A sweeping new set of rules to improve communications between European companies and their shareholders, known as the Shareholder Rights Directive (SRD) II, takes effect September 3, 2020, imposing a number of new requirements on asset managers, custodians, and other intermediaries in the share-ownership chain.
SRD II was adopted by the EU in 2017, updating the original SRD passed in 2007. The goal was to encourage longer time horizons for shareholding, drive shareholder engagement, and require more transparency and accountability to shareholders regarding company director pay and conflicts of interest.
SRD II takes a long-term view
Taking note of the fact that the average shareholding period is only eight months, the European Commission said that “the performance of asset managers, employed by institutional investors to manage their assets, are often evaluated on a quarterly basis or even on shorter periods, which doesn't allow them to take into account long-term performance and puts pressure on them to deliver short-term returns.”
In an effort to reverse what the EU saw as a negative trend, central securities depositories (CSDs), custodians, intermediaries, and asset managers will be required to:
- Answer requests from companies based in Europe for data about shareholders in their firms, often within 24 hours.
- Convey information about a company's general meetings to shareholders.
- Facilitate voting by those shareholders on issues at the general meetings.
- Convey those votes to the company or its agents, as well as inform the shareholder that the company had received their votes.
With more than 8,000 affected companies in the EU, the directive will apply to all firms in the custody chain that are holding European equities or investing in them, whether they are located within the EU or not, making it one of the most sweeping changes to corporate governance regulation ever. The administrative burden on firms across the globe will be substantial.
Conforming to GDPR and transparency requirements
Intermediaries will have to ensure that requests from issuers for shareholder data are legitimate and that they conform to the rules of the EU's General Data Protection Regulation (GDPR), which took effect in 2018 to protect the privacy of individuals resident in the EU.
The transparency requirements for annual general meetings (AGMs) are also elaborate. SRD II says that shareholders must be given sufficient notice of company events so that they can closely examine the various options. When shareholder votes are submitted to the company by electronic platform, the shareholders must be notified that their votes have been tallied within 15 days.
While the directive requires that companies have a right to data concerning shareholders, it provides that member states may limit the identification of shareholders to those holding at least half of a percent of the company's outstanding shares, which would limit the burden considerably.
Addressing misgivings over management pay
The EU has expressed concern that management pay at companies is sometimes out of step with the company's financial performance. As a result, SRD II requires that companies establish a remuneration policy, which must be submitted to the shareholders for a vote at least every four years, and submit a pay report for an advisory vote annually. If these votes fail to gain approval, the directive provides some key follow-on steps.
SRD II also imposes rules governing administrative costs, including for implementing SRD II itself. For example, intermediaries need to be transparent about proxy costs and the provision of proxy services, which should be published visibly (such as on a company website) so both end investors and regulators can find it. It is likely that SRD II will mean that global proxy notifications would become a mandatory service, where it is currently an elective option for the EU locations in scope.
The directive provides that any charges levied by an intermediary on shareholders, companies, and other intermediaries should be non-discriminatory and proportionate to the actual costs incurred for delivering the services. In addition, any difference between the charges levied between domestic and cross-border exercise of rights must reflect the actual costs incurred for delivering the services.
Another requirement is that investment firms and institutional investors must now publicly disclose their shareholder engagement policy, which explains how they plan to integrate shareholders into their investment policies – or if they don't plan to do that, publish an explanation of why not.
SRD II also contains language requiring a code of conduct for proxy advisers, the firms that research and advise asset managers on how to vote on issues at AGMs. It provides that proxy advisory firms should provide accurate and reliable recommendations to the firms they advise but does not spell out how it expects this to be implemented.
In summary, it's clear that SRD II represents a heavy administrative lift, requiring action in 2020. Custodians and financial institutions are expected to be the first intermediary in the chain for most communications in order to respond to or re-distribute requests as soon as possible. Asset manager and institutional investor readiness for SRD II focuses on the definition of shareholder engagement policies that highlight transparency and long-term thinking in their approaches.
BBH will continue to support messaging regarding general meetings, proxy notifications, and corporate actions, and will meet the same day turnaround times to either answer such requests, or pass them on through the intermediary chain as needed.