Statement: Towards Capital Markets' Long-Termism: Revised Shareholder Rights Directive

Brussels, 7 June 2019

June 10th marks the application date of the revised Shareholder Rights Directive (SRD II). The new rules were proposed to promote long term shareholder engagement and address shortcomings in corporate governance of listed companies which were exposed by the financial crisis.

Asset managers are supportive of the new rules and fully committed to comply with them. Nevertheless, any country-specific nuances that are not yet known will be hard to comply with by the deadline. We therefore call upon the European Commission to ensure a swift transposition of the Directive in all Member States.

Striking the right balance: a bundle of rights and obligations
The Directive tries to strike the right balance by providing a bundle of rights and obligations on EU listed companies, institutional investors, asset managers, proxy advisers and intermediaries. Investors and asset managers gain more control over executive compensation and related party transactions, but are now subject to more stringent transparency rules. These include: 1) public disclosure of engagement policy, including voting behaviour, and its implementation, and 2) reporting to institutional investors on how the investment strategy and its implementation relates to the mandate and contributes to the medium to long-term performance of the assets.  Companies are granted the right to identify their shareholders but, on the other hand, they must provide greater transparency on executive pay and related party transactions.

Driving long-term engagement
EFAMA is very supportive of the new rules, which are believed to improve investors’ long-term engagement and investment in companies. The Directive strengthens asset managers’ incentives to engage with the companies in which they invest their clients’ capital, so as to ensure the long-term potential of those holdings and preserve and add value for clients. Asset managers engage with investee companies on topics such as long term business strategy, board composition including gender diversity, sustainability and impact on the environment, executive remuneration, capital allocation, and other ESG issues.

We have always encouraged asset managers to increase their engagement with investee companies. To that end, in 2011, we produced a ‘Code for external governance’, providing a framework of high-level principles and best practice recommendations. In 2018, it was aligned with SRD II provisions and renamed “EFAMA Stewardship Code.”

The code aims to be a European reference document, helping asset managers seeking to comply with SRD II. It is not designed to supersede applicable law and regulations nor national stewardship codes or statements. It rather aims to find a common European denominator, making it easier for international players who often find it challenging to have to comply with an amalgam of different national codes. 

Challenges
Asset managers have been actively preparing to comply with the new rules. We tried to support our members by facilitating an exchange of information on the provisions enacted in different Member States.  Nevertheless, it has been challenging as, to our knowledge, many country-specific nuances are still not yet known, and therefore will be hard to comply with ahead of the deadline.

A publication of all national laws and specific country provisions in one central place (e.g. website of the European Commission) would be highly appreciated and would help all relevant markets participants to comply with the new rules.

Background: Specific rules on transparency for institutional investors and asset managers
The Directive requires institutional investors and asset managers to develop and publicly disclose an engagement policy including the information on the exercise of voting rights, monitoring of the company invested in, dialogue with the company, and the management of conflicts of interest. Otherwise, they need to provide a proper explanation as to why they have chosen not to do so.

Institutional investors are also required to publish the main elements of their investment strategy and arrangements with asset managers. Asset managers, on the other hand, are required to disclose to institutional investors how their investment strategy and implementation thereof complies with their arrangement and contributes to the medium to long-term performance of the assets.

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