The new European Shareholder Rights Directive (SRD II) aims to strengthen the position of shareholders and ensures that stock listed companies take decisions keeping their company’s long-term stability and goals in mind. SRD II will enter into force on June 10th, 2019. This seems a long way off, but "failing to prepare, is preparing to fail...".
11 Oct 2018
Better access to different sources of capital
SRD II is part of a larger plan, the so-called Capital Markets Union (CMU). The CMU is an ambitious and prominent initiative of the European Commission that aims to give companies from all over the European Union better access to different sources of capital. The following five priorities were published by the European Commission in its CMU Action Plan:
- Provide more financing opportunities for European businesses and SMEs;
- Ensure appropriate regulation on long-term and sustainable investments and the financing of European infrastructure;
- Increase investment and choices for private and institutional investors;
- Enhance the capacity of banks to lend and, by doing so, remove cross-border obstacles;
- Further develop all 28 Member States’ capital markets.
The SRD II directive provides an in-depth elaboration of the 2nd and 5th priority of the CMU. For further details on SRD II, see a recent article by my colleague.
What triggered the Capital Markets Union and Shareholder Rights Directive II?
The financial crisis revealed several problems that negatively affected European corporate governance: strong focus on short-term thinking, poor communication on priorities between investors and their asset managers and underperforming investment companies.
SRD II helps European member states to encourage shareholder engagement through regulation. Better involvement of shareholders should lead to more responsible corporate behaviour. And at the same time the directive facilitates access to foreign markets and reduce cross-border costs of shareholder rights. When shareholders are engaged and active, SRD II will ensure they can have a positive influence on corporate governance and the performance of stock listed companies.
Shareholder Rights Directive II in a nutshell
Broadly speaking, SRD II encompasses the following actions for different institutions in the financial industry:
- Request asset managers to align their investment strategies and decisions to the risk profile and long-term investment needs of their institutional investor clients,
- Require from institutional investors and asset managers to be more transparent about their involvement in listed companies they invest in and communicate on a yearly basis how they integrate shareholder engagement into their investment policy. Institutional investors and asset managers must also annually disclose their voting behaviour, explain significant votes, and disclose how they use proxy advisory services,
- Oblige proxy advisors to disclose their code of conduct and policies for avoiding conflicts of interest and for dealing with any differences between national markets. Additionally, they must specify their methodology, sources of information and procedures to ensure the quality of their voting recommendations, research and advice,
- Require listed companies to give shareholders the right to vote on remuneration policies and to make these votes binding or advisory ("say on pay"), and to allow shareholders and directors to approve any major transaction between a listed company and a related party,
- Require intermediaries to communicate to shareholders the general meeting agenda and voting information "without delay", in a standardised format, to shareholders. National legislators may set a mandatory deadline to ensure that information is provided in a timely manner.
Obviously, the last item is of particular interest to us and we will therefore closely monitor the precise implementation text of SRD II and voice any concerns with local or regional regulatory authorities. It is clear that the phrase 'without delay' is one of the details that needs further explanation. The same applies to the phrase 'standardised format'. It is not inconceivable that the development of our distributed ledger technology (DLT) based voting application (Voteroom) could play a role in the increasing importance of shareholder control.
Prepare for SRD II
My recommendations for the implementation of SRD II:
- Make an impact analysis to understand exactly how and when SRD II will influence specific procedures and information flows. Also have a close look at the Corporate Governance policy document and determine its possible impact.
Bear in mind that IT enhancements are only a small part of SRD II. An example of this is the obligation for intermediaries to disclose the proxy voting fees.
- Actively engage with the regulatory authorities, or organisations and associations with a strong voice in Europe (e.g. Distributed Ledger Technology (DLT) task force of the European Central Bank).
- Closely follow the agenda for passing SRD II related implementation measures and the legislative deadlines. Issuers and registrars (e.g. Broadridge), for instance, should follow changes in the standardisation of the Annual General Meeting (AGM) announcements and the provision of voting confirmations (both in terms of timing, as well as standards). Institutional investors and asset managers should closely monitor the transparency requirements and the analysis of the directors' remuneration.
The European Commission has set up an expert group that assists in the determination of the SRD II-implementation text. This text is likely to be published in Q4 of this year. KAS BANK mainly plays a role in the technical discussions of DACSI’s* SRD II task force.
Shareholder Rights Directive increases shareholder involvement
In my opinion, SRD II will have a positive effect on shareholder engagement and the implementation of the Capital Market Union. The deepening and integration of the European capital market, is important for the European economy, especially with the upcoming Brexit. Capital markets in Europe have long been fragmented along national lines. I also believe that the current tendency in the United States to cut back regulations (although not yet accomplished in full) could lead to a regulatory 'race to the bottom'. Since President Trump took office, no new major regulations have been imposed and there are clear signs that the regulatory burden on the financial sector will decrease. The liberal interpretation on day to day supervision is also frequently mentioned. The tone at the top of politics in the United States has clearly changed with the more "pro-growth and pro-market" tendency of Trump’s team. Finding the right balance between further developing European integration while being in sync with regulatory developments in the USA will be a major challenge of SRD II.
*DACSI (the Dutch Advisory Committee Securities Industry) is the principal not-for-profit association in the Netherlands for companies active in the securities sector. The association represents the interests of its members in all aspects of their securities and securities-related business - both domestic and international - and positions the Dutch view to the market infrastructure service providers and regulatory authorities in the Netherlands and the European Union.
KAS BANK has been an active member of the DACSI since its foundation approximately ten years ago. As a specialist in the post trade environment, we believe it is important to play our role in an ever-changing technological and regulatory environment. In this way, we stay informed of all developments in legislation and regulations. KAS BANK has been chairing this committee since 2012.