous and even interpreted as to the group. In these cases, some jurisdictions have developed sets of rules to control negative effects, including by specifying that a transaction in favour of another group company must be offset by receiving a corresponding benefit from other companies of the group. A key underlying principle for board members who are working within the structure of a group of companies is that even though a company might be controlled by another company, the duty of loyalty of a board member is related to the company and all of its shareholders and not to the controlling company of the group.
Other common provisions to protect minority shareholders that have proven effective include pre-emptive rights in relation to share issues, qualified majorities for certain shareholder decisions and the possibility to use cumulative voting in electing members of the board. Considering that some group structures may lead to disproportionate and opaque control, and the risks this may create with respect to the rights of non controlling shareholders, some jurisdictions place limitations on certain structures of company groups such as cross-shareholdings. Under certain circumstances, some jurisdictions require or permit controlling shareholders to buy-out the remaining shareholders at a share price that is established through an independent appraisal. This is particularly important when controlling shareholders decide to de-list a company. Other means of improving minority shareholder rights include derivative and class action lawsuits. Most regulators have established mechanisms to receive and investigate complaints from shareholders, and some have the possibility to support lawsuits through disclosure of relevant information (including whistleblowing mechanisms) and/or funding. With the common aim of improving market credibility, the choice and ultimate design of different provisions to protect minority shareholders necessarily depends on the overall regulatory framework and the national legal system.
II.H. Markets for corporate control should be allowed to function in an efficient and transparent manner.
II.H.1. The rules and procedures governing the acquisition of corporate control in capital markets, extraordinary transactions such as mergers, and sales of substantial portions of corporate assets, should be clearly articulated and disclosed so that investors understand their rights and recourse. Transactions should occur at transparent prices and under fair conditions that protect the rights of all shareholders according to their class.
II.H.2. Anti-takeover devices should not be used to shield management and the board from accountability.
In some jurisdictions, companies employ anti-takeover devices. However, both investors and stock exchanges have expressed concern over the possibility that widespread use of anti-takeover devices may be a serious impediment to the functioning of the market for corporate control. In some instances, takeover defences can simply be devices to shield the management or the board from shareholder monitoring. In implementing any anti-takeover devices and in dealing with takeover proposals, the fiduciary duty of the board to shareholders and the company must remain paramount. Some jurisdictions provide options for exit at a fair and reasonable market price to dissenting shareholders in case of major corporate restructurings including mergers and amalgamations.