Shareholder Engagement and Custody Chains

Abstract

Shareholder engagement has come to be seen to be pivotal to good corporate governance. It is therefore more important than ever for the mechanisms of shareholder engagement to be up to the important task they are meant to perform. Historically, these mechanisms have fallen short because of the capital markets’ necessary dependency on custody chains. Custody chains perform valuable functions but they also create a distance between the company and the end investor from which flows a significant risk of voting preferences and other important information not passing smoothly up and down the chain. Corporate governance is thus at risk of being distorted by process deficiencies. Changes to the operation of custody chains that were introduced by the EU’s flagship amended Shareholder Rights Directive II became operative in September 2020. This article is therefore among the first to draw on operational impact to assess the significance of these new measures. Experience has already demonstrated that while there have been some important advances, the regulatory changes are struggling on two levels: they have created new uncertainties within national laws; and they have failed to provide the necessary cross-border harmonization of key concepts. These are not issues that can be resolved effectively by technology or market workarounds on their own. There is a continuing need for legislative change to ensure that legal uncertainties do not act as a barrier to further technology-driven market standardization and innovation.