Corporate Governance in Cyberspace – A Blueprint for Virtual Shareholder Meetings by Dirk Zetzsche

SSRN-Corporate Governance in Cyberspace – A Blueprint for Virtual Shareholder Meetings by Dirk Zetzsche:

This article “analyses the rules regarding the internet-based exercise of shareholder rights for public corporations incorporated in Canada, France, Germany, the U.S. (DelGCL & RMBCA), the UK and Switzerland”

A few highlights:

  1. “…this paper asserts that the transition from the traditional shareholder meeting, which is based on physical attendance of shareholders, towards a virtual shareholder meeting that fits the needs of the digital age is still incomplete.”
  2. “Under the traditional doctrine, shareholder meetings fulfill three purposes: Dissemination of information; communication between shareholders and management and among shareholders; voting.”
  3. “the current regimes of the internet-based exercise of shareholder rights merely replicate some of the above functions of traditional shareholder meetings”

Put simply, web-based shareholder meetings are not living up to their potential. For instance, the author suggests that shareholder voting could be done easily digitally. This lowered cost of voting would be anticipated to give shareholders more opportunities to vote on company matters and to monitor management.

In Zetzche’s words:

“Achieving an efficient regime on virtual shareholder participation requires adjustments to traditional procedures. This paper argues in favor of a virtual shareholder meeting that (1) is freed from the time and place restrictions provided by traditional corporate law doctrine, (2) integrates the functions of analyst and institutional investor meetings, and (3) replicates the face-to-face accountability of managers, which is associated with traditional shareholder meetings.”

and later, he gives some of the implications of this new paradigm:

“In a world of continuous disclosure and continuous buy/hold/sell decisions of market participants, more frequent opportunities for voting – a quasi-continuous-
voting – will bring management’’s activities more in line with shareholder interests and with market reactions, and thus improve market efficiency….communication with management and among shareholders, organized over an independently organized, publicly accessible chat-board on the company’’s website, will take place all-year-long; and voting will be exercised in the period after management has informed all shareholders in the shareholder conference. This design of internet-based exercise of shareholder rights will (1) improve corporate decision-making, (2) require management to follow shareholder interests to a greater extent than today, and (3) help align capital-market reactions with shareholder decision-making (i.e. voting).”

I agree to a point. However, given that the technology for this format is currently available and yet firms are not taking advantage of the technology suggests that this change may not be immediately forthcoming. More importantly, shareholders will have to demand this new format as managers have little incentive to increase shareholder monitoring.

I do think however that the increased number of shareholder votes is a likely consequence of such a change and that could have interesting ramifications. For instance, Zetzche hints at some of these in the following paragragh:

“Efficient voting is commonly said to be hampered by the high costs of exercising shareholder rights (as compared to the less costly alternative of selling), collective action problems, and limited shareholder influence on certain subject matters. The situation in which shareholders find themselves has been termed picturesquely as the shareholders “rational apathy”. It is one of the driving forces behind the “Wall Street Rule”––the traditional approach of institutional investors to either vote with management, or sell….”

Definitely thought-provoking!

Zetzsche, Dirk A., “Corporate Governance in Cyberspace – A Blueprint for Virtual Shareholder Meetings” (June 19, 2005). CBC-RPS No. 0011

FWIW this is a law paper, but remember some of the best new ideas in any field come from outside the field, so don’t hold that against it–well except for the gazillion footnotes 😉