European Parliament postpones crunch vote on revised Shareholder Rights Directive until early July

Controversial draft text sent back to legal affairs committee

The European Parliament has postponed until early July a plenary vote on the revised Shareholder Rights Directive (SRD) due to several controversial amendments that it now contains – including, for example, country-by-country reporting, a binding shareholder vote on executive pay and rewards for long-term shareholders.

Brussels insiders told Responsible Investor that just before the scheduled vote last Thursday, European Parliament President Martin Schulz had the SRD sent back to the legal affairs committee (JURI). The purpose is to come up with a text that was less controversial.

“Because of the amendments, the vote in JURI was very close, with 13 MEPs for and 10 against, as well as some abstentions. That would not bode well for SRD’s easy passage by the full Parliament, so Schulz wants to give the project more time,” said one insider who asked not to be named.

Schulz’s decision was no doubt in part influenced by a letter dated June 2 from two major corporate lobby groups (BusinessEurope and EuropeanIssuers) and a group representing European board directors (ecoDa). In it, the trade groups blast the SRD draft that emerged out of JURI for ignoring the “comply or explain principle which in the last 20 years has become the unanimously accepted basis for corporate governance in Europe.”

In particular they took aim at the requirements for uniform board director pay across the EU, binding shareholder votes on executive pay and country-by-country reporting by companies regarding profits and relevant taxation.

“While supporting transparency, we stress that more flexibility is needed in the definition of the remuneration packages so they can be adapted to different corporate models of management and, most importantly, to each company’s needs,” the lobbies said in the letter, a copy of which was seen by RI.As to say-on-pay and rewarding long-term investors, the lobbies said: “The amendments…are misplaced in this proposal. They are not related to the proposal’s objective which is shareholder engagement.”

And finally on the corporate disclosure, the lobbies wrote: “The SRD is not the right place to include amendments on country-by-country reporting on profits, taxes and subsidies and on tax rulings. This is already being dealt in other initiatives such as the accounting directive and in the 2015 Commission communication on tax transparency.”

European sustainable investment body Eurosif and Eumedion, the Dutch corporate governance platform, welcomed JURI’s original intention to require binding shareholder votes on executive pay. According to a letter they sent on May 29, their major gripe had to do with a plan to reward shareholders in companies if they remained invested for at least two years. The rewards are to come in the form of voting rights, tax incentives or loyalty shares.

They added that granting additional voting rights to specific shareholders may be “counterproductive” in that it could result in an “undesirable concentration of power” and not lead to greater engagement. “We are therefore not in favour of this article.”

Whatever final version of the SRD emerges from the European Parliament must be reconciled with a separate text that the European Council, which represents EU governments, has already finished. That text differs sharply from that of JURI in that there is no mention of country-by-country reporting, no uniform director pay and a provision that shareholder votes on executive pay can be consultative in nature.