Seeking to foster more responsible share ownership, the European Commission’s proposed changes to the 2007 Shareholder Rights Directive aim to address the shortcomings it sees in corporate governance monitoring and engagement by asset owners and managers and a stubborn lack of focus on long-term performance. This brief overview is taken from a fuller article in our SRI Insights magazine.
Why the EC is seeking change
The scale of the financial crisis led regulators to question corporate governance practices. Too often, company Boards and shareholders allowed excessive short-term risk taking; in short, shareholders didn’t monitor the companies they invested in closely enough. Remuneration policies were too often disconnected from actual performance.
In response, the new Directive would enhance shareholders’ rights, and their application, on critical corporate governance issues. It would increase transparency among all parties and homogenise key aspects of shareholder ownership across Europe, pushing shareholders to hold companies’ top management accountable by encouraging engagement. Yet the real challenge lies in how to boost long-termism.
Regulation of proxy advisors
Proxy advisors are believed to excessively influence investors’ votes. Some investors, though not BNPP IP*, delegate their voting rights to proxy advisors; many blindly follow their recommendations. Conflicts of interest can arise, undermining the value of the votes. The new directive demands greater transparency in the proxy-voting process. However, while most major advisors have already improved their transparency, the directive could leave other financial and extra-financial advisors out of scope. This would be regrettable as their influence can include the question of which companies to invest in.
The EC is determined to empower shareholders to exercise proper control over management through a vote on say-on-pay to better link directors’ pay with performance and get away from an excessive focus on the short term. Evidence shows that irrespective of whether shareholders’ expressed wishes are advisory or binding, companies tend to respond to them, fearing reputational damage when remuneration schemes are contested.
With greater power comes more responsibility
The directive expects shareholders to demonstrate greater responsibility in exchange for greater empowerment via a non-binding request to establish a dialogue and monitor the financial and non-financial performance of the companies they invest in. Brussels proposes a “comply or explain” requirement for asset owners and asset managers whereby all investors have to publish their policy on their websites or explain publicly why they don’t intend to. This change covers the relationship between the investor and investee, and gives equal relevance to the role of the asset owner and its investment manager. The directive requires investment managers to describe how their strategy contributes to the medium to long-term performance of the asset owner.
BNP Paribas Investment Partners’ position
We embrace this effort to encourage transparency, extend shareholder rights and address the need for engagement. We have already developed an engagement policy as we consider that environmental, social and governance (ESG) issues can impact the value and reputation of the entities in which we invest. We are committed to engaging more with the companies we invest in to ensure we act in the long-term interests of our clients. While some of the proposed changes require clarification and improvement in our view, this should not be an obstacle to its adoption. This amended directive has the potential to stimulate engagement and responsible investment.