Published and draft legislation - European Union

Review of the European Directive on shareholder rights

Proposed reform of Directive 2007/36/EC

The draft reform of Directive 2007/36/EC of the European Parliament and the Council created with the main objective of promoting shareholder involvement in the management of listed companies, large corporations and groups of large corporations, and promote their long-term commitment to the company and its strategy.

Among other changes, the text added two new chapters to the Directive: Ia, Ib, governing the identification of shareholders, providing information and facilitating the exercise of their rights; and regulating the transparency of institutional investors, asset managers and proxy advisors.

Effective and sustainable involvement

The document argues that an effective and sustainable involvement of shareholders in corporate governance helps improve the financial and non-financial performance of corporations. It thus deems it important not only to consider the proper exercise of shareholders’ rights, but also to ensure that there is a culture of transparency and dialogue with and between all stakeholders, to improve the transmission of information within organizations.

It provides certain advantages for the shareholders of the company, to encourage more long-term participation and involvement: additional voting rights, tax incentives, and dividends and loyalty; if they are shareholders for more than two years.

On the other hand, it also argues that companies should be able to request identification of shareholders and communicate directly with them, establishing a framework for shareholders to be clearly identified. Information concerning their actions must always be provided on the organisations’ websites.

To boost transparency, the regulatory provision requires that companies supply information on their operation regarding profits, taxes paid on benefits and subsidies received in order to ensure confidence and facilitate the involvement of shareholders and other stakeholders in society, considering all as an essential element of corporate social responsibility.

Engagement policy

The culture of transparency is applied equally to the companies’ institutional investors and asset managers, which should publish their investment strategies and develop policies of engagement, to determine how they:

- Integrate the engagement of shareholders in their investment strategy,

- Supervise the entities in which they invest,

- Maintain a dialogue with these companies and their stakeholders, and

- Exercise their voting rights.

These policies should also include measures to manage real or potential conflicts of interest in the company. They should be published and sent to customers and institutional investors each year. Should they not apply or not communicate their engagement policy, they must explain why not, offering a clear and reasoned explanation.

Remuneration policy for directors

The new directive uses compensation as a key element to ensure that the interests of the companies are in line with those of their directors. This is why it places such emphasis on ensuring that the remuneration policy be clearly identified.

In order to allow the shareholders to decide on the remuneration policy, they are entitled to vote on it at least once every three years on the basis of a clear, understandable report with a comprehensive description and breakdown of the remuneration received by each director in the last year. Companies must ensure that the policy is in line with their longer term business strategy, objectives, values ​​and interests, and integrate measures to avoid conflicts of interest.

Also, to ensure adequate protection of the interests of companies, shareholders or the companies’ board of directors or oversight bodies should approve transactions with related parties. They must publicly disclose such transactions when they are performed, at the latest, along with a report drafted by an independent third party, assessing whether the transaction was made at arm’s-length pricing and is in line with corporate interests.

Next steps

The draft was approved last June, and now Member States are in talks to reach agreement on the final document.