Views on improving the integrity of global capital markets
29 January 2014

Shareholder Engagement: Gauging the Impact of Revised EU Shareholder Rights Directive

The 2007 shareholder rights directive aimed at facilitating shareholder control as a prerequisite to sound corporate governance. It introduced minimum requirements regarding information and participation in shareholder meetings. It also removed certain impediments to voting, such as the obligation to deposit shares, and enabled voting by electronic means and proxy.

Yet, in 2012, the European Commission’s action plan on corporate governance announced the revision of the directive. The upcoming revision will pursue five objectives:

  1. foster engagement by asset owners and managers
  2. give shareholders better oversight on pay
  3. enhance transparency and shareholder control of related-party transactions
  4. facilitate cross-border voting and information
  5. introduce rules on transparency and conflicts of interest for proxy advisers

This blog post focuses on engagement in the upcoming proposal, outlining the likely key provisions.

The European Commission points to evidence that monitoring and engagement by asset owners and asset managers is sub-optimal (either insufficient or focused on short-term rather than long-term performance) and is in line with the Kay Review in the United Kingdom and the World Economic Forum. The directive aims to promote best practices from the UK Stewardship Code, the Dutch Eumedion (which includes best practices for engaged share ownership), the code for external governance of the European Fund and Asset Management Association (EFAMA), and the International Governance Network Corporate Governance Principles.

Levels of Shareholder Engagement in Upcoming Proposal

The revised shareholders rights directive is expected to encourage asset owners and managers to develop and disclose engagement policies and their application on an annual basis. Firms who do not comply with this provision will need to give a clear and reasoned explanation.

For institutional investors, life insurers, and pension funds, the proposal is expected to encourage (if not obligate) them to explain how their equity investment strategies are in line with the profile of their liabilities and how these strategies contribute to the long-term performance of the assets. It would also encourage transparency among investment mandates, including incentives provided to the manager to pursue medium to long-term returns and the method and time horizon for the evaluation of performance.

The directive would, therefore, seek to encourage larger-duration mandates, absolute-performance measurement, and lower portfolio turnover, in terms of institutional investors trying to meet long-term liabilities through strategic equity stakes. To complement this, managers would report periodically to life insurers and pension funds on the application of their mandate regarding engagement.

Expected Impact on Firms and Markets

The proposal raises concerns on a number of fronts, including compliance burden and the protection of commercial information from disclosure to the public. These concerns would be mitigated, however, should the directive’s provisions apply on a non-binding “comply-or-explain” basis.

Engagement has the potential for positive externalities, but mandating it across the board (where it does not make sense or is not desired) is unlikely to enhance welfare. Investors should be free to determine whether they wish managers to engage on their behalf and, if so, on what basis. Yet, in promoting engagement, transparency has a central role to play. It facilitates monitoring by end investors, beneficiaries, and organised civil society, thereby empowering willing parties to pave the way for further engagement. As such, it becomes the most important element of the proposal.

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About the Author(s)
Mirzha de Manuel Aramendía

Mirzha de Manuel Aramendía is director of capital markets policy at CFA Institute. He is responsible for developing capital markets policy in the Europe, Middle East, and Africa (EMEA) region through education and research, developing policy papers, research projects, and regulatory consultations.

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