Holding companies to account (electronically)

It has been a slow journey, but the financial services industry has seen an acceleration of initiatives designed to strengthen corporate governance over the past 10 years.

UK-based readers will look back to the Combined Code on Corporate Governance, issued in 2003, and the earlier recommendations of the 1992 Cadbury Committee and realise that these advances have been some time in the making.

But now it is commonplace for equity investors to take an active interest in how companies in which they have an ownership stake are run. And impact investors are insisting on delivery of tangible environment and social outcomes in addition to financial return.

The Shareholder Rights Directive II (SRD II) is an EU directive designed to strengthen shareholder engagement and to improve transparency of communication between companies and their investors.

Building on the original SRD, which came into effect in 2007, SRDII aims to incorporate lessons learnt since the first directive – including those from the global financial crisis ­ and to provide an electronic infrastructure to support this agenda.

SRD II requires institutional investors and asset managers to be transparent about how they engage with companies in which they invest, they must publish their shareholder engagement policy on their website, and they must provide an annual disclosure of their voting record and engagement actions.

The directive also includes “say on pay” rules, providing greater clarity around directors’ remuneration and how this changes annually.

Member states were required to transpose the majority of SRD II’s requirements into national law by 9 June 2019. The parts still outstanding ­ specifically Articles 3a, 3b and 3c of the directive – must be transposed into national law by 3rd September.

These provisions enable issuers to make ‘disclosure requests’ to identify shareholders that own equity in their company.

Information relating to company meetings and other corporate events must be transmitted ‘without delay’ between company and shareholder – typically along the complex chain of intermediaries (custodians, company secretaries, investment platforms, investor communications vendors …) that link these parties together.

The directive is significant in that it requires this communication to be handled electronically, using what the European Commission calls ‘electronic machine-readable format’. This is designed to remove manual interventions, and thus a major source of operational efficiency, from the shareholder communication chain.

It also aims to make investor communication faster. Financial intermediaries must process shareholder disclosure requests, along with meeting information and the processing of votes (and other shareholder rights) without delay – which invariably means within the same business day.

For ESG commitments to work in a modern shareholder democracy, shareholder information must be communicated safely and efficiently. Votes must be cast, processed and acknowledged. This all rests on SRDII.

So, while few will admit to being truly excited by SRDII, all investment professionals should know the basics of what it does. And no self-respecting shareholder should underestimate its importance.