The role of custodian banks, Solvency II rules and public procurement regulations are some of the issues raised in responses to the European Commission’s Green Paper on Corporate Governance, whose consultation period ended last week.
Responsible Investor has taken a look at some of the wide ranging responses from the Financial Reporting Council, the UK watchdog, the International Corporate Governance Network (ICGN) and Eurosif, the European Sustainable Investment Forum.
The role of custodians in the investment chain surfaced as a concern for the FRC. It said: “It is impossible for stewardship to work on a pan-European basis as long as the operation of the cross border voting chain remains unreliable.”
The Commission “should redouble its efforts to fix this – possibly through a full scale enquiry into the role and effectiveness of custodians”.
This view was echoed by the ICGN, which said the “lengthy time involved in the voting process due to the custodian chain” was among a number of “serious deficiencies” in the cross-border voting process.
“Many of the current mechanisms in place make it difficult for shareholders in execute their voting rights and fulfil their fiduciary responsibilities effectively,” the ICGN said in its submission. “Issuers [companies] and custodians should be obliged to facilitate the exchange of information.”
It stated: “As the vote is one of the fundamental shareholder rights, we believe that each participant in the investment chain should face a specific duty to facilitate the putting into effect of the voting decisions of the ultimate beneficial owners.”
Solvency II, a set of regulatory requirements for insurers scheduled to come into force at the start of 2013, was also a serious issue for respondents.
“We are concerned that Solvency II pushes institutions into investing in shorter-term assets,” the ICGN stated. The measure “increases risk by generating a greater discrepancy between the duration of the assets and the life of the liabilities.
If Solvency II were applied to pension funds “it would be decidedly unhelpful to long-termism in the market”. The ICGN would welcome regulation to reflect the need institutions have to match their assets to their liabilities.The FRC also called for a review of Solvency II, which has led to insurers sharply reducing their exposure to equities – thus “removing a source of long term stability and focus from the equity market”.
Eurosif said it shared the concern within the industry that Solvency II will “result in pressures to reduce holdings in equities, longer-dated bonds and illiquid asset classes and move towards short-dated bonds”.
The ICGN also raised the issue of the European public procurement rules, which limit the length of contracts between asset owners and fund managers. It said its public sector fund members are “extremely concerned” that the rules “limit their ability to generate a dynamic in their relationships with fund managers that is conducive to long-term investment behaviours”. The group argues the rules prevent public funds from granting mandates that are explicitly designed to look beyond short-term share trading advantages to longer-term value. To combat this, the ICGN launched its Model Mandate Initiative earlier this year, chaired by Hermes’ Paul Lee.
The FRC also called for quarterly reporting by corporates to be made voluntary – “a deregulatory move which would also send a strong signal that the EU was anxious to restore a better market balance between long and short term interests”. It also saw scope for requiring pension trustees to consider how managers engage with companies when they hire them.
For its part, Eurosif would support minimum recommended levels of gender representation on boards and limits to the number of director mandates. It also said directors’ pay should be linked to ESG performance.
Also, asset managers could be required to report how they assess ESG risks in their mandates; it reiterated its stance that should be mandatory reporting by asset owners on how they integrate ESG factors into investment decisions.
Green Paper responses:
Financial Reporting Council