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EU: Shareholder Rights Directive Mk II

The EU’s council of permanent representatives has endorsed an agreement between the Slovakia, which holds the presidency of the European Council,  and the European Parliament that agrees revisions to the second Shareholder Rights Directive.

EU institutions agree on need for more shareholder engagement

Lucia Žitňanská, Minister for Justice of Slovakia said: “The financial crisis revealed that in many cases shareholders supported excessive short-term risk-taking by managers. The revised directive is intended to redress this situation and contribute to the sustainability of companies, which will in turn help generate growth and create jobs. I want to express my gratitude to previous presidencies, the Commission and the Parliament for the fruitful cooperation“.

The revised directive aims to improve shareholder rights and engagement in a number of areas:

  • Executive pay
  • Shareholder Identification
  • Facilitation of exercise of shareholders rights
  • Related party transactions votes
  • Transparency for institutional investors, asset managers and proxy advisors

In respect of remuneration all EU shareholders will have the right to vote on the remuneration policy of the directors of their company as is already the case in the UK. The revised director also state that the remuneration policy should contribute to the overall business strategy, long-term interests and sustainability of the company and should not be linked to short-term objectives.

Intermediaries will have to facilitate the exercise of the rights by the shareholder, including the right to participate and vote in general meetings. They will also have the obligation to deliver to shareholders in a standardised and timely manner, all information from the company that will enable the appropriate exercise of their rights.

Although nominally a Shareholder Rights Directive, a number of obligations have been introduced for asset owners, managers and some of their advisors.

In an echo of the UK’s Stewardship Code, the new rules require institutional investors to develop and publicly disclose a policy on shareholder engagement or explain why they have chosen not to do so. This policy will describe how they integrate shareholder engagement in their investment strategy and the engagement activities they carry out. Despite last minute introductions in respect of ESG investment strategies, only corporate governance analysts or proxy advisers will be required to disclose if they follow a code of conduct.

Commenting on the finalised wording, Sarah Wilson CEO of Manifest expressed concerns about the Directive: “After years of bitter wrangling over the need to urgently revise SRD I in respect of strengthening shareholders rights, in particular cross border voting, it became clear that the Commission had a fixed agenda and was determined not to listen to evidence about the failings of the voting system. Introducing new language about proxy advisors without also applying the same requirements to ESG advisors, proxy solicitors, remuneration consultants or head-hunters shows a  level of discrimination, which is hard to justify.”

In relation to suggestions that shareholders were to blame, Wilson said: “From the start of the negotiations, investors’ frustrations with European board’s attitudes to better governance and engagement were ignored. Issuers and their advisors have played political blame games rather than listening to the genuine concerns of their owners. For Minister Žitňanská to blame shareholders and their analysts who were blowing the whistle on short-termism and bad governance practices throughout the ownership chain is entirely unjustified. We can only hope that the implementation phase will be more productive.”

The European Council and the European Parliament must now formally endorse the agreement. The Parliament’s legal committee will vote on the directive in January then a final endorsement will be given at a full plenary session of parliament in March and the Council is also expected to formally adopt the revised directive early next year. After that it will be down to EU member states to transpose the Directive into local laws.

What do you think?