Why governance matters in European small caps

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.