The Shareholder Rights Directive II (SRD II), which came into force last month with the aim of encouraging long-term shareholder engagement and investment in listed companies, is highly welcome, but could be strengthened in some areas and will not be welcomed by all, according to a leading specialist on the issue.
‘The directive’s focus on the importance of shareholder identification, even if only ahead of the AGM, is welcome, as it shows the EU is now taking seriously the issue of transparency in the ownership of equity in its member states,’ Thomas O’ Grady, marketing and business development executive at IR consultancy RD:IR, tells IR Magazine.
‘The level of market transparency varies widely across the region and it’s disappointing that the directive does not produce a level playing field, especially after there was much talk of implementing a UK-style model in the market. We welcome any improvement to ownership transparency legislation, however, and I believe SRD II is a step in the right direction.’
SRD II is part of a series of approaches instigated by the European Commission (EC) to promote better shareholder engagement and improve transparency in the ownership of companies. It follows the EC’s analysis of shortcomings in corporate governance during the financial crisis.
It is in this context – in terms of investors and long-term objectives – that the important parts of SRD II are to be found. O’ Grady states: ‘The EU believes the sustainability of companies will be improved by requiring investors to report on how their investment strategy contributes to the long-term performance of their clients’ investments. The directive seeks to encourage long-term shareholder engagement by investors to [achieve] the same aim.
‘Short-term investing certainly has an important place in any market – think price discovery and liquidity – but regulators and legislators should be doing all they can to encourage long-term investing as we look to build sustainable economies. Longer-term investors can engage and help steer a company more profoundly than funds with short-term investment horizons.’
So how will the directive change shareholding – if at all?
‘It is yet to be seen how this directive will change the market and shareholdings in equity issuers,’ observes O’Grady. ‘It depends hugely on the penalties each member state chooses to impose for entities not following the directive. The lack of a clear minimum quantifiable threshold for penalties in each member state makes it impossible to judge how much behavior will change.
‘I hope, however, to see an increase in long-term investors that engage with the companies they have invested in. I have no problem with short-term shareholders but we need longer-term investors to produce sustainable companies and sustainable markets.’
Overall, O’Grady feels the ambitions of SRD II are sound, with a slight proviso: ‘The ambitions of this piece of legislation are well intentioned. I support the general aims of the directive though I am not convinced these will be achieved with such a weak clause on penalties, but we shall see.’
Exploring this further, does the directive go far enough in its aims? ‘When comparing the requirements of SRD II to the legislative landscape in the UK I would argue that it perhaps doesn’t go far enough, as it is neither as strong nor on par with the best legislation,’ asserts O’ Grady.
‘But considering it is trying to bring uniformity across the EU, I think it is a good step in the right direction notwithstanding the weakness of the issue of penalties for non-adherence. If the directive went any further in its aims, it would have risked not being accepted by all member states.’
So does O’ Grady see any problems or issues emerging as a result of SRD II?
‘I think those in the proxy advisory space may not welcome the direction of the directive,’ he says. ‘SRD II means proxy advisory agencies in the EU are now in the sights of the regulators for the first time, which many companies may welcome on the basis that it means a greater degree of accountability.
‘One interesting gap in the directive relates to voting. The legislation is designed to improve issuer engagement with investors ahead of shareholder meetings by allowing shareholder identification in the lead-up to general meetings during a certain period. Sadly, that time period is not actually defined in the text.’