From the blog: It is often said that a sequel is never as good as the original. While that might be true for some films, the new European Shareholder Rights Directive is a welcome revision of 2007’s first instalment.
The goal of the original Shareholder Rights Directive was to give shareholders consistent rights at annual meetings and when voting.
The amended version, published in May 2017 and due to be implemented in EU member states in June 2019, takes this further. With less than a year to go, UK pension funds should be assessing the upcoming changes and considering how the upgrade will impact their role as stewards.
The goal of the original SRD was to give shareholders consistent rights at annual meetings and when voting.
Institutional investors holding shares in these companies may see changes in their rights and face new obligations, regardless of where they are based
The amended version, published in May 2017 and due to be implemented in EU member states in June 2019, takes this further. With less than a year to go, UK pension funds should be assessing the upcoming changes and considering how the upgrade will impact their role as stewards.
As the name implies, shareholder rights remain at the heart of the second directive, but the amendments will bring new obligations for shareholders. These rights and obligations can be seen as both a responsibility and an opportunity for institutional investors.
First and foremost, SRD II aims to encourage effective and long-term-focused shareholder engagement with companies, which it is hoped will improve the sustainability of EU companies.
Secondly, SRD II seeks to improve the flow of information along the investment chain to ensure shareholders get the right information at the right time, and to provide greater transparency in the voting process.
Not a minor tweak
By focusing on the critical role of investors, the revised directive provides an opportunity to improve the governance of companies for the benefit of all key stakeholders.
This is not a minor tweak to a rulebook – more than 8,000 listed companies on EU regulated markets, with a total capitalisation of around €8tn (£7.1tn), will fall within the scope of the directive, according to the European Commission.
Institutional investors holding shares in these companies may see changes in their rights and face new obligations, regardless of where they are based.
SRD II will add shareholder rights and powers with regard to executive remuneration and related party transactions, and encourage investors to become more active in the governance of companies through engagement on all matters that affect long-term performance.
Playing by the rules
The new obligations will be enforced through a ‘comply or explain’ approach, which will require investors to be transparent about how they invest and engage, or explain why not.
While there is a certain degree of flexibility under this approach, the market may self-regulate due to increased transparency, as investors often wish to avoid being seen to lag behind their competitors and peers.
With the directive’s implementation set for June 2019, the investment industry may be insufficiently prepared for what will be a considerable step change in investor stewardship.
Now is the time for investors to consider how best to use their new rights and discharge their additional obligations, to contribute to the long-term sustainability of EU companies and economies. This will ultimately benefit those on whose behalf institutional investors operate.
Dr Hans-Christoph Hirt is head of Hermes EOS at Hermes Investment Management
