Amendments to Directive on shareholder engagement and corporate governance issues


Comments from ACCA Ireland to Irish Government on draft amendments to Directive on shareholder engagement and corporate governance issues including related party transaction disclosures.

Consultation on a proposal for a Directive of the European Parliament and of the Council amending:

  • Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement; and 
  • Directive 2013/34/EU as regards certain elements of the corporate governance statement.


The EC’s proposal features two key themes – 

The encouragement of a long-term approach to the planning and conduct of business at the listed company level 

  • The provision of more opportunities for shareholders to exert influence on how listed companies manage their affairs.
  • Both themes are praiseworthy in themselves and worthy of support.  

The two themes are broken down in the proposed Directive objectives into the objectives of:

  • Increase the level and quality of engagement of asset owners and asset managers with their investee companies;
  • Create a better link between pay and performance of company directors; 
  • Enhance transparency and shareholder oversight on related party transactions; 
  • Ensure reliability and quality of advice of proxy advisors; and
  • Facilitate transmission of cross-border information. 

These would all be laudable objectives and because of the cross border nature of share ownership, an EU wide approach is more appropriate than a country by country approach in this area. 

Individual elements of the proposal identification of shareholders (Art 3A)

Proposal – member states are to ensure that intermediaries that hold shares on behalf of other persons provide to companies on request information about the identity of those persons; intermediaries must inform shareholders that this information may be passed on. The draft proposal stresses that information communicated for this reason is not to be held in breach of data protection requirements. 

This seems a sensible measure, however it is unclear if it will cover holders of Contracts for Differences or other rights similar to ownership?  

Facilitation of the exercise of shareholder rights (Art 3C)

Proposal – member states must ensure that intermediaries make the necessary arrangements to allow shareholders to participate in and vote at general meetings.  

This also seems sensible. But the draft only allows shareholders to vote at general meetings of the company. It does not address the issue of their participation rights in respect of other forms of participation.

Transparency of engagement practice (Arts 3F-3I)

Proposal – Institutional investors and asset managers will have to be required to develop a shareholder engagement policy, covering specified matters, and to report annually on how this policy has been put into practice (including their voting behaviour); institutional investors will have to publicly disclose how their investment strategy is aligned with their liabilities and how it contributes to the performance of their assets; where asset managers invest on behalf of an institutional investor, they will have to disclose specified information either publicly or directly. 

The guiding aim of the proposals in these matters is laudable – to get institutional investors and asset managers to take seriously their investment responsibilities and to contribute to the overall goal of developing a long-termism culture. Apart from the beneficial effect that can ensue from using their financial weight in a measured way institutional investors have great potential, through their voting power, to influence the outlook of their investee companies. 

One wonders whether this outcome needs necessarily to be pursued through legislation. Legislation can have the effect of producing rigid expectations and inhibiting freedom of action. In this case, in steering investor groups towards a focus on the longer term, we should avoid giving the impression that short term investment concerns are invalid. Many companies will still have a valid need for funding in the short term and a good reason for seeking short term returns. Legislation should avoid suggesting that investor groups are to prioritise longer term goals in all cases as opposed to a measured approach whereby the virtues of all investment time scales are considered and acted upon. 

A flaw in the current system of financial responsibility is also that the interests of the great mass of retail savers in pension funds and insurance companies are not taken into account. The proposals do not address how they might go about taking those interests into account and how they might be made more accountable to end savers. 

Shareholder vote on board pay (Art 9A - 9B)

Proposal – member states will have to give shareholders the right to a pro-active and binding vote on a company’s pay policy; companies must also be required to publish a retrospective report on their pay practice and shareholders will have another, though non-binding, vote on this. The proposal mirrors changes already approved and implemented in the UK. 

The proposal on this matter is based on the presumption that shareholders, especially institutional investors, see a company’s policies and practices on board pay as being crucial to investor confidence in it. Pay may well be an important issue for many of them but it is not likely to be the only one.  

While some responsible companies may view the new proposal as an unnecessary interference in their affairs, the experience of the financial crisis was that too many companies sought short-term profit at the expense of responsible and sustainable management policies and practices. Accordingly it seems reasonable for the law to call for pay policies to be aligned systematically with the long term interests of the company. This should be seen as a reasonable additional safeguard for shareholders who recognise that, currently, the owners of a company have little influence on how a company’s directors reward themselves. It is also consistent with the overriding policy concern for businesses to be run in a way that focuses on the long term interests of themselves and their investors and employees.

A statutory requirement for a board policy on pay, and for this to be subjected to a shareholder approval process, will not in itself result in a downward influence on pay. Institutional investors can be expected fundamentally to support policies that incentivise and bring about successful performance on the part of the company, and if this leads to pay awards that are generous, even more generous than hitherto, then they may well see these as being justifiable. 

The binding vote may not be fully effective in building support for a company’s pay practices across the board because if institutional investors – who will invariably control the majority of votes - are happy there may still be smaller shareholders who will feel otherwise. The vote may therefore not amount to a full answer to shareholder concerns about board pay. 

Proposal – member states will have to ensure that listed companies comply with new rules governing RPTs: they will have to subject transactions with RPs who represent more than 1% of their assets to independent scrutiny and then publicly announce them; transactions with RPs who represent more than 5% of the company’s assets must be voted on by shareholders in general meeting. 

In both cases member states will be able to exempt companies from these requirements in specified circumstances. While this will provide flexibility for individual member states and companies, it will not serve the purpose of the EC’s initiative in harmonising shareholder rights across the EU.  

The sections envisages “an independent third party assessing whether or not (the transaction) is on market terms and confirming that the transaction is fair and reasonable from the perspective of the shareholders, including minority shareholders”.  This will be an impossible task for the independent third party to perform, it would require knowledge of the future and knowledge of what different shareholders would consider “fair and reasonable” and those shareholders will have different investment time horizons and objectives and therefore are unlikely to agree what fair and reasonable means. In addition, “market terms” by definition means that there is a “market”.  It would be impossible to confirm what “market terms” would be in a one off related party transaction, the transaction is not occurring in a market.  The requirement should be to disclose the details of the transaction or series of linked transactions over time rather than opine on how reasonable they are.  

Including an absolute cut off for disclosure of related party transactions would be welcome rather than leaving this as related party transactions that are “material”; a subjective measure.

Freedom of information

ACCA notes the scope of the Freedom of Information Act in regard to the submission. ACCA has no difficulty with this response being published on the website of the Department of Jobs, Enterprise & Innovation. This response will be published on ACCA’s website and will be available to all of our members and the general public.