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Review of the Shareholder Rights Directive

On April 9, 2014 the European Commission published a proposal for the revision of the Shareholder Rights Directive and a Recommendation on corporate governance reporting.

The proposal for the revision of the Shareholder Rights Directive is aimed at helping shareholders to become more engaged, to better hold the management of the company to account and to act in the long-term interests of the company.  Key elements of the proposal include:

  • stronger transparency requirements for institutional investors and asset managers on their investment strategies and engagement policies regarding the companies in which they invest
  • a framework to make it easier to identify shareholders so they can more easily exercise their voting rights more transparency for proxy advisors on the methodologies they use to prepare their voting recommendations and on how they manage conflicts of interests the introduction of a ‘say on pay’.

While no binding cap on remuneration at EU level is introduced, each company would have to put its remuneration policy to a binding shareholder vote. Similar to the proposals implemented in the UK, the EC proposals would require companies to have a policy which:

  • includes a maximum level for executive pay
  • explain how it contributes to the long-term interests and sustainability of the company
  • explain how the pay and employment conditions of employees of the company were taken into account
  • explain the ratio between average employees and executive pay

EC Recommendation on corporate governance reporting

The EC proposals will now be scrutinised by the European Parliament and Council, and the ABI will be feeding in throughout the process.

The Recommendation on corporate governance reporting promotes the system of a flexible ‘comply or explain’ framework. It is positive to see that the EC acknowledges that, in certain circumstances, non-compliance with some recommendations might correspond better to the company’s interest than 100% compliance with the code. The recommendations made by the Commission are similar to the ABI report published in 2012 (Comply or Explain - Investor expectations and current practices). The EC recommends that explanations include the following.

  • explain in what manner the company has departed from a recommendation
  • describe the reasons for the departure
  • describe how the decision to depart from the recommendation was taken within the company
  • where the departure is limited in time, explain when the company envisages complying with a particular recommendation
  • where applicable, describe the measure taken instead of compliance and explain how that measure achieves the underlying objective of the specific recommendation or of the code as a whole, or clarify how it contributes to good corporate governance of the company

In recent years, the ABI has met regularly with EC officials to argue against prescriptive EU legislation in this area, and to promote the ‘comply or explain’ system.  We are delighted that the Recommendations takes our views into consideration, and we will now work with FRC and BIS who will be tasked with implementing the Recommendation.

The ABI will continue to be engaged with the review of the Directive and the implementation of the Recommendation.

Last updated 01/07/2016