The proposed EU Shareholder Rights Directive aims to overcome certain corporate governance shortcomings in European-listed companies, and to encourage a more long-term-oriented investment process and active engagement by institutional investors and asset managers, in several ways.
Vote on executive remuneration
Institutional shareholders will have an effective say over the remuneration policy of EU-listed companies in their portfolio by being granted the right to a binding vote. This should contribute to the overall business strategy, long-term interests and sustainability of the company. The directive introduces that a directors’ performance when determining a bonus scheme should consider non-financial performance, including, environmental, social and governance factors in addition to the financial performance of the company. Shareholders are also granted an advisory vote on the company’s remuneration report.
Additional disclosure requirements
European-based institutional investors and asset managers will become subject to additional disclosure requirements, requiring them, on a comply-or-explain basis, to develop and disclose a policy on how they intend to engage with investee companies. The policy should describe how they integrate shareholder engagement in their investment strategy, as well as disclosing information about the implementation of their engagement policy. This should include information about the exercising of their voting rights. Institutional investors should also annually disclose how the main elements of their equity investment strategy are consistent with the profile and duration of their liabilities.
Asset managers should give proper information to institutional investors, to allow the latter to assess whether the manager acts in its best long-term interest. This information includes corporate governance matters as well as other medium-to-long-term portfolio risks.
Many institutional investors make use of their voting rights at shareholder meetings. As most shareholders are unable to attend shareholder meetings in person, voting to elect directors or on major corporate transactions occurs via solicited proxies. The directive recognises that it is important for shareholders to know whether their votes have been correctly considered, therefore a confirmation of receipt of votes should be provided in case of electronic voting. Also, shareholders voting in a general meeting should be able to verify whether their vote has been validly recorded and counted.
The revised directive seems to provide an adequate balance between new rights and new responsibilities for shareholders. It incorporates corporate governance and stewardship best practices that have developed since the publication of its initial version in 2007. On June 10, 2019, the implementation deadline, there will be more clarity about its effectiveness.
Bram Hendriks is client relations manager, Europe, at Kessler Topaz Meltzer & Check, LLP
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