European Parliament committee to vote on long-term shareholding proposals

Loyalty shares and tax breaks proposed by shareholder rights “rapporteur”

The European Parliament’s legal committee (JURI) is set to vote tomorrow (January 20) on a raft of amendments to the proposed revision of the Shareholder Rights Directive aimed at boosting long-term investments.

The amendments to the directive were tabled in a report by Italian MEP Sergio Cofferati, the so-called “rapporteur” for the revision, who shepherds the legislation through the parliamentary process.

Cofferati, a former Mayor of the city of Bologna in northern Italy, is also Vice-Chair of the Parliament’s Committee on the Internal Market and Consumer Protection. He has introduced a draft clause into the SRD calling for European Union member states to install “a mechanism in order to promote shareholding on a long-term basis and foster long-term shareholders”. While countries will themselves define the qualifying period to be considered a long term, it “shall not be less than two years”.

The mechanism will include various advantages for long-term shareholders such as additional voting rights, tax incentives, loyalty dividends/shares.

“Short-term shareholding is one of the main barriers for a proper shareholders’ engagement and for a stronger focus by shareholders on the long-term performance and sustainability of investee companies,” the report argues.“It is therefore appropriate that Member States put in place adequate mechanisms in order to foster long-term shareholding.”

Loyalty shares (L-Shares) have been championed by the likes of former US Vice President Al Gore, the co-founder and chairman of sustainable funds firm Generation Investment Management. He said in 2011: “Long-term investors need to be financially incentivized to consider long-term investment approaches.” He was speaking after academic research suggested L-shares could encourage longer-term investing by giving shareholders a reward after a contractually set period of time in the form of a warrant.

The Cofferati report includes several changes in emphasis from the draft text proposed by the European Commission. His version points to “clear evidence” that current engagement by institutional investors and asset managers in investee companies is inadequate and too much focused on short-term returns. It also calls for greater employee involvement in corporate decision-making and executive pay and greater disclosure about asset managers’ portfolio turnover.

There is also stronger wording around board members’ incentives: “Directors’ performance should be assessed using both financial and nonfinancial criteria, including environmental, social and governance factors.” Link to JURI home page