The EU Shareholder Rights Directive II (updating a 2007 original) comes into force in June 2019. This is potentially one of the biggest and most positive developments in corporate governance across Europe, including for London listed companies, for many years. It will occur whatever happens with Brexit because the UK has already agreed to it. Yet it has attracted remarkably little attention.
The full text can be read HERE
The Directive is intended to ensure shareholders can exercise their rights across the EU and for the most part, under the UK Corporate Governance code and the Listing Rules, we are already compliant. For instance, UK companies are already obliged to offer an annual vote on executive remuneration.
However, in two notable areas UK companies, brokers, custodians, asset managers and advisers are going to have to ensure they are up to speed and, in many cases, improving their practice. Both have implications from a financial PR perspective.
Intermediaries must enable shareholder rights, even for retail shareholders
All market intermediaries, including those who distribute shares to retail investors during a capital raise such as an IPO, are going to have to ensure that they pass both rights and information properly and in a timely manner between companies and shareholders.
Most intermediaries will claim they already do that and the S.783 of the Companies Act means shareholders can already be identified.
However, having worked for companies during contested situations, such as proxy fights, controversial general meetings or M&A, it would seem there is still plenty of inertia in the system when it comes to discovering who is the underlying owner of shares, whether they or someone else can exercise voting rights, how they intend to vote (if at all) and whether they have the correct information.
There can be numerous complications. Are shares out on loan? Is it a cross border situation? Are retail shareholders involved? Do hedge funds have voting rights or not? Having established the owner, who decides how to vote?
In theory the Shareholder Rights Directive clears that inertia in the system away. In so doing, it also paves the way for using distributed ledger technology to manage both ownership data and the exercise of shareholder rights.
The Directive says that intermediaries in Third Countries (outside the EU), such as the Cayman Islands or the British Virgin Islands, must also comply if they hold European listed shares (though it is not clear how that will be enforced).
Related to that, companies and intermediaries have frequently been neglectful of retail shareholders, usually arguing that as they hold their shares via nominee accounts, ensuring they have information and can vote is too difficult. That is likely to change. Given the growing importance of retail shareholders and platforms such as Hargreaves Lansdown in capital raises for small and medium sized companies, this is an important new development.
Large companies with big retail or employee shareholder bases, such as Centrica, BT, Royal Mail and Santander may also have to strengthen their efforts at enabling them to vote at AGMs.
Asset managers, institutions and proxy advisers will have to be transparent
The Directive creates a new “comply or explain” duty on asset managers and institutions to explain publicly their approach to shareholder engagement, including their approach to ESG (environmental, social and governance issues) and how they have voted. It explicitly references the UN Principles of Responsible Investment. Many investors already do this – and the UK Stewardship Code is already on a comply or explain basis – but it is another step in the move towards voting transparency and institutional accountability.
Proxy advisers will also have to adopt a public code of conduct and report on it. Given the variable standards in this industry, this is no bad thing.
Financial PR implications
The most obvious implication of the Directive is that, during a contested situation, it is going to be easier for the parties to establish who the shareholders are, to ensure that they have voted and to influence them, either via the media or directly.
This should enhance the dialogue between corporates and their investors. It will also mean that activists will potentially find it easier to communicate with other investors. Equally, they will find it harder to exaggerate their voting power.
The Boscobel view is that the lost Unilever redomicile vote in 2018 was a watershed in shareholder democracy, because it demonstrated how corporates can pay a heavy price for becoming disconnected from their owners. Corporate knowledge of shareholder registers and shareholder sentiment is often out of date or partial. The management of the register can sit awkwardly between the Company Secretary, investor relations and the house brokers with proxy advisers only brought in on an ad hoc basis (often when it is too late).
Asset managers and institutions must also ready themselves for continued demands for public transparency on how they have voted and why.
Ahead of the Directive coming into force, corporates should look to re-evaluate their shareholder communications to ensure compliance. Financial PR sits at the heart of this process, providing advice on best practice as well as anticipating issues (which may anyway first surface in the media) and pre-empting them with transparent and concise communications.