With nine months to go until the European Commission’s directive on shareholder rights (SDR II) comes into force, Dr Hans-Christoph Hirt, head of Hermes EOS (Hermes Investment Management’s stewardship and engagement team) has issued a warning that asset owners remain ‘unprepared to meet their obligations’.
‘The investment industry has so far under-delivered on its stewardship responsibility and, as such, is ill-prepared to meet the obligations under this directive, let alone demonstrate effective engagement with investee companies,’ says Hirt in a statement released by the $35.3 bn asset manager. More concerning still, he says, is the limited discourse across European member states on transposing the directive into national law and implementing the new rules.
Each member state needs to put a focus on ‘how stewardship is conducted in practice’ rather than simply disclosing policies, adds Hermes.
The directive aims to shift investor focus from the short term and onto long-term value creation, with Hermes stating that ‘propelling the investment chain into action, the directive seeks to address a market failure: prevalent short-termism in investing and ownership behaviors at the expense of long-term stewardship.
‘Short-term shareholder actions and thinking have too often become embedded in the way companies are managed, to the detriment of long-term value creation, a broader set of stakeholders and, sometimes, the investors’ own clients,’ it adds in a statement. ‘Critically, the directive aims to enable more effective engagement between investors and companies while at the same time encouraging long-term thinking.’
Covering the then newly revised directive in July last year, IR Magazine noted that the remuneration of directors, shareholder identification, facilitating the exercise of shareholders’ rights and increased transparency for institutional investors and proxy advisers are among the key items emphasized by the directive.
‘The directive is a great step forward for enhanced shareholder rights and stewardship,’ continues Hirt, adding that as much as stewardship is a responsibility, it is also ‘an opportunity to create further value for beneficiaries and investee companies, as well as benefits for the economy and society as a whole. The industry should embrace the directive and take the lead. It has, along with its clients and ultimate beneficiaries, much to gain by doing so.’