Investor groups split over future of Shareholder Rights Directive

Many of Europe’s biggest investor groups have waded in on the debate about the future of the Shareholder Rights Directive (SRD) this week.

The European Commission closed a consultation on the next iteration of the rules on Wednesday night, having received 80 responses.

Among them was a submission from PensionsEurope, which urged policymakers not to introduce additional disclosure obligations or mandatory engagement requirements for pension funds.

“In its current form, SRD II requires pension funds as institutional investors on a ‘comply or explain’ basis, to publicly disclose their engagement policy,” it noted, saying the approach “is appropriate and should be maintained”.

This point was echoed by the European Fund and Asset Management Association, which argued for the retention of the current comply-or-explain approach for asset managers, too.

PensionsEurope also warned against introducing an EU-wide stewardship code – a current campaign topic for several NGOs and responsible investors – arguing that Europe’s pension funds are too diverse for a single rule, and that “any stewardship approach should remain optional, and, where relevant, decided upon at the national level”.

For other respondents to the consultation, such national-level discretion was a source of frustration.

Finance Denmark, for example, said “some of the difficulties in the exercise of rights are exacerbated by the fact that SRD II is a directive” – meaning key decisions about how the law is applied are made by individual member states.

This includes the definition of the term ‘shareholder’, which it said created inconsistencies when it comes to who is identified as the actual owner of a share.

“We therefore recommend the Commission to convert the SRD II into a regulation as we have seen the European Commission will do with the Settlement Finality Directive,” Finance Denmark stated.

Eurosif also calls for granting shareholders an EU‑wide right to vote on “say on climate, nature or sustainability”, putting sustainability decisions on an equal footing with financial decision‑making, making shareholder votes on directors’ remuneration binding across all Member States, and strengthening transparency on how ESG criteria are integrated into variable pay.

Shareholder definition

The Investment Association, on the other hand, said in its response that it “does not think differing definitions [of a ‘shareholder’] create legal uncertainty”.

“Changing the definition could hinder investment managers’ fiduciary duties and their ability to act under client stewardship policies,” it argued, warning against “assuming shareholder identification is inherently linked to engagement”.

The French asset management association expressed similar views, stating that introducing an EU-level definition of a ‘shareholder’ “risks unintended consequences”.

“It would add complexity rather than reduce it and does not appear to target the real sources of friction in the custodian and voting chain,” the body suggested.

It also warned against loosening SRD’s current approach to ‘Say on Pay’ – shareholders’ right to vote on remuneration packages at issuers – saying such a move “would undermine confidence in European corporate governance standards”.

Eurosif, the European sustainable investment body, said shareholder votes on director pay should be made binding across all member states, and also called for shareholders to be granted an EU‑wide vote on “climate, nature or sustainability”.

Meanwhile, Swiss shareholder body Ethos highlighted problems around “divergent national interpretations of acting-in-concert rules” in its response to the consultation, which it claimed “hinders collective shareholder action, particularly on issues such as climate risk”.

It said “EU-level clarification is urgently needed” on the topic – a suggestion echoed by the Investment Association, which said the Commission should refer to a White List developed by the European Securities and Markets Authority for permissible activities for collaboration.

Tighter rules

Ethos also weighed in on the debate about whether proxy advisers should face tougher regulation.

“Excessive regulation disadvantages smaller providers and undermines competition, which may further accelerate the current duopoly,” it wrote, referring to the dominance of ISS and Glass Lewis.

UK-based Pension and Investment Research Consultants (PIRC) was more visceral in its response, acknowledging that proxy advisers “often face criticism” from companies over their influence on voting decisions, but insisting “these criticisms are overwhelmingly based on opinions, not facts”.

“Introducing hard-law regulation on the basis of an unsubstantiated claim of market failure would be unwarranted and would run counter to the EU’s objective of simplifying the regulatory framework,” said PIRC.

Several business associations representing issuers, including VNO-NCW MKB Nederland, argued for tighter rules for proxy advisers in their consultation responses.

Many consultation responses called on the Commission to ensure that shareholder rights were safeguarded as annual general meetings undergo changes to format, with many moving online. In its response, Norway’s sovereign wealth fund said the SRD should be changed to ensure that remote participation “complements rather than replaces in-person attendance”.

A number of shareholder bodies requested the introduction of clear rules around hybrid meetings, and a ban on closed-door meetings unless approved by shareholders beforehand. 

There were also numerous demands for more coherent voting deadlines across member states and different parts of the investment chain.