Investors are to be granted a binding say over executive remuneration in an effort to counteract what the European Commission regards as “harmful” short-termist tendencies by companies.
Unveiling the revised Shareholder Rights Directive, internal markets commissioner Michel Barnier said that the past few years had shown “time and time again” the damaging effects of a short-termist agenda by European companies.
“Today’s proposals will encourage shareholders to engage more with the companies they invest in, and to take a longer-term perspective of their investment.
“To do that,” the commissioner added, “they need to have the rights to exercise proper control over management, including with a binding ‘say on pay’.”
The Commission said its proposals would make it easier for shareholders to exercise their existing rights and, conversely, create better operating conditions for listed companies, improving their competitiveness.
It added that transparency, both by asset owners and asset managers, would be a focus of the Directive, as well as removing hurdles to exercising voting rights across national borders.
The emphasis on the hurdles of cross-border voting was necessitated, according to the Commission, by over 40% of listed companies shares belonging to investors based outside the member state in which the firm was based.
Addressing its proposal for a binding vote on pay, the Commission said that while it would not introduce a cap on executive remuneration, firms would be forced to put the recommendations of the remuneration committee to a binding vote.
However, the policy put to vote would need to include an upper level on pay and “need to explain how it contributes to the long-term interests and sustainability of the company”, the Commission added in a statement.
Additionally, the Directive would also introduce a corporate governance code based on a ‘comply or explain’ model, forcing firms that depart from the code to justify its reasons for doing so.
The UK’s National Association of Pension Funds said it welcomed the idea of a more consistent shareholder rights framework across Europe.
Will Pomroy, policy lead for corporate governance at the association added that its members had a “clear interest” in promoting the longer-term sustainability of its shareholdings and that it was therefore crucial to leave them equipped with sufficient information to challenge them.
“Whilst the objectives of the Directive are positive,” he said, “and greater transparency around activities is beneficial, new disclosure requirements must be practical
“Care needs to be taken to avoid unintentionally tying the hands of investors or creating a tick-box exercise at the expense of encouraging the right behaviours.”