Views on improving the integrity of global capital markets
26 December 2012

European Commission Corporate Governance Action Plan: Engagement and Sustainability

In mid-December 2012, the European Commission revealed its corporate governance “Action Plan” outlining future initiatives in the areas of company law and corporate governance. The Action Plan states that its objectives are to encourage and facilitate long-term shareholder engagement, increase the level of transparency between companies and their shareholders and simplify cross-border operations of European undertakings.

That all sounds well and good; however, once more the emphasis is on investors becoming more “engaged”. According to the Action Plan, shareholders should fully assume their responsibilities in order to make sure that the investee company remains competitive over the longer term in return for additional rights. Companies should match these moves by becoming more transparent, and these initiatives are expected to contribute to effective governance of companies. But isn’t governance primarily a board issue? Shouldn’t the onus of corporate governance rest with those responsible for directing the business?

Several points from the Action Plan are worth highlighting:

  • There are plans for imposing a limited number of obligations on institutional investors, asset managers, and significantly, proxy advisers to bring about effective engagement. There is a perceived lack of interest from shareholders to hold management teams accountable; this is witnessed by the prevalence of short-term holding periods.
  • The proxy advisory industry is in for closer scrutiny and possible regulation — not a surprise following the European Securities and Markets Authority’s (ESMA’s) consultation on this matter earlier this year.
  • There is a possibility that institutional investors will be required to disclose voting and engagement policies and voting records as per a modified 2013 shareholders’ rights directive.
  • Shareholders should be offered more possibilities to oversee remuneration policy. Although this is a step forwards, it is not as dramatic as what was being proposed by EU Internal Market Commissioner Michel Barnier in summer 2012; however, political negotiations may change the scope again.
  • Plans demonstrate support from both issuers and investors for an EU-wide shareholder ID mechanism in the short term (by April 2013 as part of the Securities Law legislation). Companies should be allowed to know who their shareholders are, and institutional investors should be more transparent about their voting policies.
  • The European Commission believes that companies could benefit from remuneration policies, which stimulate longer-term value creation and genuinely link pay to performance, but without binding votes.
  • New measures and incentives will be offered to encourage long-term investing as well as encouraging “absentee” investors to engage.
  • Moves towards non-financial (corporate social responsibility) reporting will be implemented via modifications to the accounting Directives.
  • Companies may face stronger shareholder curbs on “related-party” transactions  those between the company and directors or large investors.

Putting personal hobby horses aside, the focus and challenge will be in designing and implementing the proposed actions in order to ensure that they really do assist improved company performance and shareholder engagement. The consultation programme is due to start at the end of January 2013, so watch this space.

About the Author(s)
Claire Fargeot

Claire Fargeot is a former head of Standards and Financial Market Integrity at CFA Institute for the Europe, Middle East, and Africa (EMEA) region. She was responsible for leading CFA Institute efforts in advocacy, policy development, and regulatory outreach in EMEA.

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