Key takeaways:
- Corporate governance is pivotal in European small caps, where concentrated ownership and limited scrutiny can amplify both long-term value creation and downside risk.
- Strong governance acts as a strategic lever, improving capital discipline, strategic clarity, and investor trust, while weak governance drives misallocation and value destruction.
- Active engagement, board accountability, and minority shareholder protection are essential to addressing risks from dual-class shares, de-listings, and entrenched management.
Corporate governance is the engine behind sustainable performance, investor protection, and strategic agility. Its importance is especially pronounced in European smaller companies (small caps). These businesses can often be hidden champions: high‑quality, innovative firms with leadership positions in specialised niches. Yet governance standards across the small‑cap universe remain uneven. Ownership is frequently concentrated, boards are less exposed to market scrutiny, and external discipline is weaker. As a result, governance quality can make or break the long‑term investment case, magnifying both upside potential and downside risk.
Governance as a value lever
Strong governance is not just a defensive tool; it is a strategic asset. In small caps, where resources are constrained and visibility is limited, good governance can drive tangible value creation by supporting capital discipline, providing strategic clarity, and building investor trust that lowers the cost of capital.
Weak governance delivers the opposite outcome – it can lead to poor capital allocation, flawed strategic decisions, and lasting value destruction. In markets where shareholder rights are diluted and boards fail to challenge management, investors must remain vigilant and be prepared to engage.
Our approach: Active, constructive, long term
Within the Janus Henderson European Smaller Companies team, we believe governance is a key consideration. We assess management capability and execution, as well as a company’s attitude toward its public market investors, capital allocation discipline, and corporate accountability.
Governance structures and incentive alignment matter even more in small caps, where individual decisions can have an outsized impact on outcomes. This is particularly true in turnaround situations, where boards and management teams play a decisive role in determining whether change is delivered, delayed or even successful.
We place strong emphasis on constructive engagement and the protection of minority shareholders. A company’s willingness to listen, respond, and adapt is often the clearest signal of governance quality and long‑term value potential.
Engaging with companies and advocating for strong governance is a core pillar for the Janus Henderson European Smaller Companies team. When we allocate capital, we have clear expectations that our clients’ interests are treated fairly and prioritised by both executive and supervisory boards. One of our core values is ‘Clients come first – always’, and robust governance is fundamental to delivering on that commitment.
Rory Stokes, Portfolio Manager
Dual-class shares and the accountability gap
One of the most persistent governance challenges in parts of Europe is the use of dual‑class share structures. These arrangements separate economic ownership from voting control. While often justified as a way to support long‑term decision‑making, they weaken accountability, particularly in small‑cap companies.
In markets such as Germany, Sweden and the Netherlands, these structures remain common. The issue is more acute in smaller companies that face limited external scrutiny. When founders, families, or controlling shareholders hold disproportionate voting power, minority investors have little influence when it comes to board composition, strategy, or capital allocation.
This imbalance matters. When performance deteriorates or a strategy fails, shareholders may lack effective tools to drive change. Dual‑class structures can entrench management, dilute accountability, and weaken the feedback loop between investors and company leadership, making governance failures harder to correct and risks more persistent.
Delisting and minority shareholder risk
Delisting represents another significant governance risk in European small caps. In many jurisdictions, companies can delist with limited shareholder approval and without robust exit protections. Minority investors can be left holding illiquid shares, often without a fair buyout mechanism.
We have seen cases where companies delist after prolonged underperformance, locking in losses and removing transparency. Regulatory standards vary widely across Europe, and enforcement remains inconsistent. For investors, this creates a material risk and reinforces the need for rigorous governance analysis in the small‑cap space.
Board access without accountability
Access to boards in European small caps is generally good. Management teams are often open to dialogue, and directors are willing to meet investors. But access alone does not guarantee accountability.
We continue to encounter boards that hesitate to challenge entrenched management, even amid periods of sustained underperformance. Independent directors may be present, but they often lack the mandate or resolve to drive change. In some cases, boards defer to founders or controlling shareholders, prioritising continuity over results.
This dynamic is especially damaging in small caps, where agility and leadership quality are critical. When boards fail to act decisively, transformation stalls, value erodes, and investor confidence weakens. Governance is not only about structure; it is about behaviour.
What needs to change
Improving governance outcomes in European small caps requires more than investor engagement. Stronger regulatory frameworks are essential. Priorities include greater transparency in ownership structures, clearer safeguards for shareholder rights, stronger requirements for genuine board independence, and enhanced protections in corporate actions such as de-listings and buyouts. Greater alignment across European markets would support a more competitive and trustworthy capital ecosystem.
As the EU moves toward a more integrated capital markets union, it is essential that shareholder friendly rules and regulations are strengthened. Better governance standards are critical to unlocking long term corporate value and supporting sustainable economic growth across Europe.
Rory Stokes, Portfolio Manager
Governance as the foundation of trust
Strong governance is fundamental to confidence in European capital markets. Public markets must remain attractive to companies, without imposing burdensome regulations and reporting requirements that risk pushing businesses toward private ownership and delisting. At the same time, the case for transparent, accountable, and investor‑friendly governance has never been stronger. If Europe is to remain a vibrant hub for innovation and capital formation, governance must sit at the heart of its small‑cap ecosystem.
Capital discipline: A strategic approach where companies prioritise projects that can deliver a high return, and financial prudence, over other areas such as maximising rapid – but costly – expansion.
Delisting: The removal of a company’s shares from a stock exchange, such as the S&P500 Index, or FTSE All-Share Index. This can occur voluntarily, for example following a takeover, or involuntarily, such as when the total market capitalisation of the company falls below a certain threshold.
Dual-class share structure (DCSS): A corporate mechanism where a company issues two or more classes of shares with unequal voting rights, for example so an existing shareholder can maintain voting control after an initial public offering (IPO). The structure can help to support long-term strategic focus, but it can raise concerns regarding shareholder accountability.
Environmental, Social, and Governance (ESG): Factors that relate to the quality and functioning of the natural environment, the rights, well-being and interests of people and communities, and the governance of companies & their stakeholders.
Market capitalisation (market cap): The total market value of a company’s issued shares. It is calculated by multiplying the number of shares in issue by the current price of the shares. The figure is used to determine a company’s size and is often abbreviated to ‘market cap’.
Small cap stocks: Companies with a valuation (market capitalisation) at the smaller end of the market scale.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
There is no guarantee that past trends will continue, or forecasts will be realised.
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Important information
Please read the following important information regarding funds related to this article.
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.