Last year’s AGM season was meant to see a leap forward in the spread of shareholder democracy – but instead it exposed “alarming” new obstacles for individual investors, says Arnaud Houdmont of Better Finance.
Despite the entry into force of the Shareholder Rights Directive II (SRD II) in September 2020, and the strong emphasis the European Union places on corporate governance and on shareholder engagement, the exercise of shareholder voting rights, particularly across borders and by individuals, continues to face significant obstacles to date.
The combination of long and complex holding chains and omnibus accounts makes it difficult and costly for shareholders to exercise their fundamental rights, namely the right to participate in general meetings and to exercise their voting rights, especially across borders within the European Union. If we want to ensure that companies behave ethically and sustainably and ensure proper ESG compliance, we need to give shareholder engagement a chance, and this can only be achieved if voting processes, both domestic and cross-border, are simple and efficient.
Shareholders are considered the real owners of a company. As such, they participate in the profitability of the company and enjoy specific privileges and rights, such as the right to vote on corporate matters and influence the management of the company, thus enabling them to influence the direction and important decisions of a company and enforce accountability on the part of management.
Shareholder engagement, by voting on shareholder proposals and resolutions at annual general meetings (AGMs), is essential to ensure that shareholders can influence corporate decision-making. As such, AGMs are the cornerstone of shareholder democracy and an essential element underpinning good corporate governance. Not only are AGMs the place where shareholders can vote on key decisions, but it is also the only time when board members and management are held accountable, directly to their shareholders, for their performance and decisions.
In addition to ensuring that companies have the best interests of their shareholders at heart, shareholder engagement can positively influence corporate governance and encourage companies to act as responsible citizens within the communities and environment in which they operate and conduct business.
The importance of shareholder voting rights and the ability to exercise these rights across EU borders was recognised by the European Commission and led to the adoption of the Shareholder Rights Directive (SRD) in 2007, with the main objectives of defining minimum rights for European shareholders, improving corporate governance in companies whose securities are traded on EU-regulated markets and facilitating the cross-border exercise of voting rights.
Ten years later, the financial and environmental crises had brought the shortcomings of the corporate governance of listed companies to light. Today, given the increasingly urgent need to mitigate human-induced climate change, limit the financial fallout from the current Covid-19 pandemic, and address the ESG implications of Russia’s invasion of Ukraine for companies around the world, the need to ensure that companies live up to their environmental, social and governance responsibilities, thereby creating sustainable value for their shareholders, has never been more urgent.
Given this new reality and the importance of shareholder engagement and strengthening corporate governance in the European Union, the 2007 Shareholder Rights Directive was amended in 2017 by SRD II with the aim of encouraging shareholder engagement, increasing transparency, improving corporate governance and reducing short-termism by promoting long-term shareholder involvement in the management of companies in which they are invested.
As the EU Shareholder Rights Directive II itself states, “greater involvement of shareholders in corporate governance is one of the levers that can help improve the financial and non-financial performance of companies, including as regards environmental, social and governance factors”.
Despite good intentions and the European Commission’s assertion that “the new rules aim to contribute to the long-term sustainability of the EU companies, enhance the efficiency of the chain of intermediaries and to encourage long-term shareholder engagement”, the exercise of shareholder voting rights, particularly across borders, continues to face significant obstacles to date. Some of the main barriers to shareholder engagement stem from complex chains of intermediaries and the use of omnibus accounts - with intermediaries or agents holding shares for individual investors - making the exercise of shareholder rights more difficult and costly, thus limiting shareholder engagement.
The 2021 AGM season was the first full season with these new rules in place, which were supposed to pave the way for greater shareholder engagement. However, the ‘Barriers to Shareholder Engagement 2.0’ study by Better Finance and its member organisations to determine whether intermediaries were ready for SRDII and whether shareholders were able to fully exercise their rights by attending and voting at cross-border general meetings thanks to the new rules, revealed an alarming situation where, in the vast majority of cases, shareholders were not able to fully or partially exercise their basic rights in general meetings abroad. In addition to not being able to vote, there were many cases where they were charged high fees, in some cases up to €250 per general meeting.
To ensure a culture of transparency and dialogue with and between all stakeholders and to improve the flow of information within organisations, the process of voting on a cross-border basis must become simpler, more effective and more efficient. The easier and cheaper it is for shareholders to vote at the general meetings of their companies on a cross-border basis, the more they will exercise their voting rights also abroad, and thus be able to commit to the sustainable development and energy transition of corporate Europe. If we want to ensure that companies behave ethically and sustainably and ensure proper ESG compliance, we need to give shareholder engagement a chance, and this can only be achieved if voting processes, both domestic and cross-border, are simple and efficient.
This year again, we are surveying retail investors’ about their experience with engagement at cross-border AGMs in the EU (see below for survey link). Gathering shareholders’ impressions on the ease of the process and on any barriers experienced - such as costs and communications with intermediaries - is paramount to provide hard evidence, and ultimately substantiate policy recommendations for a proper SRD II implementation at EU and MS Level. This will allow us to assess potential improvements or new obstacles between 2021-2022.
*Arnaud Houdmont is Better Finance’s chief communications officer. Better Finance is inviting people to share views to support shareholder democracy in the EU. Until mid-September, the organisation is seeking input to its Survey on Shareholders' experience of voting at cross-border AGMs in the EU. This feeds into the study on cross-border voting under SRD II. Better Finance is looking for evidence of barriers to shareholder engagement in the EU.
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