Shareholders Rights Directive has been approved
The latest piece of capital markets regulation is the Shareholder Rights Directive. On 3 April 2017, the Council finally adopted the revised Directive – close to three years after its presentation by the European Commission in April 2014. The Directive will enter into force two years after its publication in the Official Journal of the European Union. We have asked Professor Jesper Lau Hansen of the University of Copenhagen to comment on the process and the implications of the new Directive.
For those who may have forgotten it during the long adoption process, the Directive was revised to promote the long-term sustainability of EU companies, encourage long-term shareholder engagement and enhance the efficiency of the chain of intermediaries. The revised Directive is thus intended to address the corporate governance shortcomings of listed companies identified by the European Commission after the financial crisis.
Why has it taken so long to adopt the revised Directive?
The road to approval of the new Shareholder Rights Directive has been long and filled with obstacles.
Jesper Lau Hansen offers his explanation of the troublesome birth of the Directive: “After the European Commission presented its proposal to a revised Shareholder Rights Directive in the spring of 2014, it was extensively amended by the European Parliament’s Committee on Legal Affairs (JURI) and a compromise text was adopted in July 2015. The compromise was subsequently blocked in protracted trilogue negotiations between Commission, Council and Parliament. Among the biggest hurdles was the proposal on related party transactions and the European Parliament’s proposal on country-by-country tax reporting. Once the proposal on related party transactions was amended and the proposal on country-by-country reporting removed, negotiations got back on track and the European Parliament and Council reached agreement in December 2016. The final step in the long process was the Council’s adoption earlier this week”.
Will it work as intended?
Jesper Lau Hansen hopes that the new Directive will support the overall political aims and ambitions, but from an analytical and research perspective he raises some interesting questions concerning the degree of detail in the Directive.
“Even though the EU has strongly stressed that corporate governance shortcomings in listed companies, including lack of shareholder engagement, contributed to the financial crisis, we have seen no empirical evidence that shareholders were responsible for the way company managements acted before the crisis. Therefore, we cannot be certain that the amendments to the Directive are the right medicine to change corporate behavior in the desired direction and prevent a crisis. In this connection, it is interesting to note that the Nordic governance model is significantly influenced by the historical ownership structure with large shareholders actively exercising their shareholder rights, including engagement – in other words, in the Nordic region we already have a governance model very much like the one the EU is looking to implement. But this is not the case in many other European countries where the ownership structure is quite different and where shareholders have historically been less active. EU wants to change this pattern by means of the new Directive. It is also worth noting that although we have a well-functioning governance model in the Nordic region we had our own share of problems during the crisis.
On a more general note, I wonder if maybe policymakers have gone too far with regard to, for example, information on and regulation of executive remuneration, information on shareholders’ identity and the relation between institutional investors and their asset managers. Let’s hope that the new control mechanisms and more detailed regulation will prove their worth and not just generate more work and stricter compliance requirements”, Jesper Lau Hansen concludes.
What’s new? – Shareholder Rights Directive in brief
The implementation of the new Directive will result in the following main changes:
Stronger shareholder rights and facilitation of cross-border voting:
The new rules are intended to make it easier for shareholders to exercise their rights, nationally as well as internationally, and for companies to know the identity of their shareholders. Intermediaries, such as banks, will have to ensure that they pass on the necessary information from the company to the shareholders, and vice versa.
Long-term engagement of institutional investors and asset managers:
The new rules are intended to require transparency from institutional investors and asset managers with regard to how they invest and how they engage with the companies they invest in. Each year, they will have to publish a shareholder engagement policy and a report on their implementation of and compliance with the policy together with a description of any voting rights exercised in listed companies and a description of any services received from proxy advisors. The new rules are based on a 'comply or explain' approach and largely reflect the Recommendations for Active Ownership recently presented by the Committee on Corporate Governance in Denmark.
More transparency for proxy advisors:
The new rules are intended to require proxy advisors to disclose certain key information about the preparation of their recommendations and advice, and to report on the application of the code of conduct they apply.
Shareholders will have a "say on pay":
The new rules are intended to give the shareholders in listed companies a say on remuneration practices as they are given the right to vote on the remuneration policy at the general meeting. Furthermore, listed companies must publish a remuneration report outlining all benefits granted to individual executives and the shareholders will be permitted to vote on the report (advisory vote).
Related party transactions: The new rules are intended to require listed companies to make sure that any material transactions with related parties are approved either by the company’s board of directors or by the shareholders at the annual general meeting, and to publish these transactions.
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