Knowledge is power for vulnerable shareholders

If you have attended any of the annual general meetings for Irish listed companies, you will probably realise that they are a type of charade.

Most of the votes are normally cast beforehand by institutional investors who don’t usually attend the meetings. And while some of the questions from retail shareholders are intelligent, there is sometimes a circus atmosphere where some but not all shareholders simply like to have their voices heard.

It wasn't always like this. There was a time when both annual general meetings and company law were taken a lot more seriously.

Regulation change
The problem, according to one leading corporate lawyer, is that regulation has moved from principle-based to rule-based. Some less scrupulous market participants have discovered that they can simultaneously comply with the detail of the law and mislead shareholders.

So they will organise agms, produce annual reports and tick whatever boxes are necessary knowing that it doesn’t do much for corporate governance.

Most shareholders will be unaware, for instance, that a 1,100-page draft of new Irish company law legislation was published two months ago.

Fewer still will have read it and there is the added danger that those who have and think they understood it, are falsely reassured.

Complexity and thousands of rules suit the lobbyists, who want to amend company law to suit their own ends. It appears that even the EU itself was overwhelmed in the detail, so much so that the assurances to protect shareholders against fraud under Irish company law are weakened substantially.

Vested interests
Regulators are often exposed to "regulatory capture" – listening too carefully to the advice of those with a vested interest in weakening company law, if only because they are the most likely to know how best to make the approach.

For instance, after the Enron scandal, lobbyists encouraged the EU to design regulation that would improve the annual reports that shareholders receive, making company law more effective. The EU empowered a committee to develop regulation to help companies comply with EU company law directives.

What that committee came up with was Regulation (EC) No 2086/2004, which ignored the EU company law directives.

Within months, the lobbyists wrote to the British government to remind it that Regulation 2086/2004 takes precedence over the EU directives and domestic company law.

Many clauses in both Irish and British company law are potentially unenforceable because of Regulation 2086/2004. This document, since updated, allows companies to delay revealing losses to shareholders.

Some corporate governance experts have also warned that it makes it easier for bankrupt companies to raise money from unsuspecting shareholders and allows companies to pay dividends out of capital and loans, instead of out of profits.

All of these are contrary to Irish company law but potentially permitted by Regulation 2086/2004.

No doubt they had Irish and British banks in mind.

Warning
Pirc, the independent British corporate governance consultancy, has warned that although some Irish and British companies are following Regulation 2086/2004 blindly, they might still fall foul of company law.

This may be of some comfort to shareholders but there remain two areas of concern.

First, there is a strong lobby group intent on diluting the protection afforded to shareholders and lenders, in Irish company law.

Second, because of the huge confusion, compliance specialists, ranging from solicitors to regulators and accountants, are ticking boxes and complying with procedures without any knowledge of the damage they are doing.

The problem is neatly summed up in the Kay Review of Equity Markets and Long-Term Decision Making, which reveals that market participants are lobbying to suit their own ends.

“Regulators come to see the industry through the eyes of market participants rather than the end-users they exist to serve, because market participants are the only source of the detailed information and expertise this type of regulation requires.

“This complexity has created a financial regulation industry – an army of compliance officers, regulators, consultants and advisers – with a vested interest in the regulation industry’s expansion.”

The benefit to market participants of undermining company law are two-fold. When company law works well, the incentive schemes and bonuses that directors receive are based on genuine profits, being much smaller than those that arise when company law doesn’t work.

Job security is also guaranteed if directors withhold bad news.

Compliance officers, solicitors, accountants and regulatory advisers also benefit because with company law going into thousands of pages, huge compliance fees are generated.

And, if the law is ineffective, the issue of professional liability ceases to exist because shareholders can’t sue.

Shareholders need to do their own due diligence.

Relying on box-ticking professionals is not only a waste of money – the false sense of assurance is also damaging. Shareholders should not take agms seriously – rogue directors often give false assurances and claim to comply with their version of unduly complicated company law.


Cormac Butler is author of Accounting for Financial Instruments and has led training seminars for bank regulators and investors on financial risk. He has traded equities and options.