The clock has started ticking on individual member countries’ translation of the revised Shareholder Rights Directive (SRD). The first tranche of measures, as adopted by the European Council (EC), are set to be implemented into national law by member states by June 2019. That may seem like plenty of time to prepare, but be forewarned: The directive is broad and will require extensive and potentially expensive changes related to process reforms and transparency requirements.
These efforts also come as many other complex regulatory mandates are set to go into effect. Alongside the SRD, the additional regulations adopted as part of the EC’s Capital Markets Union plan will shape the future investment landscape of the region. The SRD may have flown under the radar until now, but firms and individuals across the shareholder communication chain must act promptly or will be found wanting come deadline time.
How can firms assess the full impact of SRD and manage this information flow? What best practices must they follow? And how should they get started and proceed?
First, they should grasp the specific compliance details that apply to them, all of which are designed to enhance investor engagement and increase shareholder voting transparency. In broad terms, the SRD will drive the following actions:
- Compel asset managers to align their investment strategy and decisions with the risk profile and long-term investment requirements of their institutional investor clients.
- Require institutional investors and asset managers annually to be more transparent about their engagement with companies they invest in and communicate how they integrate shareholder engagement into their investment. They also must annually disclose voting behaviour, explain significant votes, and disclose how they use proxy advisory services.
- Oblige proxy advisors to disclose annually their code of conduct and policies for preventing conflicts of interest and for dealing with any national market differences. They also must detail their methodology, information sources and procedures to ensure quality of voting recommendations, research and advice.
- Compel companies to give shareholders the right to vote on remuneration policies and for those votes to be binding or advisory, and also to allow shareholders and directors to approve any material transaction between a listed company and a related party.
- Oblige intermediaries to transmit general meeting agenda and voting information “without delay” to shareholders in a standardised format; national regulators may prescribe a mandatory deadline for submitting this information.
So, what should firms and individuals across the shareholder communications chain – and the industry do prior to the transposition deadlines? Here are several suggestions:
- Clearly understand how SRD will impact their specific operations. For instance, intermediaries will have to disclose their fees in relation to proxy services, so a new era of proxy services pricing transparency is likely. Understanding therefore the effect of these changes to existing client arrangements will be essential. Intermediaries could also find that they are required to absorb the cost of changes related to transparency, so a complete impact analysis on operations and service pricing is advisable.
- Actively engage with the regulatory community to ensure that the impact and implications of SRD upon implementation are achievable by the industry. The European Commission has established an expert group to help determine the implementing text of SRD requirements, which are due to be published in September 2018. All intermediaries should however continue to voice any concerns with their local and regional regulatory authorities while also staying apprised of what has already been decided.
- Bear in mind the calendar for passing SRD-related implementation measures as well as the legislative deadlines. Issuers and registrars, for instance, should follow changes in the standardisation of meeting announcements and the provision for vote confirmation. Among other proactive steps, institutional investors and asset managers should keep apprised of transparency requirements as well as obligations for analysis on director remuneration and related party transactions, which could trigger a significant data burden. Now is the time for firms and individuals that communicate throughout the chain of shareholder reporting to assess the impact of SRD on their operations and clients, appraise their readiness, and engage with industry peers and other constituents to help assure their views are considered. These steps are critical in the near term as regulators grapple with putting the finishing touches on SRD regulations.