The European Parliament has adopted a revised shareholders’ rights directive it says will contribute to the long-term sustainability of European Union companies, enhance the efficiency of the chain of intermediaries, and encourage long-term shareholder engagement.
“We have learned our lessons from the past,” said Vĕra Jourová, the EU’s commissioner for justice, consumers and gender equality. “For a stable European economy, it is essential to look beyond fast profits and focus on long-term success.”
Jourová said the new rules will prevent short-term excessive risk-taking, and that shareholders will have more rights, including having input on directors’ salaries so that they are linked to performance.
The revision of the shareholders’ rights directive is intended to address “the shortcomings in the corporate governance of listed companies identified after the financial crisis,” said the European Commission.
The main changes include:
Stronger Shareholders’ Rights, Facilitation of Cross-Border Voting
Intermediaries, such as banks, will have to ensure that they pass on the necessary information from the company to the shareholders, and from the shareholders to the company. The new rules also make it easier for shareholders who live in one EU country to participate in the general meetings and vote on issues for companies based in another EU country.
Long-term Engagement of Institutional Investors, Asset Managers
Institutional investors and asset managers are required to be transparent about how they invest, and how they engage with the investee companies. The new rules will require institutional investors to disclose how they take the long-term interests of their beneficiaries into account, and how they incentivize their asset managers to take these long-term interests into account. Asset managers will be required to report to the institutional investors for whom they manage funds how they have performed in relation to their mandate.
More Transparency of Proxy Advisors
The new rules will require proxy advisors to disclose certain key information about the preparation of their recommendation and advice. They will also be required to report about the application of the code of conduct they apply.
Shareholders Will Have a Say on Pay
The new rules will encourage more transparency and accountability about how a director’s salary is determined. Shareholders will have the right to know how much the company’s directors are paid, and they will be able to influence this. The Commission said it will guarantee a stronger link between pay and performance.
Related Party Transactions
Companies will be required to publicly disclose material related to transactions that are most likely to create risks for minority shareholders. Companies will also have to submit these transactions for approval from the general meeting of shareholders or of the board.
The new rules apply to more than 8,000 listed companies on the EU regulated markets, with a total market capitalization of approximately €8 trillion ($8.6 trillion).
By Michael Katz