The rights of shareholders in EU companies are on the rise, and investors will soon be required – on a comply-or-explain basis – to publicly report on their engagement activities and voting decisions. This is a watershed in the evolution of shareholder rights, but are investors fully aware of the responsibility that comes with greater powers?
In May 2017 the European Parliament and Council agreed an amendment to the 2007 Shareholder Rights Directive ('SRDI'), to further encourage long-term shareholder engagement. Implementation of the amendment1 ('SRDII') by member states is required by 10 June 2019.
In the main, asset owners and asset managers operating in Europe.
The requirements relate to shareholdings in companies with registered offices in, and whose shares are admitted to trading on a regulated market situated or operating within, an EU member state. Third-country intermediaries who provide services with respect to shares of such companies should be subject to the rules on shareholder identification, transmission of information, facilitation of shareholder rights, and transparency and non-discrimination in relation to costs.
Shareholder rights are a key tool for institutional investors to achieve effective stewardship of their assets. The Directive aims to:
The amendment includes elements found in existing stewardship codes which have emerged over the last decade, such as those of Denmark, Italy, the Netherlands and the UK.
Additional Implementing Acts underpin the Directive’s aim of efficiency along the investment chain and greater consistency across member states through defining requirements for consistent disclosure along the investment chain on shareholder identity, meeting notices, methods of participation and exercise of voting rights.
We believe the Directive, if implemented effectively, will create a step change in the quality and quantity of stewardship through raising the awareness and expectations of investors and beneficiaries, and ultimately contribute to the sustainability of EU companies. The Directive will achieve this through:
The Directive sets out requirements on disclosure and the facilitation of that disclosure along the investment chain. However, various actions will need to be undertaken in order to provide such reporting. Through increasing transparency and awareness, the Directive will shed light on the extent to which investors fulfil their responsibility as delegated stewards of financial stakes in a company and the assets of their clients and beneficiaries.
The disclosure requirements are summarised in the diagram below.
Key deadlines are:
Member States are required to bring into force laws, regulations and administrative provisions necessary to comply with the Directive. Asset owners and asset managers will be subject to such new law set by the member states.
The Directive states that: “Member States shall ensure that institutional investors2 and asset managers either comply with the requirements… or publicly disclose a clear and reasoned explanation why they have chosen not to comply with one or more of those requirements.”
Member States are required to implement rules on measures and penalties applicable to infringements of national provisions adopted.
These penalties, and the details of when an explanation of non-compliance is acceptable, are yet to be confirmed through transposition in each member state.
The amendment to the Directive will empower investors through greater transparency along the investment chain, an extended set of rights and the removal of barriers to the exercise of those rights. Stewardship and the exercise of shareholder rights, when implemented effectively, is increasingly being viewed as an effective tool to improve returns, reduce downside risk, and achieve additional outcomes in the broader interests of beneficiaries.3 Ultimately, it can create greater long-term value for all stakeholders. These outcomes are borne out by independent research.4
Hermes Investment Management has a long track record of promoting responsible investment and active ownership. Its stewardship arm, Hermes EOS, has been helping clients become active stewards in the companies in which they invest since 2004. Hermes EOS’ purpose is to assist asset owners and asset managers in adding long-term value to their investments and managing their risks, by engaging with companies and policy-makers on environmental, social, governance, strategic and financial issues. Further detail on our services can be found in the Hermes EOS Stewardship Brochure.
Hermes EOS assists some of the largest and most respected global institutional investors to comply with stewardship codes and initiatives such as the UN Principles for Responsible Investment (PRI). In fact, Hermes helped draft and was one of the founding signatories of the Principles. As a value-added service, we help our clients with their PRI reporting obligations by providing data and narrative related to the activities we have performed on their behalf. We have a strong and respected reputation for our expertise, recognised by clients, as well as by the companies that we engage with. Companies often ask us for our investor perspectives and insight on behalf of the assets and clients we represent5 as our overall focus is on encouraging long-term, positive change in the businesses we engage with. Hermes EOS evaluates the link between engagement and improved long-term value on an ongoing basis, to inform and structure its activities.
