04 April 2017

ICGN expresses caution over the long-term effects of Brexit on corporate governance in the EU

The ICGN Viewpoint “Brexit: what are the governance implications for the EU and the UK?” was published shortly after UK Prime Minister Theresa May presented EC Council President Donald Tusk a letter triggering Article 50 of the Lisbon Treaty to set in motion the UK’s exit from the EU.

Brexit: Negative impacts could be on the long-term horizon

Brexit is a very important geopolitical development and almost all investor members of ICGN will have investment holdings in the UK and EU; moreover roughly half of ICGN members are Europe-based, with over 20% from the UK. In the near term the ICGN believes there is not likely to be immediate substantial change from a corporate governance perspective, and the UK will continue to have a strong influence on European corporate governance, both in general philosophy and in practice. Over time however, the British influence in Europe could diminish in ways that have negative impacts for corporate governance shareholder rights and institutional investors. At the same time the UK’s own corporate governance model, based on shareholder primacy, may come under further scrutiny to the extent that investor expectations on companies are seen to encourage unduly short-term time horizons and poor long-term planning for companies.

George Dallas, ICGN Policy Director, stated: “The UK’s influence in European corporate governance has been strong and generally positive. Post Brexit however, there are potential fault lines that could lead to a European governance model expressing differing governance preferences – and which could challenge minority shareholder protections and investor stewardship.”

Potential challenges: Voluntary codes & shareholder protections

The report focuses in particular on the extent to which the effectiveness of voluntary codes, supported by a “comply or explain” framework, might come under question by EU legislators who may favour hard law regulation in future corporate governance policy. At the same time the British model of shareholder primacy and corporate purpose could come under greater scrutiny post-Brexit on the Continent, with governance models that place greater emphasis on the role of stakeholders and controlling shareholders. To the extent this might lead to weakened minority shareholder protections or diminished engagement between investors and companies, such a shift in emphasis would pose clear corporate governance challenges for investors.

Kerrie Waring, ICGN Executive Director, stated: “it is important for the European governance ‘ecosystem’ – minority investors, controlling investors, regulators and stakeholders – to respond to Brexit in a constructive and sustainable way and to seek to find ways to align interests in this changing political environment. ICGN, for its part, is prepared to serve both as a voice of institutional investor interests and as a convening platform for dialogue with key market participants in this important debate.”

Full press release

Full viewpoint

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