With nine months until the implementation of the European Commission’s Directive on shareholder rights (‘SRD II’), Hermes EOS, Hermes Investment Management’s stewardship and engagement team, raises concerns that asset owners are underprepared to meet their obligations.
The enhanced Directive sets out to empower shareholders, enhance the efficiency of the chain of intermediaries and encourage long-term shareholder engagement, with the ultimate aim of contributing to the sustainability of publicly traded EU companies.
Dr Hans-Christoph Hirt, Head of Hermes EOS, said: “The investment industry has so far under-delivered on its stewardship responsibility and as such is ill-prepared to meet the obligations under this Directive let alone demonstrate effective engagement with investee companies. More concerning still is the limited discourse across member states on local transposition of the Directive into national law and its implementation. Last week the Implementing Acts were adopted and it is now truly in the hands of each member state to work out how they build the Directive into their own legislative and regulatory framework, so that they encourage the investment industry to raise its stewardship game. It is in the interests of any member state wishing to drive sustainable wealth creation to transpose robust measures into national law.”
By propelling the investment chain into action, the Directive seeks to address a market failure: prevalent short-termism in investing and ownership behaviours at the expense of long-term stewardship. Short-term shareholder actions and thinking have too often become embedded in the way companies are managed, to the detriment of long-term value creation, a broader set of stakeholders and, sometimes, the investors’ own clients. Critically, the Directive aims to enable more effective engagement between investors and companies while at the same time encouraging long-term thinking.
To be impactful on engagement, member state transposition must put the emphasis on how stewardship is conducted in practice rather than disclosing policies. This is more likely to drive positive behaviour change and awareness along the investment chain, taking stewardship practice to the next level.
Dr Hans-Christoph Hirt continues: “The Directive is a great step forward for enhanced shareholder rights and stewardship. From our experience, as much as a responsibility, stewardship is an opportunity to create further value for beneficiaries and investee companies, as well as benefits for the economy and society as a whole. The industry should embrace the Directive and take the lead. It has, along with its clients and ultimate beneficiaries, much to gain by doing so.”
The Shareholder Rights Directive II: An Engaging Opportunity, an article written by Hermes EOS explaining the Directive and asset owner obligations is available online.