Stringent and tough-to-meet new transparency rules laid down by the Shareholder Rights Directive II will affect the entire investment chain. Steve Giles explains
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This article was first published in the September 2019 International edition of Accounting and Business magazine.
The second version of the Shareholder Rights Directive (SRD II) is highly ambitious, seeking to improve the stability and sustainability of EU companies in EU-regulated markets, where governance practices often differ significantly between member states.
It also has a broad scope, establishing new obligations for each party in the investment chain: institutional investors, asset managers, intermediaries, proxy advisers and EU-listed companies. There are extra-territorial implications too for third-country intermediaries and proxy advisers providing services for organisations in the EU.
The main changes introduced by the latest version of the directive are:
- Long-term engagement of institutional investors and asset managers. Increased transparency rules require investors and asset managers to develop and disclose – on a comply or explain basis – their investment policies and how they engage with investee companies, together with information on policy implementation and voting decisions. This includes monitoring companies against long-term environmental, social and governance (ESG) factors.
- Stronger shareholder rights and facilitation of crossborder voting. Issuers have been given the right to identify their shareholders. The updated directive is stringent on the role of intermediaries such as banks. They must facilitate this right and transmit information to shareholders without ‘undue delay’, either by providing voting forms to shareholders and registering votes with issuers or by putting a shareholder in touch with an issuer. Member states are permitted to set a minimum threshold of a 0.5% holding before a company can request shareholder identification.
- More transparency of proxy advisers. For the first time proxy advisory agencies are required to draw up and disclose a code of conduct and report on its application. They must also disclose certain key information about the preparation of their research, advice and voting recommendations (eg any conflicts of interest).
- Shareholders will have a ‘say on pay’. SRD II encourages more transparency and accountability on directors’ pay. It gives all shareholders the right to vote on remuneration policies every four years. Whether this vote will be binding or advisory will be decided by each individual member state. SRD II also requires remuneration reports to be voted on annually on an advisory basis. The objective is to establish a stronger link between pay and performance.
- Related-party transactions. Companies are now required to disclose material related-party transactions that are most likely to create risks for minority shareholders. These should be submitted for approval by the shareholders in a general meeting.
Given the significance of the changes, it is surprising how little awareness of SRD II there appears to be among the EU investment community. Research by Hermes Investment Management in early 2019 found that 42% of European investors surveyed had not heard of the directive, and only 3% believed their organisation met its requirements.
This low profile might reflect the hitherto disparate approach to stewardship issues across the EU – for example, full shareholder identification processes currently exist in only half of EU member states. Also, parts of SRD II already apply in some member states – Belgium, France and the UK already have laws in place covering shareholder votes on remuneration policies. The UK also has a Stewardship Code for institutional investors and asset managers requiring them to disclose their policies on stewardship and engagement (see box).
Despite this, SRD II has implications for all parties in the investment chain. Take proxy advisers: they not only have to draw up codes of conduct, they must also come to terms with the new disclosure requirements – not easy in an area of the market where transparency is not widespread.
Compliance with the new requirements will not be easy. But whatever the challenges, SRD II should be viewed positively, especially for its encouragement of longer-term stewardship.
Steve Giles is a consultant and lecturer in governance, risk and compliance.
CPD technical article
"42% of European investors had not heard of the directive and only 3% believed their organisation met its requirements"