The European Commission has recently published a package of proposed reforms to company law and corporate governance practice which is designed to support longer-term financing for our economies. These reforms will impact both on companies and the fund managers who control the voting rights for significant holdings in such companies.
The Shareholder Rights Directive was adopted in 2007. Since that point the economies of Europe have experienced the financial crisis and are now, to a greater or lesser extent, moving from recession to a phase of growth. The proposed changes to the Shareholder Rights Directive are designed to reflect the evolution of best practice so as to build greater long-term shareholder engagement and to develop stronger bonds between companies and their shareholders. Implementation is left to member states.
A number of issues are considered below:
The UK has long had a very effective mechanism to allow companies to obtain conformation as to who is interested in its shares. This has not been the case across Europe. It is a shame that the new proposals do not go so far as to give all companies on a public market a single, simple and transparent right and mechanism to identify the holders of all issued securities. UK fund managers are very accustomed to dealing with this process, but the challenges of differing national enforcement will remain.
Communication is a two-way process and the Commission recognises this requires both shareholders and companies to assume greater responsibilities to each other. Investment takes place in a highly intermediated world. Engagement is tricky when there are so many persons at the table. The role of proxy advisors is significant and member states are charged to ensure that the proxy advisory industry meets a number of high-level outcomes. The proxy advisory industry provides a vital service to its fund management clients in processing the large number of corporate communications, particularly during the peak season for annual general meetings of European companies. It can only be in the interest of the fund manager clients of such providers that standards are to be driven up and transparency and accountability increased.
New shareholder votes
Shareholders are to be given new votes, including a binding “say on pay” (reflective of changes which have already come into effect within the UK) and in respect of related party transactions. The related party transaction right goes further than that which would be required under the Listing Rules, AIM Rules or ISDX rules and (inappropriately) extends to intra-group transactions. Accordingly, it would be useful for both fund managers and companies to unite to create pressure for a better definition of what should constitute a related party transaction where a shareholder vote should be obtained.
Criticisms of the proposals
There has been criticism from some quarters that these new rights for shareholders represent a burden to both companies and investors, but those criticisms seem to be out of pace with the manner in which corporate governance has evolved in the post-financial crisis world, ignoring the manner in which UK initiatives such as the Stewardship Code and Kay Review have taken root within the European Commission.
Some fund managers have gone on record to criticise the “burden” that these new shareholder rights will impose upon them. It is important to recognise that they are acting as investment intermediaries, managing the investments of others. The new obligations will require a change in the behaviour of some.
The most engaged fund managers will welcome this new directive that seems to do little more than to demand what it sensible best practice. However, not all fund managers have the same investment strategy and approach to issues of corporate governance. In particular, those who adopt aggressive short positions and do not wish to engage on issues of governance will be challenged.
Some are, understandably, resistant to a new landscape in which they will need to disclose information about how they engage with companies. Not all managers engage in any event. However, it is not a very strong argument for fund managers to criticise the proposed directive on cost grounds because the cost will be borne by the underlying clients.
By Edward Craft