Rejection of the 1 Share - 1 Vote principle will hurt European Markets

The Financial News has a nice editorial on this issue today. Remember I talked about this over the weekend and said that personally speaking, I dont like it. I quote:

But the decision is a setback for the development of European capital markets and European prosperity. It follows publication of a study this summer that found the proportionality principle was widely ignored in several European markets. Of 464 European companies surveyed, 44% deviated from the principle by using devices such as multiple voting rights, priority shares with special voting rights, pyramid structures, voting ceilings and golden shares. Institutional investors surveyed expressed an aversion to these practices, stating the increased risk led them to expect a substantial discount when buying the affected shares.

This raises the cost of capital, fragments the European capital market and impedes a properly functioning market for corporate control.The lack of common understanding on proportionality bedevilled discussions around the European Union’s takeover directive and made the result ineffective.

The European Corporate Governance Forum, which advises the EC, identified reasons why proportionality matters. Without it, boards and management can become entrenched, companies can be harder to take over and minority shareholders can lose out because controlling shareholders are in a stronger position to take benefits for themselves. Also, the principle of comply-or-explain, which is a valuable tool of corporate governance, works less well when companies entrench their ownership structure in this way.

The forum therefore suggested an enhanced transparency regime whereby companies that deviate from the proportionality principle should explain their reasoning and the value their structure brings. This would promote debate and enable the market to decide. The extra information would also inspire further academic debate, which has been narrow and sometimes based on unreal premises.

Shareholders would go further and suggest there could be a vote on the explanations provided by companies. This would boost the pressure for change when companies are unable to provide a satisfactory explanation for their capital structure.

All this to be taken with a grain of piquant salt!!!