Brexit fears hit Shareholder Rights Directive

Experts consider what UK withdrawal from the EU could mean for European corporate governance reforms.

Britain needs to continue to play an active role on the global stage on stewardship and shareholder rights, despite the uncertainty triggered by UK’s Brexit vote and its impact on a raft of EU legislation including the Shareholder Rights Directive.
The latest revision to the Shareholder Rights Directive which aims at improving transparency and corporate governance for listed companies within the EU, is currently still at the trialogue stage involving negotiations between the European Commission, Parliament and country representatives. It was expected to come into force later this year.
“The UK’s voice in global markets on stewardship and shareholder rights reform is crucial and the UK still has to participate because this is a key investor risk issue,” says Sarah Wilson, CEO of governance research service Manifest.
The original Shareholders Rights Directive was first introduced in 2007, with amendments in 2010. The latest directive proposes shareholder identification as a right for companies, instead of a service provided by intermediaries, simplification of the control of related party transactions and improvements on the provisions on directors’ remuneration. It also calls for listed companies to disclose information on a country-by-country basis.
Another key provision is to encourage long-term shareholder engagement including engagement of asset managers with companies in which they invest.
The amendments, which were passed by the European Parliament in July 2015, came after earlier proposals were significantly watered down, with a key proposal calling for a binding vote on pay modified to allowing member states to decide if shareholder votes on pay should be binding or advisory. Mandatory employee consultation on executive pay proposals was also excluded.“The simple fact is that the corporate world has been better at lobbying than investors and a lot of what happens in Brussels does depend on lobbying activity,” says Paul Lee, head of corporate governance at Aberdeen Asset Managers. Lee says there was a worry that following Brexit, UK investors would struggle to make their voices heard: “So far, UK investment firms have been the ones who have been most active in pressing for improved shareholder rights and with our views becoming devalued there probably is more scope for the corporate voice to dominate on these issues. The Shareholder Right Directive is the most immediate issue but there are a broader range of issues and although UK investors will remain investors in European companies, it will be much harder to make our points of view heard.”
However David Styles, director of corporate governance at the Financial Reporting Council (FRC), says the UK’s corporate governance framework is well-respected internationally and will remain so: “Leaving the EU means we have to keep a strong focus on making the UK a place where people want to invest,” he added.
Manifest’s Wilson points out that much of what the Directive is now proposing has already been in place in the UK. For example, the binding vote on remuneration was introduced in 2013. UK companies are also obliged to report on whether they have consulted employees on directors’ pay. The maximum amount expected to be paid out to individual executive directors under shareholder approved remuneration policy must also be disclosed by UK companies: “The UK’s position on corporate governance has often been viewed with suspicion by parts of Europe which call it ‘Anglo-Saxon capitalism’. But this is misunderstanding the UK’s position which is not solely about maximising shareholder return, but rather about promoting the success of the company by taking into account a huge range of factors and treating them fairly,” Wilson said.

Aberdeen’s Lee noted that with all amendments and redrafts, the current version of the Directive had only a “few bits” on shareholder rights, while shareholder responsibilities made up the rest of it.
“It’s ironic that the directive that has the name is already more about something else and potentially will head further in that direction,” he added.
However, FRC’s Styles said the “broad-ranging directive” would help improve corporate governance in Europe, pointing to the new disclosure requirements for asset managers and institutional investors which would oblige EU members to introduce a stewardship code in some form.
In the UK, the FRC introduced the Stewardship Code in 2010 to improve the quality of engagement between asset managers and companies.
As part of the revised Directive, asset managers and institutional investors will be required to develop and disclose, on a “comply or explain” basis, a policy on how they exercise voting rights and engage as shareholders in companies they invest in.
While institutional investors will be required to publicly disclose certain aspects of their arrangements with asset managers, asset managers in turn will be required to disclose their portfolio turnoverlevels and whether their investment strategy is based on medium-to-long term performance of the companies invested in.

Key dates of the Shareholder Rights Directive

  • 2007: Original Shareholder Right Directive launched
  • 2010: Amendments to Shareholder Rights Directive
  • April 2015: Proposal by the European Commission for revised Directive
  • May 7, 2015: European Parliament’s JURI Committee approves an amended text of the Commission’s proposal by a 13 – 10 majority
  • July 8, 2015: The European Parliament votes on the proposal with amendments to the text approved by JURI.
  • July 2016: Directive at trialogue stage