The Shareholder Rights Directive II (SRD II) promised to reshape the relationship between companies and their investors, affecting areas from say on pay to shareholder ID and proxy advisers. But what has been the actual impact so far?
Some of the new rules, such as those around identification of beneficial owners, have struggled to operate as intended given their inconsistent roll-out across the bloc and a lack of industry readiness.
Below we check in with Michael McPolin, the new managing director of market advocacy for EMEA and Asia-Pacific in Broadridge’s Investor Communication Solutions International business, to find out how SRD II has changed the IR role and what developments are still to come.
In what ways has SRD II impacted the work of IR professionals so far? Where are further changes expected to come in the near future?
SRD II has been a game changer for IR professionals in the EU as the directive was introduced with a view to increasing transparency between issuers and their shareholders and encouraging investors to engage more frequently in corporate governance, and specifically in voting activities. The new compliance obligations mean the provision of proxy voting services is a fundamental requirement for intermediaries focused on either retail or institutional investors, which for some firms is an entirely new mandatory responsibility.
SRD II has provided IR professionals in the EU with an enhanced ability to establish the identity of beneficial owners who had previously been hidden behind nominee companies as part of the shareholder disclosure requirement. The expansion of the provision of proxy voting and encouragement to participate in corporate governance has significantly enhanced the universe over which the IR professionals need influence and, in some cases, added to the challenge of established market coverage. The requirement for a vote confirmation should assist with transparency and the ESG, stewardship and transparency agenda for investors and IR professionals.
There have been some challenges and inconsistencies – for example, local market definitions of ‘shareholder’ – in the implementation of SRD II across the EU markets. Consequently, the goals of enhanced market efficiency and expanded voting participation have not been fully achieved in line with the spirit of the directive, so it is inevitable that when the EU undertakes its review in 2022/2023 there will probably be more changes to come.
The directive faced a number of setbacks and delays along the way. Has the impact been as you expected?
SRD II was introduced during a global pandemic and, despite industry requests for a postponement, the EU felt the importance of delivering transparency, automation and enhanced investor participation in corporate governance was sufficiently important to proceed. In the build-up to the September 2020 deadline, the focus was on intermediaries’ preparation.
Post the September 2020 go-live date, it became clear that several intermediaries and domestic markets were not ready, so we now find ourselves in a period of harmonization as market participants work collaboratively to achieve the efficiency and standards the directive set out as its goals. It is difficult to say whether this outcome was expected but, under the circumstances and with multiple local market variations, it was always going to be difficult.
The following is a list of challenges identified post-implementation. Broadridge has been proactive in working with the market to drive the harmonization effort and ensure the impact on investors and issuers is avoided.
- Shareholder identification: SRD II defines ‘a shareholder’ as the natural or legal person who is recognized as a shareholder under the applicable local law. The definition of shareholders has not been harmonized across European Economic Area member states and consequently this creates a number of challenges in defining services and achieving consistency for both proxy voting and shareholder disclosure.
- Standardized message-mapping and adoption: In the area of communication, the directive advocates the use of modern technology between issuers, intermediaries and shareholders. It advocates the use of machine-readable and standardized formats that are interoperable between operators and that allow straight-through processing. In response to this, ISO 20022 was adopted by the industry, with Securities Market Practice Group introducing the final version of the market practices for general meetings in July 2020. This gave intermediaries limited time to adapt to the new messaging standards before the SRD II deadline.
- Differing transposition timelines per country: The deadline for the transposition of SRD II into national law was June 2020 but, despite that date being clearly known, seven countries had failed to complete the transposition on the deadline, with some still to complete the process. This added significantly to the challenge of implementation when local laws and standards had still to be defined.
- Penalties and enforcement: The directive provides regulators with several options and penalties to enforce adherence to SRD II standards. Again, these have been transposed differently with some proposing substantial fines and others no fines.
- Vote confirmations: One of the key features of the directive that was welcomed by shareholders and IR professionals was the requirement to provide vote confirmations, but not all intermediaries have the capabilities to comply with this requirement and it remains an area for further attention.
Outside of SRD II, what should IR professionals be keeping an eye on in the coming years in terms of regulation and emerging trends?
While it is always difficult to predict the future, there are a number of areas that will continue to be a focus for the industry. It is inevitable that industry bodies, governments and regulators will continue to promote initiatives such as stewardship codes, ESG, transparency and disclosure, which inevitably will be linked to further regulatory change, and these drivers will continue to be catalysts for change.
The pandemic has seen a significant acceleration in adoption of the digital agenda and this is perfectly reflected in the industry’s use of virtual shareholder meetings (VSMs), which expand capacity of participation and help comply with the green agenda of reducing travel needs and cutting costs. In several markets, adoption required a change in the law with authorities making the change on a temporary basis – this change will need to be transposed into law. For example, it is still hard to tell whether VSMs or hybrid incarnations will remain the go-to solution for issuer general meetings in a post-pandemic world. The Broadridge analysis predicts that hybrid meetings will prevail as the new industry norm.
Broadridge also predicts that digital agenda communication will remain a primary area of focus for financial intermediaries as they continue to look at ways to improve the speed of dissemination and remove manual processing. Therefore, IR professionals should work with their product and technology teams to be ready to cater for these requests. SRD II made many promises to issuers, intermediaries and investors but it will require everyone to be ready to trade wants and needs if we are to see real progress in the investment communication value chain.