Commission Proposal for a Directive
amending the shareholders' rights
directive
as regards encouragement of longterm shareholder engagement
Council Working Party
6 May 2014
Summary
I. Background
II. Content of the proposal
1. Shareholder Identification and facilitation of exercise of
shareholders rights
2. Transparency of institutional investors and asset managers
3. Transparency of proxy advisors
4. Remuneration
5. Related party transactions
6. Final provisions
III.Recommendation on 'comply or explain'
BACKGROUND
Overview of developments
•
•
•
Green Paper
on corporate
governance
in financial
institutions
CRD III
•
Action Plan: EU
company law and
corporate
governance
Adoption CRD IV
2014
2013
2012
2011
Shareholders
rights
directive
2007
2007
2006
Directive on
corporate
governance
statement in
annual accounts
2010
2009
•
Study on
'comply or
explain'
•
Green Paper on EU
corporate
governance
framework
Proposal CRD IV
Green Paper on
long-term financing
of the EU economy
•
•
•
Communication
on long-term
financing
Proposal for the
revision of the
shareholders'
rights directive
Recommendation
on 'comply or
explain'
Main findings of the review of the EU
corporate governance framework
Insufficient long-term ownership and shareholder
engagement
• Crucial role of shareholders in the EU corporate governance
•
•
framework – the EU model based on self-regulation supposes that
shareholders engage with companies and hold the management to
account
Shareholders, and in particular institutional investors often fail to
look into the long term value of companies and do not establish
long-term relationships with them (shareholder engagement)
Evidence from the financial crisis : institutional investors did not
exercise sufficient control or even supported excessive short term
risk taken by banks
Evidence from financial and non-financial sector:
• Low level of engagement
• Low level of general turnout in general meetings (60% in
average in the EU, compared to 81% in the US and 74% in
Japan)
• Low level of dissent in general meetings (2-3%)
• Low level of private engagement with companies (39% of
'responsible investors'
• Short-termism
• Average holding period of 8 months
• Average annual fund portfolio turnover 72%
• Concerns about the role of proxy advisors
• Increasing influence of proxy advisors as institutional
investors, especially foreign, rely to a large extend on proxy
advisors (ex. in DE 80% of foreign investors follow the advice
of proxy advisors)
• Incertitude concerning the reliability of advice and the
treatment of conflicts of interests
• Concerns over directors' pay
• Insufficient link between pay and performance (increase of pay
while share price decreased)
• Insufficient alignment of directors' incentives with long-term
interest of the company
• Information on remuneration often not appropriate
• Shareholders' oversight on remuneration is insufficient
• Concerns over related party transactions
• Lack of appropriate information
• Lack of adequate safeguards for minority shareholders
• Despite the adoption of the shareholders' rights directive,
still difficulties to exercise the rights of shareholders and to
engage with companies
• Shares held through a network of intermediaries, ex.
investment firms, banks, custodians, Central Securities
Depositories
• Intermediated holding chain can be an obstacle to contacts
between company and shareholder and a barrier to
engagement
• Concerns regarding the transmission of information and voting
instructions in the holding chain: voting instruction not passed
over to companies
• Price discrimination for cross-border situations
• Concerns regarding the quality of corporate governance
reports
• 60% of companies do not provide sufficient information on
deviations from corporate governance codes recommendations
Cumulative impact of these problems
• Listed companies
 Short term pressure (ex. listed companies invest less into
product development, R&D, etc. than similar privately held
companies)
 Lost potential for improved financial performance: studies
show that shareholder engagement improves the performance
of investee companies
• Shareholders
 Difficulties to exercise their rights in cross-border context
 Lost potential for higher returns : Studies show that
investment strategies based on engagement improve the longterm performance of the investors' portfolio
Need for EU action:
International/European dimension
of the equity market
• 44% of the market value of EU listed companies belong to
foreign (European or other) owners, in particular foreign
institutional investors and asset managers.
• Increasing importance of institutional investors (in some MS
hold over 50% of shares of listed companies)
• 66% of all assets managed in three largest Member States
(UK, FR, DE)
• International importance of proxy advisors
CONTENT OF THE
PROPOSAL
Introduction
• Extended scope of the existing Shareholders' Rights
Directive
• new substantial rights for shareholders
• new transparency requirements for certain categories of
investors
• new requirements for intermediaries
• New definitions added:
•
•
•
•
•
•
intermediary
institutional investor
asset manager
shareholder engagement
proxy advisor
related party
Shareholder identification and facilitation of
exercise of shareholders rights
• Increased importance of intermediaries in the equity holding chain
•
•
•
•
•
•
make the exercise of shareholders rights and the engagement
between companies and investors more difficult
Information from companies not always passed on time to
shareholders
Voting instruction not always transmitted to companies
Direct contacts between companies and investors can improve
corporate governance, but identification of shareholders not always
possible, particularly in cross-border situations
Transparency Directive only subjects investors to transparency
requirements when they acquire 5% of the voting rights of a
company
Divergences between national frameworks and uncertainty among
foreign intermediaries create a barrier to shareholder identification
Price discrimination by intermediaries for cross-border services
Shareholder identification
• On the request of the company, intermediaries are required to transmit to the
•
•
company the name and contact details of the shareholders and for legal persons
their unique identifier
Contrary to the Transparency Directive, no public transparency, but information
only transmitted to the issuer
Safeguards for shareholders with regards to their data:
•
•
•
•
Shareholders to be informed of the possibility of transmission of their data
Information only to be used for the purpose of facilitation of the exercise of
shareholders' rights
Right to rectify or erase any incomplete or inaccurate date
Information not to be conserved longer than 24 months
• Commission shall adopt implementing act to specify the requirements to
transmit the information, including:
•
•
the format of the request and the transmission
the deadlines
• Shareholder identification would allow listed companies to communicate directly
with their shareholders and to proactively engage with shareholders
Transmission of information
Transmission from company to shareholders
• Intermediaries shall transmit without undue delay to shareholders the
information related to their shares when:
•
•
the information is necessary to the exercise of shareholder rights flowing
from shares or
the information is directed to all shareholders in a class
• Companies to provide to intermediaries the information related to the exercise
of shareholder rights in a standardised and timely manner
Transmission from shareholders to company
• Intermediaries shall transmit without undue delay to the company the
•
information received from the shareholders related to the exercise of the rights
flowing of their shares, according to their instructions
Commission shall adopt implementing act to specify the requirements to
transmit the information, including:
•
•
•
•
the
the
the
the
content
deadlines
types
format of information
Facilitation of exercise of shareholders rights
Facilitation of exercise of rights flowing from shares, including
voting
Intermediaries shall facilitate the exercise of shareholder rights, including the
right to participate and vote in general meetings at least in one of following ways:
•
•
arrangements for shareholders or persons nominated by them to be able
to exercise the rights themselvesµ
exercise of rights flowing from the shares upon explicit authorization and
instruction of the shareholder and for his benefit
Confirmation of votes cast by shareholders
• Companies shall confirm the votes cast in general meetings by shareholders.
• If the vote cast by the intermediary, he should transmit the voting
•
confirmation to the shareholder.
Commission shall adopt implementing act to specify the requirements to
facilitate the exercise of shareholder rights, including:
•
•
•
the type and content of the facilitation
the form of voting confirmation
the deadlines
Transparency on costs
• Intermediaries are allowed to charge prices and fees for their
•
•
•
services
Prices, fees and other charges should be publicly disclosed,
separately for each service
Charges on shareholders, companies and other intermediaries
shall be non-discriminatory and proportional
Any differences between charges for domestic and cross-border
exercise of rights shall be duly justified.
NB: third country intermediaries with a branch in the EU
also subject to rules of this chapter.
Transparency of institutional
investors and asset managers
18
Turnover of 900 institutional actively managed equity
portfolios (June 2006-June 2009), average 72%
-
19/15
Why is shareholder engagement important?
Who will benefit from more shareholder engagement?
Companies:
- Proper control over management is crucial for good governance: studies
show that shareholder engagement (including on corporate governance
issues) improves the performance, efficiency and profitability of investee
companies
- Studies show that lack of monitoring and/or short-term pressure from
institutional investors results in underinvestment
Shareholders, beneficiaries of institutional investors (future
pensioners, insured):
- Studies show that investment strategies based on shareholder engagement
improves the long-term performance of the investors' portfolio
- Current level of turnover is very costly: 100% turnover reduces the value of
the pension fund by 30%! in 25 years
20/15
Who are institutional investors? Why do they not engage
enough?
21
Transparency obligations for institutional investors and
asset managers – objectives of the proposal
1. Increase the accountability of institutional investors to impose their
long-term interests (stemming from long-term liability) better on
asset managers
2. Raise awareness about the consequences of short-term investment
strategies (transparency of asset managers)
3. Encourage engagement
22
Transparency obligations for institutional investors and
asset managers – content of the proposal
1. Transparency on engagement policies and their implementation (comply or
explain)
2. Transparency of institutional investors about how their equity investment
strategy is aligned with the profile and duration of their liabilities and how it
contributes to the medium to long-term performance of their assets
3. Transparency of the asset management mandates on issues which determine the
time horizon of the investment strategy and on incentives to engage (incentives
to take non-financial information into account, performance evaluation,
remuneration, portfolio turnover limit)
4. Transparency of the asset manager towards the institutional investor on
•
•
whether they make investment decisions on the basis of medium to long-term performance of
the company
portfolio composition, portfolio turnover, turnover costs, etc.
23
Transparency of proxy advisors
24
Obligations of proxy advisors in the proposal
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•
MS to ensure that PA adopt and implement adequate measures to ensure
that voting recommendations are accurate and reliable
Public disclosure on key issues:
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•
•
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methodologies and information sources
how they take national conditions into account
contacts with companies subject which are the object of the voting recommendation
total number of staff/total number of voting recommendations
Disclosure to clients on conflicts of interest
25
Remuneration – existing problems
• Agency Theory has shown that:
- delegation of power leads to asymmetries of information and divergence of
-
interests between directors and shareholders
remuneration is a key tool to ensure the alignment of directors' interests with
those of the company
• First problem: lack of transparency
- in more than 50% of the Member States, shareholders do not have
-
comprehensive, clear nor comparable information on directors' remuneration
in the EU, only 1/3 of the companies disclose link between pay and performance
result: it is difficult, time consuming and costly to know how directors are paid
and if directors' pay is justified by performance
• Second problem: lack of oversight
- in more than 50% of the Member States, shareholders do not have tools to
-
express their opinion on directors' remuneration (even when not justified by
performance)
result: repeated cases of mismatch between directors’ pay and companies’
performance
Remuneration – opinion of stakeholders
• Green Paper on "Corporate governance in financial institutions and remuneration
policies" – June 2010:
• result: in favor of mandatory disclosure of remuneration policy and report &
mandatory shareholder vote on directors' remuneration
• declared as such: a significant majority of shareholders, institutional investors,
asset managers and proxy advisors, as well as a small majority of Member
States
• Green Paper on "The EU corporate governance framework" – April 2011:
• result: in favor of mandatory disclosure of remuneration policy and report
•
based on a standardised template & mandatory shareholder vote on
remuneration policy and individual remuneration of directors
declared as such: 75% of shareholders, institutional investors, asset managers
and proxy advisors, as well as a majority of Member States
Remuneration – elements of the proposal
• Improved transparency on directors' remuneration:
•
•
publication of information on remuneration policy:
- maximum amount & proportion of the components of fixed and variable pay
- performance criteria & contribution to the long-term interests of the company
- ratio between directors' pay and workers' pay
publication of information on individual remuneration (based on a template):
- remuneration components & proportion of fixed and variable remuneration
- application of performance criteria & link between pay and performance
- evolution of directors' pay & evolution of the ratio directors'/workers' pay
• Improved oversight on directors' remuneration:
•
•
mandatory shareholder (ex ante) vote on the remuneration policy:
- policy submitted for approval at least every three years
- remuneration paid only in accordance with an approved policy
mandatory shareholder (ex post) vote on the remuneration report:
- report submitted for approval each year
- next report explains whether or not, and how, the shareholders' opinion has been
taken into account
Remuneration – expected impact of the proposal
• To improve quantity and quality of information on directors' remuneration (and to
•
make it less time consuming and less costly to assess remuneration)
To create a link between directors' pay and companies' performance (and to avoid
unjustified transfer of value from companies to directors)
no shareholder vote (2006-2012)
performance
pay
-34%
-46%
+94%
+27%
before advisory vote (2006-2011)
after advisory vote (2011-2013)
France
Austria
Italy
Spain
performance
pay
performance
pay
-130%
-40%
+29%
+26%
+10%
-5%
+1%
-10%
before binding vote (2006-2011)
Sweden
Belgium
after binding vote (2011-2013)
performance
pay
performance
pay
-17%
-45%
+18%
+95%
+16%
+18%
+18%
-10%
Related party transactions – existing problem
• RPTs can have a negative impact on the value of the company, since they
•
transfer value from the company and its minority shareholders to those
who control the company (directors, controlling shareholders, companies
affiliated with them)
However, shareholders do not have access to information ahead of the
planned RPTs and do not have tools to oppose to abusive RPTs:
•
•
no EU rules that provide for public disclosure at the time of the conclusion of the
RPT, nor for involvement of shareholders
national legislations are so diverse that it makes it difficult, time consuming and
costly for foreign investors to influence decisions on important RPTs
• Green Paper on "The EU corporate governance framework" – April 2011:
•
•
result: in favor of increased transparency on RPTs & shareholder approval of
significant RPTs (related parties excluded from the vote)
declared as such: a majority of shareholders, institutional investors, asset
managers and proxy advisors, as well as a small majority of Member States
Related party transactions – elements of the proposal
• RPTs that represent more than 1% of a company's assets:
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•
public announcement at the time of the conclusion of the RPT
report from an independent third party assessing if the RPT is on market terms and
is fair and reasonable from the perspective of the (minority) shareholders
• RPTs that represent more than 5% of a company's assets:
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•
submission to a shareholder vote (related parties excluded from the vote)
no conclusion of the RPT before shareholder approval or conclusion under the
condition of shareholder approval
• High degree of flexibility:
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for RPTs of 1%: no report in case of prior shareholder approval of clearly defined
types of recurrent RPTs with identified related party in a period of 12 months
for RPTs of 5%: no vote in case of prior shareholder approval of clearly defined
types of recurrent RPTs with identified related party in a period of 12 months
for RPTs of 1% and 5%: no requirement in case of transactions between a
company and a wholly owned subsidiary
Related party transactions – expected impact of the proposal
• A public announcement of RPTs would:
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•
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provide shareholders with timely, more and better information, which facilitates
monitoring and engagement of RPTs
enable stakeholders (employee representatives, monitoring bodies) to take legal
action against problematic RPTs
prevent boards from entering into doubtful RPTs & prevent unjustified RPTs
• A shareholder vote on RPTs would:
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•
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enable shareholders to reject RPTs they consider not to be in their interest
protect minority shareholders since related parties are excluded from the vote
prevent boards from entering into problematic RPTs & prevent unjustified RPTs
stimulate companies to reflect on RPTs & to engage with shareholders
• A public announcement & a shareholder vote would:
•
•
provide an effective barrier against unjustified transfer of value
have a positive effect on the competitiveness, sustainability of EU companies and
cross-border investment
Final provisions
• Commission empowered to adopt implementing acts :
• transmission of information concerning shareholder
identification
• transmission of information in the holding chain
• facilitation of the exercise of shareholder rights
• standardised presentation of information to be included in the
remuneration report
• Commission assisted by the European Securities
Committee, application of the examination procedure within
the meaning of Article 5 of Regulation(EU) 182/2011
• Requirement to put in place appropriate penalties for
infringements, to be notified to the Commission
• Transposition
• request for explanatory documents (recital 24)
RECOMMENDATION ON
'COMPLY OR EXPLAIN'
Recommendation on 'comply or
explain'
• 'Comply or explain' – key feature of EU corporate governance
• It may be good corporate governance not to follow corporate
•
•
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governance codes' recommendation, but explanations are crucial
Companies' explanations for departures from codes still often not
appropriate
Commission Recommendation 2014/208/EU on the quality of
corporate governance reporting ( ‘comply or explain’ )
Guidance to improve the overall quality of corporate governance
statements and specifically of explanations for deviations
Recommendation on 'comply or
explain'
• Explanations should:
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explain in which manner the company deviates
describe reasons
describe the decision process
specify the timing
describe measure taken instead of compliance
• Need for efficient monitoring at national level, within the existing
•
monitoring arrangements
Member States should inform the Commission of measures taken
in accordance with the Recommendation by 13 April 2015
Thank you!